Compensating for effective sales

Many organisations around the world have back-offices that are larger than the front office. As HR departments seek to balance employee compensation packages, they sometimes forget the need to truly incentivise the people who generate the revenue.

At a strategic level, there have been debates on capping sales incentives. The answer lies in separating sales jobs into two distinct categories. First is the 'seller/business' model which typically includes life insurance, stock brokers, real estate and mortgage brokers to name a few.

In this category, the company's business is purely selling. Here sales is individual dependent and carries the risk of salespeople taking customers along with them if they leave. This necessitates sales incentives be paid as a proportion of profits/revenues without any cap.

Second is the 'seller/representative' model where salespeople act as an employee-representative of the company and its products. Here the company manages payouts within a prescribed target pay range and management uses market data to establish these amounts. Through careful incentive design and assignment of accurate quotas, the sales incentive plan can successfully manage payouts within a preferred range and is capped with market benchmarks.

Pay-mix, the ratio of 'base salary-to-incentive at risk', is expressed as a percentage of target pay. An aggressive sales incentive strategy favours a lower base salary with a higher at-risk incentive because these plans ensure variable costs, drive volume performance and are more motivational. Degree of persuasion in a sales job defines nature of the pay-mix.

For example, if sales rely on persuasion skills of the seller (door-to-door sales) then base salary will be low and at-risk portion will be significant. However, if the company's product/services provide rationale for customer purchase (brand equity), then the persuasion role of a salesperson is less relevant and base salary is higher, while at-risk proportion is smaller.

An effective sales compensation strategy synchronises three critical processes - forecasting, quota allocation and sales compensation. Forecasting develops overall goals and sales needs to participate to ensure realistic numbers.

Quota allocation breaks down forecast into individual goals for each salesperson. It is preferred that there is no over-assignment of quotas that exceed forecast, nor 'breakage' that leaves some fraction of forecast number unassigned to sales resources.

Sales organisations need to realign jobs with emerging/changing market conditions. Without effective buyer segmentation tools, sales organisations allow sales jobs to become 'blended' and 'corrupted'. Typically, the tendency is to attempt to resolve these job design errors with sales incentive patches.

Critically, the sales department 'owns' responsibility for design and administration of the sales plan, but others must contribute to the effort. Using a taskforce approach, HR can ensure target pay levels are consistent with the market, Marketing can ensure proper focus on products and finance can provide revenue, cost and profit objectives.

A sales compensation strategy is a high-stake, high-visibility pay system that requires focus and comprehensive design support.

- Sanjiv Anand is the managing director, and Bhaskar Menon, a principal at Cedar Management Consulting International.