The office lights flicker on at seven o’clock Monday morning. The early risers arrive and the staff trickles in. The CEO, vice president of sales, CMO, and vice president of human resources sip their first cups of coffee, bleary-eyed from Sunday evening’s conference calls. The office chatter starts. In an hour, the phones will begin to ring. A few miles away, manufacturing has been busy at the line for a couple of hours by now.
Despite the bustling activity, everything will come to a halt if the next sale isn’t made. “Sales” is the top line on nearly every income statement. Without sales, the funding runs out, the stock doesn’t trade, the lights no longer burn, and the office chatter falls silent.
At the root of sales is a team of tenacious souls squeezed in middle airline seats without upgrades, walking the hallways of major corporations, making outbound calls to semi-qualified prospects, pacing customer reception areas waiting for a chance to have that critical conversation about the customer’s needs, and generally wearing out the soles of their Cole Haans. Each year, on average, they experience eight to 10 times more rejection than acceptance from their prospective customers. Yet they persevere—most with continued optimism—in pursuit of the close, the add-on sale, the contract renewal. Most of them are driven by a quest for three things: personal accomplishment, recognition, and compensation, sales compensation … commission … bonus … the deal that makes their year and the company’s year.
The sales compensation plan is one of the most significant drivers of performance in the sales organization and represents one of the single largest expenses a company incurs, commonly tens or hundreds of millions of dollars each year. It’s a thin but vital long-distance line that keeps the daily connection between corporate growth and the rep on the street. It guides and motivates the actions of the sales organization more than any other single factor. It trumps leadership messages, sales strategies, sales management, and sales training. If there is a hard wire between the customer’s office and the corner office, sales compensation is it.
But if the plan’s message isn’t clear or to their liking, sales reps will interpret it in their own financial interest. As a corporate leader, you’ll get what you measure and what you pay for—and it may not always be what you expect.
While its impact can be direct, the compensation plan is a fine blend of art and science that has long been a point of conflict within companies. Everyone has an opinion about sales compensation and everyone is an expert, yet few agree on the best approach to drive performance toward the company’s objectives. Sales, sales operations, human resources, and finance regularly engage in battles over questions like:
- Does the plan represent our business objectives?
- Are our highest paid salespeople actually our top performers?
- Is the plan too expensive?
- Can we better motivate our organization to pursue the sales strategy?
- How can we promote more of a performance-oriented sales culture?
- Can we make the plan simpler to understand?
- Can we make the plan easier to administer?
- Are sales quotas penalizing our best performers?
- How can we set quotas that better represent the sales potential in our markets?
Too often, these battles lead to sales compensation programs that are compromises between parties, ultimately leading to underperformance in the business. Above the fray, senior executives look on, often asking only the most general questions. Many of these senior executives, concerned about the next quarter and the remainder of the year, miss opportunities to use sales compensation as a tool to drive growth.
What Your CEO Needs to Know About Sales Compensation focuses on the top challenges in companies today; offers logical leadership approaches, tools, and models for dealing with each of these issues; and shares stories from top sales executives in leading companies.
Before we address these challenges, we’ll take a look at the big picture around the Revenue Roadmap as an important foundational point. Too often, sales organizations start with commissions and try to figure out how much they can alter payouts either to save money or to drive behavior in a different direction. But that’s exactly the wrong place to start. We want to start by asking the big questions: Where are we going with the business? What’s important to accomplish from a strategic perspective? How do our sales roles support our goals? How does sales compensation align with the strategy and sales process? We’ll build on a base of big questions and share some examples from real companies and their C-level executives who leverage the power of sales compensation.
We recently worked with the CEO of a large insurance company who understands the connection between sales compensation and company growth. He says that what happens on the street absolutely has to be aligned with overall objectives. One-off situations at the street level undermine the overall organization. Everything has to be aligned to the objectives of the company down to the details in the field. Pay for performance runs unbroken from senior management to local management to the sales teams.
This CEO looks at the measures that sales management and the sales team can control that are critical to the business. He looks at sales compensation from a strategic perspective and understands how it impacts his objectives around growing shareholder value. He gets involved in the process by challenging his organization’s thinking and asking tough questions. His questions move beyond “Will this cost us less than last year?” and aim for answers around alignment to the strategy, impact on key customer segments, emphasis on strategic products, and building the capability to attract and retain the right sales talent for the business.
What are the right questions to ask of your organization? In our 25 years of working with Fortune 1,000 companies, we’ve consistently seen challenges in the following areas, and we’ve organized this book around these top challenges, discussing each in its own chapter:
- Driving the sales strategy with compensation
- Motivating the right sales roles
- Differentiating top performers
- Aligning performance measures with business direction
- Structuring strategic account incentives
- Setting equitable and profitable sales quotas
- Motivating sales management
- Communicating and implementing the sales compensation plan
- Getting the C-level involved in the right way
Throughout this book, we’ll explore each of these challenges from a leadership perspective. In addition to our own analysis, we include thoughts and stories from executives in high-performing sales organizations on the sales compensation challenges they’ve encountered over the years and what they’ve learned.
The final chapter of the book, “Your Strategic Sales Compensation Report Card: Grading Your Plan and Taking Action,” will be an opportunity for you to literally grade your organization’s approach to sales compensation based on the challenges that have been discussed. Compare your grades with those of other sales organizations and see where you can improve. As you design plans for the future, think about the strategic connection between the corner office and the front line, and discover how your organization can magnify the impact of one of its most powerful programs.