This article was originally published in Selling Power. What’s the worst that can happen with your new sales compensation plan?
When you lay out the new compensation plan for the sales force, you are trying to write rules that will align the company’s goals with the incentives for the sales team. You might engage in some modeling, applying last year’s performance to the new plan, looking at the pay impact on your top and bottom performers. This is usually done with assumptions of 5%, 10%, 15% higher growth rates and maybe a 5% drop in revenue.
However, have you looked at the other potential impacts of your plan? What is the WORST that could happen? This does not just mean low performance, but instead the behavior of your sales team that might be in line with their personal short-term goals embedded in the new plan, but against the long-term strategic needs of the firm.
You get the revenue and profits you ask for, not necessarily the revenue and profits you need. In this article, we review different ways that sales teams have responded to well-meaning sales compensation plans.
Are you TELLING your sales team to sandbag? A common bonus is hitting the quarterly number, with a kicker for money earned above that. However, if you don’t put enough leverage in the plan to reward additional above-and-beyond performance in this quarter vs. potentially coming up short next quarter – you are TELLING your sales team to delay a deal once they hit quota.
The sales team will consider the extra payout from selling above quota this term, vs. the cost of missing quota next term. If the balance is not there, expect your sales team to be pocketing deals to ensure that they get their quarterly bonuses. Nobody is immune from this, in one case even US Military recruiters would stockpile recruits for the next measurement period, since there was minimal incentive to beat their numbers once they hit their goal.
LESSON: Look at when critical measurements will happen, and ask yourself if the timing is right, or even necessary. In addition, look for ways to smooth the sales flow with incentives to pull sales forward before the end of the measurement period. Look back at prior years for patterns of this behavior (heavy deal flow in the first week of the new period for example).
Pulling the Wrong Business, in the Wrong Way
The reverse of the sand-bagging problem is when your sales team starts pulling business into this period with deep discounts or poorly thought-out proposals that later fall apart once delivery, installation, or implementation begin. This happens when your sales rep anticipates a change in territory, plan, or job after the end of the measurement period.
Knowing that they might not be able to get credit for a future deal, they do anything possible to close the deal now – regardless of the repercussions. They might discount to the lowest level, undersell a lesser product rather than the premium offering that the customer truly needs, or leave off something that gets lost in end-of-year proposal review and approval processes.
LESSON: Open communication about upcoming changes will help the incented rep plan for the next year, instead of chasing bad business in fear of negative changes.
Customer Knowledge of Your Timing
The consumer market has been taught that end of period discounts are always there. This is reflected in measurable hits to profitability during the closing days of Q4.
In one study by Paul Oyer published in the The Quarterly Journal of Economics, prices were found to be higher in Q1 (.7% higher) of the year, and measurably lower (1.7% lower) in Q4 across multiple industries and years. The more your sales team is tracked on easily identifiable measurement periods, the more your customers will wait until the last day to get that special deal.
LESSON: If you see a pattern, don’t wait for the end of the year customer demands for price specials or discounts. Let your comp plan and price specials alter the timing.
Cramming Your Customers
A different problem occurs when too much incentive is placed on just one part of the customer relationship. At Dun & Bradstreet in the 1980s the sales team earned no commission unless the customer bought a larger subscription (no incentive for just renewing).
This resulted in members of the sales team changing customer orders to get paid, without the customers asking for it. By 1989 the company was facing millions of dollars in lawsuits.
LESSON: Look at all the activity of your sales team, and see if you are giving them work (like annual renewals) without any incentives. If your only incentives are for increasing business, then you need a different team handling renewals.
Seemingly Objective Goals Open to Subjective Change
Job Training Partnership Act Centers were mandated by government subsidies to provide training for the disadvantaged, and were rewarded with increased funding if they successfully placed their clients in a job after graduation. This sounded like a great way to put incentives into the public sphere, but it backfired.
The result? Some centers qualified their clients by rejecting the most-disadvantaged, a practice they called “cream skimming.” This increased their “win” percentage, but was contrary to the goals of the centers. Then, when it came time to determine if someone was ready to graduate, they would “graduate” clients who got a job (even if they were not fully trained), and delay graduation for those who hadn’t yet found one (even if they had completed all training). (Courty and Marshke 1997). In this case the measures were too easy to manipulate, and were not objective enough.
LESSON: Measures should be trackable and objective whenever possible. MBOs work best when they are reviewed, but numerical measures should only be used when you have clean, accurate data.
The Cost of Gaming the System
Ian Larkin, in The Cost of High-Powered Incentives: Employee Gaming In Enterprise Software Sales finds that companies in technology regularly lose 6-8 percent of their revenue from discounting and other manipulations of the compensation plan. With long sales cycles allowing for more control of final deal timing, sales reps can push deals into the perfect quarter to fit their personal compensation desires.
They combine this timing manipulation with offering the most-favorable discounts at the end of a fiscal year to ensure that they get the payout that they want, not necessarily the profit that you need. Tracking this can be difficult without an integrated system that allows you to track Lesson: Run a review of recent deals and their discount level. See what your average profit margin is for deals against days until the end of the term
- Complement objective measures with subjective measures when you are rewarding things that are hard to measure.
- Develop a reputation for being fair; if subjective bonuses are given out too rarely, they may not be credible, if they’re given out too-frequently, they may be viewed as entitlements.
- Complement objective rewards for easy-to-measure outcomes with other methods of encouraging hard-to-measure outcomes, eg. by selective recruiting, training, promotions, etc.
It is important to understand desired behaviors and outcomes, even if they’re difficult to measure and not captured directly by a performance measure. You need to have a system of evaluating behaviors and outcomes, and be able to track how these changed with new policies (like commission schemes). Finally, you need to have a flexible and adaptable performance management system that employees can count on and trust.