Lotis Blue Consulting recently partnered with TechCo (a pseudonym to protect privacy), a 30-year-old, private technology firm and United States market leader. The organization provides corporate automation solutions for transaction business reporting, planning and compliance technology. The company found itself in an expanding market due to the growth of e-commerce and more government and municipal policy changes which made their product more vital to customers. As a result, TechCo needed to take a new approach to reward its teams.
Specifically, they sought to enhance their sales incentive plan and align it to their company strategy.
The sales organization had set aggressive growth goals, and leadership was concerned the sales teams weren’t chasing the highest value deals. TechCo was also looking to expand its channel partnerships and alliances as a key level to drive future growth.
Historically, the company customized sales compensation plans around five market segments and three verticals to drive the different behaviors needed from its 100-plus-member salesforce. While desired behaviors remained mostly consistent over the years, incentives were customized or tweaked to the point where they were no longer efficient — there were too many one-off plans or plans with too many metrics making the designs unwieldy, confusing and ineffective.
TechCo operates in a highly competitive market for talent and needed to ensure the new designs could attract and retain top salespeople. Here, we examine the approach taken, the ensuing results and the lessons learned from the initiative.
Sometimes the worst thing you can do to update long-standing compensation plan designs that are not working is to keep tweaking them as you can end up with extra elements that add little value. TechCo leadership understood this and believed very strongly that the design team should start by stepping back to consider the overall sales objectives and strategy.
TechCo implemented our sales compensation design process to ensure the team considered the business context before launching into a design exercise. (See Figure 1.) In doing so, our work would be connected to and aligned with the business and, most importantly, the new go-to-market strategy. Having completed extensive research and analysis to understand market positioning and competitive advantage, TechCo outlined four strategic objectives:
Software sales: The company sells software across product lines and is agnostic as to whether implementation occurs on-premise at the client organization, in the cloud, or within TechCo Enterprise. TechCo meets their customers where they are, including customers who have large, on-premise enterprise resource planning (ERP) systems and have no urgency to move operations to the cloud.
Mid-market: TechCo wanted to capture a larger share of mid-market sales. In recent years, TechCo had identified and invested in the mid-market sector as both a strategic opportunity and as a defense against competitors that could later penetrate up-market customers.
Outbound business development: TechCo wanted to strengthen its outbound business development to prepare for the inevitable decline in opportunities as the market matures. Historically, most business comes from inbound leads.
Alliances: The fourth objective was to balance the company’s focus on alliances and services. Alliances played an important role both as a sales channel and as an implementation resource. TechCo had limited capacity for implementation, so as sales expanded, building alliances with implementation partners became ever more critical.
TechCo sought to clarify the sales process and the accountabilities of the various sales roles to support lead generation, software sales and implementation sales. (See Figure 2.)
Mapping sales roles against the sales process starts with a solid understanding of a company’s different customers and how they prefer to buy, which, in turn, informs how the salesforce should approach those customers in the sales process. Based on customer understanding, the next step is to map out the stages in the process and the accountabilities of the sales team, identifying which roles are prominent in each stage and core activities that must be accomplished. It’s also important to consider how the roles interrelate, particularly when there are multiple buying paths and touchpoints.
Within TechCo, inside sales generate and qualify leads, and are responsible for developing account penetration strategies. These roles share revenue responsibility with account executives (AEs). Channel managers are also critical in lead generation as they build relationships with channel partners and value-added resellers (VARs) to drive demand and sales. They are accountable for increasing the number of partners and differentiating product messaging to meet needs and demands. Administrative duties for sales practices and tools, among others, also sit with channel managers.
Alliance managers, AEs and sales engineers are critical in software sales. Alliance managers own the relationships with key partners and develop those relationships to drive software sales, while AEs close all software sales. They also sell consulting services and bring in alliances to attach implementation support. Sales engineers provide support from proposal to close and are critical partners in complex sales. They are the subject matter experts charged with crafting innovative solutions to ensure client success. Business development managers (BDMs) primarily sell implementation consulting services in close collaboration with the sales team.
With the new sales process defined and roles clarified, TechCo turned its attention to address pay challenges and the incentive design.
Through benchmarking, TechCo discovered that market compensation and pay-mix were not aligned to market for some roles. These pay disparities were especially problematic for sales professionals outside the U.S. where there are different expectations for pay-mix and on-target earnings. TechCo sought to address these differences over time to adhere to budget.
To address the challenges and explore practices and plan designs that would drive attainment of the strategy and sales objectives, the design team undertook a series of analyses. TechCo benchmarked plan design practices for similar organizations and completed a qualitative analysis of gaps between best practices. TechCo also conducted quantitative analyses of compensation-cost-of-sale, quota attainment, distribution of performance and sales productivity for both incumbents and segments.
Quota attainment showed a reasonable distribution, suggesting good goal-setting capability. Ideally, when quota setting and sales motivation are working well, 60% to 65% of AEs achieve or exceed quota. In TechCo’s case, roughly half of the AEs met or exceeded targets. The analyses also showed that TechCo had less pay at risk than was typical in the market, with inside sales representatives, business development managers and alliance managers showing the greatest disparity and 20% variance from desired levels. TechCo decided to address territory design — particularly around various market segments — to ensure fairness in subsequent years.
The goal was plan simplification and harmonization where it made sense, but also avoiding a “one-size-fits-all” approach given the differences in its go-to-market strategy by segments, sectors and geography.
Guiding principles provide the high-level rules to consider in the design process. They serve as guardrails and parameters to focus the design team during design sessions, and they provide a starting point for the development of communication materials during the socialization and implementation phases.
Based on the review of TechCo’s plans, input from leadership and preliminary benchmarking, the design team identified the five preliminary incentive plan design principles:
Focus on software sales.
Keep it simple.
Focus on an appropriate mix of software and consulting and achieve a “non-competitive” approach to alliance and TechCo consulting sales.
Drive high performance and outbound sales through competitive on-target earnings and strong upside earnings potential.
Appropriately reward the right contributions and influence at each stage of the sales process (part of the job vs. activities vs. outcomes) and avoid conflicting directives across roles.
Although benchmarking was an important input, it did not guide the direction of incentive plan design. Rather, the main determinant was aligning incentive design with strategy.
The team presented three straw models to management. The presentation and socialization of both initial results, straw models and recommendations was highly collaborative. The design team conducted working sessions for stakeholders, engaging them in steps three through six of the sales compensation design process.
The workshops helped stakeholders understand and talk through the dynamics between the direct salesforce and identify potential implications, especially around keeping all parties motivated and satisfied across TechCo’s alliances and channels. In the past, sales representatives had adopted a short-term focus — how much will I earn from a sale? To be successful with the new growth strategy, the sales team had to devote time to developing relationships with channel partners — initiatives that would feed more leads over time and eventually lead to payouts. The new plan design needed to align to these go-to-market changes.
Together, the design team and stakeholders reviewed and vetted the following components of the recommended sales incentive plan:
Recommendations for pay levels and pay-mix by role, taking into account individual impact, affordability and broader talent/reward strategy;
Plan design framework and mechanics (e.g., plan type, measures, elasticity, upside);
Best practices and advice to set plan policies and administration (e.g., quota setting, windfalls, measures, etc.);
Cost modeling; and
Final recommendations, incorporating stakeholder adjustments.
Not everyone agreed along the way. Some stakeholders felt compelled to alter the strategy because of concerns that existing infrastructure could not support and sustain it. After further discussion, we aligned on the importance of sticking to the strategy, investing in the infrastructure to improve the systems, and, in the meantime, devising short-term workarounds as needed. The interactive sessions were critical in building consensus and support for the new plan. Sales operations, sales and finance played key roles, but everyone participated, leading to collective decision-making and coalescing around final recommendations — so vital for introducing and managing the change on the horizon. The change management model illustrates common pitfalls of change management, each of which was considered and incorporated into our approach. (See Figure 3.)
Before finalizing, the team stacked up the guiding principles against the plan design. The new incentive plan brought consistency to a system that had been earmarked by many individual agreements and legacy arrangements. Now, each of six sales roles had its own commission-with-quota plan that focused on the priorities for that role.
The approach clearly is a departure from the past, yet it was not radical. It’s more evolutionary, streamlining incentive plans and adding more consistency to help prepare TechCo and its sales team for growth.
TechCo found that it underestimated the amount of time and energy needed to bring along sales management and the individual contributors despite the changes being more evolutionary. The communication materials, payout calculators and message cascade helped support the adoption as the AEs had more visibility and understanding of what they could impact than before. Behind the scenes, the cost model that helped inform decision-making also served as the calculation tool in operationalizing payout calculations and payroll feeds, and TechCo plans to upgrade its incentive compensation platform soon.
TechCo found that, in general, the behavior change took three to six months, and as a result, it had one of its best years following implementation of the changes. The sales leader rolled out a communication strategy that consisted of one-page plan summaries, FAQs and small-group webinars held after the annual sales meeting to reinforce the message. Just as importantly, the sales leader held their directors and managers accountable for ongoing communication and consistent coaching. TechCo developed a dashboard to track messaging accountability and provided a feedback loop through sales operations on what issues needed to be addressed.
TechCo had more AEs, inside sales and sales engineers earn President’s Club than previous years despite the slow start. Channels and alliances were able to grow over 15% due to better internal coordination on opportunities and rolling out partner programs. The BDMs leveraged the success of the direct sales team to capture additional implementation work to achieve their goals.
Reflecting on the design process, three learnings stand out:
Don’t underestimate the importance of the sales process and impact of the indirect sales channel. It’s critical to fully comprehend the relationships between inside sales, alliances and channels in order to establish the most reasonable role for inside sales — how they fit in and how they can influence customer success. Expect that the sales process mapping will change over time.
Systems must be capable of operationalizing the plan design. If they aren’t, design stop-gap measures — such as the temporary incentive calculator — should be used to ensure quotas can be tracked and rewards delivered as promised until the new systems are up and running.
Change management starts right away. All of the upfront interviews and work sessions provide opportunities to build champions for the new plan. The more sales team members feel listened to and involved at the start, the more likely they will be to promote the new plan.
Finally, it’s important to forecast and build the capability that will be needed when the incentive plan succeeds. The cost and human capital impact will get bigger as the organization succeeds, so ensure there is a robust process to support growth.
Article originally published in WorldatWork’s Workspan, June/July 2020. Reprinted with permission from WorldatWork.