Revitalizing Sales Compensation - Aon

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Instead of over relying on sales compensation, companies need to develop a more sophisticated diagnostic system to identify the underlying drivers of cost and dysfunction. 14 www.aonhewitt.com/india Revitalizing Sales Compensation
Diagnosing Your Company’s Sales Compensation Problems There is no sales compensation plan that can solve all business problems. While this may seem intuitive, a challenging economy and tremendous professional pressure are taking a toll on business leaders, and many find themselves asking for sales compensation to work miracles. Instead of over relying on sales compensation, companies need to develop a more sophisticated diagnostic system to identify the underlying drivers of cost and dysfunction such as talent gaps, coverage holes and mismatched sales channels. Successful companies start by looking for these types of root business issues before beginning any redesign of sales compensation. Often, the root business issue lies in the structural clarity and characteristics of the salesforce the company is trying to attract, motivate and retain. A detailed model to help companies apply the best techniques for workforce planning brings many of these root issues to light. Such a model helps companies construct a fully aligned and focused salesforce that creates lasting competitive advantage while also achieving immediate business goals. While this work may appear to be outside of the responsibilities of most compensation professionals, it is critical to ensure compensation is addressing appropriate goals and issues. As a cautionary example, companies sometimes try to create aggressive sales compensation programs in an effort to overcome weak sales coverage models, creating alignment, cost and equity issues. In order for companies to have the right salesforce for a specific market, they must first compare their current workforce design to their business objectives. As illustrated by the representative case study that follows, nine major steps in workforce planning for sales emerge (see Exhibit 1). Nine Steps to Salesforce Planning 1. Identify business goals and constraints 2. Quantify opportunity in customer segments 3. Develop productivity equation(s) 4. Determine talent requirements 5. Evaluate the current talent supply 6. Quantify talent gaps 7. Select talent gap closure levers 8. Build the talent plan 9. Execute salesforce transition Exhibit 1 COVERstory A Hypothetical Business Situation A company, let’s refer to it as 'Acme Widgets,' is delivering USD 1 billion in annual revenue with 40% gross margins and 15% operating margins. The immediate problem is that two years ago, the company was delivering USD 1.2 billion in revenue, 50% gross margins and 20% operating margins. The decline experienced in the previous two years has placed immense pressure on the senior management to orchestrate a turnaround in the company’s performance and to show the levels of shareholder return to which Wall Street had grown accustomed. The company has only 10% market share (ranking third to larger competitors who have 30% and 20% shares, with the remaining 40% of the market spread out across a fragmented group of smaller competitors), so both executives and investors believe there is an opportunity for expansion in a market that is growing at 5% per year. Acme Widgets employs approximately 400 salespeople and sales managers who are largely generalists. The company operates on a fairly simple sales compensation plan that pays sales representatives an average of USD 150,000 per year, half in base salary and half from a 2.5% commission based on total revenue in a geographical territory. When the company was growing, these territories would grow and then divide as new sales representatives were added. Recently, the company has trimmed back the number of representatives, resulting in accounts, sales and commissions being distributed to the remaining representatives somewhat arbitrarily. Compensation Cost of Sales (or CCOS – the sum of all base salaries and actual cash incentives paid as a percentage of revenue) has hovered around 6% in the recent years despite headcount reductions. The CFO has decided that Acme’s return to greatness should begin in 2011, with goals of: 10% revenue growth to USD 1.1 billion 48% gross margins 18% operating margins The CFO and CEO believe that much of the revenue and gross margin increase can be driven by selling more solutions to their customers’ senior-most C-Suite buyers. The operating margin increase, they believe, can come from improved gross margins plus further cuts in headcount and compensation. The first premise makes sales and marketing nervous, because the company does not have a track record of successful solution sales. The second premise makes human resources uneasy, because most compensation professionals understand that the totalRewards quarterly India • Volume 2 • Issue 2 15
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