As organizations, large and small, approached the end of 2003, Human Resources and Sales Departments came under great scrutiny with regard to revenue objectives and performance management.
In any economy, be it the boom of the late ´90s or the tough times of 2000 - today, complex sales structures and multi-channel sales organizations create a gap between a company´s strategic goals and the daily realities of managing commission plans. Striking a particular chord with Human Resources and Sales Departments, exiting the 2003 calendar year means that they have to evaluate results achieved and work to realign sales and incentive compensation strategies to set new priorities based on overarching business objectives. Critical to their success is not just a framework for conducting this analysis and realignment, but also the technology to easily and accurately assess what has passed, while projecting what´s ahead.
HR 101
Good HR and Sales Managers know that motivating employees´ performance to ensure alignment with corporate goals is a critical component to bottom-line success. Strategically designed incentive compensation plans that connect compensation to goals, whether by team performance, management-by-objective (MBO) bonuses, sales comp plans or other techniques, are the most effective way to direct and motivate people. However, creating such plans requires senior management buy-in, a clear understanding of what motivates employees, and flexible systems that reward in a timely, accurate way.
Well-designed incentive compensation plans can produce great rewards, while poorly designed plans can drive efforts in the wrong direction and cost the company in lost profits and productivity. Incentive plans fail for a number of reasons; among them: a lack of clear objectives, oversimplifying the process, misunderstanding the impact incentives can have on performance, limiting incentives to cash, and limiting them to only the sales organization. Successful incentive plans take into consideration all of the factors that drive the more diverse and complex business structures of today´s economy. These new structures are characterized by changing strategic alliances, more rapid product development and marketing cycles, and the resulting development of complex relationships with both internal and external sales channels that need to be managed and motivated.
HR and Sales Working Together
The first challenge is recognizing that traditional sales processes no longer apply. Customer contact from initial inquiry to post-sales service now occurs at various touch points within the organization, such as Web or call centers, making it important to appropriately compensate and motivate individuals in these departments, as well as sales. New strategies and incentive plans need to guarantee that sales and the entire customer relationship team are synchronized and mutually focused on achieving agreed upon goals. Savvy organizations will use strategic Enterprise Incentive Management (EIM) initiatives to drive improved quality, reduced costs, exceptional customer service and higher revenues and profitability for the company.
The second challenge is to create incentives for external channels (affiliates, distributors, value-added resellers, partners), and those involved in the many varieties of web-based sales and distribution models. Organizations must design incentive plans for these external channels that align with internal channels as part of the overall corporate strategy. Accurate, up to date, universally accessible reporting between internal and external channels and management is required to communicate and coordinate new sales goals and performance metrics. The Internet has provided a perfect technology for instant mass communication, but its success requires providing the right information in the right framework with minimal effort.
The business world is changing dramatically, but one thing hasn´t changed; compensation continues to be the carrot that motivates employees, partners, and stakeholders to meet the goals that will drive an organization to new levels of success. By putting the right incentive compensation plans in place, along with the right tools to manage them, EIM can help organizations ensure everyone is being driven toward the same goals.
So What Do You Do? - 10 Best Practices
A good first step for HR and Sales is to assess how well teams performed against the metrics set at the start of 2003. (1) Review selling costs and (2) Compare sales results against targets. Companies should ask:
- What happened over the past year?
- What were our goals and the goals we set for salespeople?
- Did we set goals for specific markets/products/territories?
- Did we provide employees with the tools/training to succeed?
- How did we fare against goals, and how were they measured (revenue, marketshare, etc.)?
- Did we hit or miss our targets, and if so, why?
- Did the commission/incentive offered correlate to products/services with the highest margin?
After adjusting for seasonal sales, review the ratio between sales compensation payouts and year to date sales. Also, compare results against the same period in previous years to see if there are any early indications of problems. Remember: if you´re paying out most of your commissions on products with lower margins, then you may be hitting revenue targets, but not profitability targets. That likely means that your resources are spending more time on products that won´t yield as much return for the company. It´s that kind of misalignment that causes companies to miss projective revenue targets because company and employee objectives were not in synch.
Another critical aspect in this analysis is (3) Testing the efficiency of compensation processes. As you review/compare key metrics to previous periods, look for indicators such as: the time it takes to pay people, results of accuracy audits and ratios of compensation administrators to salespeople.
Automated Analysis Save Times, Money and Resources
Conducting that detailed level of evaluation is very difficult if you don´t have an automated Enterprise Incentive Management (EIM) system that can scale to handle any product, with any performance metric, against any plan format determined. The value of EIM to an organization extends far beyond Compensation Analysts and Sales Operations Managers to all levels of the enterprise. Forward thinking executives are realizing that using incentives to motivate not only sales and non-sales employees but also vendors, channels and partners is ultimately the most effective way to quickly achieve critical strategic objectives.
Company Snapshot: Staples Inc. (Nasdaq: SPLS)
Staples used an EIM solution to automate and manage incentive compensation for retail and direct sales divisions - more than 35,000 employees. By automating EIM, Staples increased employee communication, motivation, performance and profitability, while providing the flexibility its delivery sales organizations needed to quickly alter plans as goals changed, ensure timely communication of those changes and guarantee accurate and on-time payments to employees.
By leveraging an automated EIM system instead of manual legacy spreadsheets, managers can also more easily determine performance relative to commissions received over the course of a year. (4) Ranking the sales team provides a means for a company to compare individual performance against compensation payouts over a period of time. If there is not a strong correlation between the two, some hidden pay for performance issues may exist, which leads to the fifth best practice (5) Reviewing turnover trends.
Given the nature of business today, some level of turnover should be expected. However, if turnover rates are too high there may be a compensation problem; conversely if they are too low managers should evaluate potential overpayments. This collaborative evaluation by HR and Sales involves a (6) Review of administrative costs and effectiveness from both a sales and compensation/incentives staff perspective. The high turnover rates in compensation administration, excessive overtime or large numbers of manual processes can be a sign of operational issues, or an overly complex compensation plan. Having your "ear to the street" will be critical when making assessments regarding what worked/what didn´t work last year and what strategies should be employed moving forward.
Communicate Desired Performance
One of the biggest mistakes made in developing compensation plans across employee levels is a lack of communication and alignment regarding desired behavior. Not only is it the responsibility of HR, but it is the Sales Management Team´s role to (7) Engage in performance management discussions. An open dialogue will enable Sales Managers to identify issues and provide a forum for formal coaching, and also clearly convey to HR what training and development needs are required. Taking a look at individual performance within the sales ranks is a minimal cost and can dramatically impact the generation of new-year revenue and performance assessments.
In addition to these performance management discussions, when planning for the year ahead, HR and Sales should be sure to assess the type of business/level of activity conducted in a given area in the years prior. By (8) Segmenting account revenue (i.e. as penetration, acquisition or retention), an organization can gain insight into its performance against its sales strategy. If the strategy was not executed upon, it could be that:
- Pay is not motivating the right behaviors;
- Geographical drivers had an impact on the sales cycle;
- Teams didn´t receive adequate training;
- Sales managers weren´t effectively directing territories and/or
- The compensation systems in place did not communicate well enough to convey desired behaviors/actions.
These possibilities and others, through detailed analysis, will raise a red flag for Human Resources and contribute positively to the planning discussion for the year ahead.
Proof is in the Pudding
Companies often need to evaluate compensation programs and restructure their sales organization to gain competitive advantage and optimize individual performance. One thing to remember is that sales professionals are directed and motivated by their compensation plans. At year-end, companies have the opportunity to take a close look at results from the past and identify areas within compensation plans and processes that must be adjusted to meet key business objectives. Organizations that employ EIM systems can easily leverage the rich analytic capabilities provided to identify many of the previous year´s best practices and re-establish the path to set and reach sales revenue goals in the coming year. Without that type of holistic, enterprise-level insight that will consolidate all of your various performance plans, programs, people and product lines into one system, the analysis will be a lengthy, grueling process.
Company Snapshot: New England Business Service Inc. (NYSE: NEB) NEBS is a straightforward example of how communication, motivation and performance can be quickly increased within the sales organization. This leading business-to-business direct marketing company leveraged EIM to automate and manage incentive compensation for its bank alliance partners and direct sales representatives.
"A combination of the right incentive compensation management infrastructure and programs will enable NEBS to grow our distribution channels and maximize their effectiveness, ultimately increasing revenue and profitability," said Mark Erickson, division vice president, enterprise applications and corporate integration services for NEBS. "Given our anticipated growth and the variety in our incentive plans, Centive will provide the much-needed flexibility and scalability to ensure that we have the foundation in place to support our future needs."
By implementing an EIM solution, NEBS migrated from its existing legacy compensation system to a centralized, automated solution for management of incentive plans. NEBS and its wholly-owned subsidiary, McBee Systems Inc., more effectively manage commissions for the sales force, as well as royalty payments for bank alliance partners, resulting in more clearly defined performance metrics and increased productivity.
Why Even HR Must Know Thy Market
While HR must (of course) pay special attention to correlating pay for performance, it is Sales that´s responsible for assessing the market in which the company must survive and thrive. On multiple levels, it´s beneficial for Sales to (9) Examine competitive positioning in the marketplace. By investing the time to compare pay levels to market survey data, ensuring that the levels align with retention strategies, evaluating products relative to the markets they need to penetrate, and assessing the use of channels and distributors, Sales will help HR determine if staff skill sets are up to par. HR can use the competitive and market data gathered to conduct skills assessments, institute new training, better articulate corporate strategy and individual goals, and augment appropriate processes to arm Sales with the best team possible.
Fortune 500 organizations renowned for the strength of their HR departments include General Electric, Honeywell and Pepsi. What differentiates them from the average HR division is that they are extremely involved in the assessment and placement of employees within their organizations. At those marquee companies, HR is viewed as a strategic business advisor, trusted to enlist the best available talent to tackle specific jobs and functions. However, when you peel back the layers, you´ll find those strong HR teams are fueled by the knowledge, research and market data provided by Sales, Marketing and R&D. Collectively, each has a significant role in the company´s ability to hire and attract high quality people that will achieve overall business goals.
Looking Ahead to 2004
Having conducted a thorough assessment of what worked and what didn´t work in 2003, HR and Sales are ready to plan for the coming year. Some of the key questions to consider include:
- Are we introducing new products into new markets?
- What are the economic/geographic indicators in various regions we´re targeting?
- Is profitability, marketshare, product volume, etc. our biggest concern?
- Do we have the leadership in place to direct staff on initiatives?
- Does our staff have the necessary training/skills to accomplish objectives?
- How will we measure the success of our sales team, partners, channels, etc.?
- Who are our top producers and how does their prior performance impact corporate expectations in the coming year?
- Why were certain folks successful and was it a due to their territory, quota, ability, etc.?
- How will we effectively/accurately communicate pay for performance in a timely manner?
In addition, it´s essential for HR and Sales to (10) Create sensible plans that can be easily automated and measured. As we´ve previously discussed, it´s not enough to simply have an incentive compensation plan that is aligned with your business strategy and can reward performance. The technology infrastructure must be in place to support and communicate those plans. In other words, don´t paint a Monet if you know your system can´t even handle the paint by numbers.
Work with your organization to implement an EIM system that will address the basic as well as the most complex analysis involved with managing incentive compensation from one year to the next.
SIDEBAR:
Top 10 Best Practices for Year-End Comp Review and New Year Planning
1. Review selling costs.
2. Compare sales results against targets.
3. Test efficiency of compensation process.
4. Rank the sales team.
5. Evaluate turnover trends.
6. Review administrative costs and effectiveness.
7. Engage in performance management discussions.
8. Segment account revenue.
9. Examine competitive positioning in the marketplace.
10. Create sensible plans that can be easily automated and measured.
