Category: Sales Compensation

By Mark Donnolo

If you’ve ever been involved in designing a sales compensation plan, you’ve probably heard these questions:

1. How much is the sales compensation plan going to cost us this year?
2. Is this a good investment of our money?
3. What should we expect back?

There are several hot-button issues that drive ROI:

• The amount we’re going to pay in the market.
• The pay mix: the amount we’re going to pay in fixed versus variable costs. Some CFOs debate how much money they actually want to commit rather than tie to performance. Another common debate between CFOs and sales is why we can’t put more pay at risk and have less fixed pay.
• The upside and threshold. How much are we going to pay our top people and how little are we going to pay our bottom people? Do we employ the Reverse Robin Hood Theory, which takes from the underperformers to pay the overperformers?
• The mechanics. Accelerators are a driver of costs and ROI.
• How we set our objectives and goals, relative to target pay, and how we allocate those goals to the organization. What we expect back is a big driver of ROI.

When determining the ROI of your own sales compensation plan, we recommend considering several drivers around ROI.

1. Determine your strategy and the business objectives you are trying to achieve. Understanding, for example, that we want to grow a certain product group or develop a certain market may change the way we look at ROI. We may be willing to invest a bit more to develop this market than we would on average or in our traditional markets. Isolate and evaluate ROI uniquely for that market.

2. Define how the sales compensation plan can help drive that strategy, and where its limits are. The sales compensation plan doesn’t control everything. If we were going to sell a strategic product, we know the sales compensation plan can motivate people to sell it – but there are other factors such as availability of that product, targeting the right markets, the right sales messages, having the skill in the sales organization to do that, and having the right sales processes. A lot of other factors will play into whether we can actually accomplish that objective, in addition to the sales compensation plan. When we attribute success to the sales compensation plan because it helped us achieve certain objectives, often we have to understand that sales comp was just one piece of it.

3. Determine who you will pay. We might look at ROI a little bit differently this way as well. We might consider certain sales groups that were able to help us achieve that growth objective, versus the whole population. We can then look at the ROI on them.

4. Decide how much to spend. We recently worked with a media company that traditionally sold TV advertising, and they wanted to increase their cross selling of online advertising. That’s a sales strategy; that’s an objective. What could the plan do? They wanted the plan to help them get a 10 percent average attach rate to their core product. Their television advertising will have a 10 percent attach rate of online advertising. They stated what they wanted to happen; next, they examined who would do it and who would bring in the return on their investment.

They looked at the TV sales organization. They would be selling that online inventory cross-platform. So now they knew who they were going after. What were they going to pay? They expected an incremental spend of about 15 percent of the first year’s contracted program revenue. So this company basically took that idea and converted it into a statement.

It sounds ironic but, when considering sales compensation ROI, move any focus away from the number. Take the focus – and the argument – away from the number and break down the components driving that number; then, the conversation is simply a lot more productive.

Mark Donnolo is the managing partner at SalesGlobe and the author of The Innovative Sale and What Every CEO Needs to Know About Sales Compensation.

By Donald St. Clair

The economics and shifting contexts related to motivating B2B salespeople are staggering. U.S. companies spend more than $800 billion each year on B2B sales force compensation, representing the single largest marketing expense.  

According to a 2012 article (“Breaking the Sales Force Incentive Addiction: A Balanced Approach to Sales Force Effectiveness”) written by ZS Associates experts and published in the Journal of Personal Selling & Sales Management, customers are also better informed than ever and expect salespeople to be consultants – which is consistent with recent research findings that incentives distract from the creative problem-solving required for such consultative sales roles.

While salespeople face an array of obstacles in meeting customer and organization needs – and as the center of gravity shifts in buyer-seller relationships – it is imperative that sales leaders reexamine how motivation affects sales performance. A recent review by ZS Associates on sales force drivers reveals U.S. spending on sales force incentives – traditionally utilized as the primary sales motivator – exceeded $200 billion in 2010. Certainty concerning how best to use sales force drivers remains elusive, with nearly 80 percent of U.S. companies making significant changes to their sales force programs every two years or less.

Yet, countless researchers and sales managers propose that monetary rewards are the primary motivators of sales efforts. Perhaps not surprisingly, many U.S. corporations employ programs to motivate employees by linking compensation to one or more aspects of performance. Meanwhile, some companies have abandoned such sales incentives, favoring salary compensation plans while citing the detrimental effects of such short-term economic incentives on the long-term relationship building goals of the sales organizations.

Here are two key findings about how to really motivate salespeople, based on decades of successful sales leadership and scholarship relevant to successful sales forces in business markets:

Finding #1: Take money off the table.

In addition to my 23 years of B2B sales and sales management experience, my study and many others have found P4P plans and carrot-and-stick approaches led to decreased well-being levels and diminish feelings of autonomy and intrinsic motivation. While I agree simple selling tasks (transactional) require incentivizing, selling in today’s B2B world requires creative and conceptual skills. In this transformational B2B sales domain, incentives hinder performance and are the competitor of exploration. Sales managers should pay salespeople generously and equitably and do their best to ensure money is a non-issue. Please do not mistake this as an indictment on all extrinsic rewards. I have found they can be effective if used appropriately and are not linked directly to performance.

Finding #2: Promote purpose.

Rather than bringing in XYZ Associates to help tweak, yet again, your sales compensation plan, focus on how to promote purpose. The first step to recovery is admitting you have a problem. This addiction to incentives is challenging and stifles innovation and the cross-pollination of ideas. After all, we are indoctrinated into this “if/then” thinking – like children. We bribe our children with rewards stating “if” they make their bed and mow the lawn (or other countless chores), ‘then” they will reap a reward. In doing so, we are attempting to control them. If you believe you need to pay salespeople more money to do their job or that, by paying them more, they will perform better over the long term, you – simply misunderstanding intrinsic motivation – are unknowingly creating unsustainable compensation models.

Salespeople are intrinsically motivated by the challenging work and by the ability to improve their customers’ lives. In his book, Creativity: Flow and the Psychology of Discovery and Invention, psychologist Mihaly Csikszentmihalyi coined the concept of the “flow state.” My study uncovered intrinsic motivation (doing an activity because they find it interesting and derive natural satisfaction from it) to be rooted in creative behavior that is often characterized by a “flow state” where a person’s skills are fully engaged in overcoming a challenge that is just about manageable, so it functions as an attractor for learning and developing new skills to tackle even more challenging problems.

Specifically, “flow” is defined as a state in which a person is a temporary psychological merger with the activity, which produces positive feelings such as enjoyment and enthusiasm. In practical terms, this research revealed salespeople felt a sense of wholeness when they were allowed to do what they do best – help improve customers’ lives.

Salespeople are seeking genuine relationships where there is no longer an “us” or “them” but rather a “we” (collaborative relationships) – we are all people seeking connection, a sense of belongingness. Sales managers need to transition their thinking into paradigms without incentives or sales goals and encourage salespeople to self-actualize – to grow vertically to a new stage of consciousness. In this new world of B2B sales, sales managers need to decouple sales performance models derived from the share of the customer’s wallet to ones that foster the higher-order development of its sales force.  

In their book Why We Do What We Do: Understanding Self-Motivation, authors Deci and Flaste suggest the question sales managers should be asking is, “How can people create the conditions within which others will motivate themselves?” The ineffectiveness of incentives highlighted above strongly suggests that sales managers need to shift resources and energy toward models that align better with what matters to salespeople – improving customers’ lives! Sales managers need to create systems that feed purpose and promote self-actualization rather than try to drive change through control mechanisms.

Metrics should evolve from frequency and quantity of sales calls to quality of relationships, customer retention rates, customer satisfaction, and other longer horizon metrics. If sales managers are willing to shed orthodoxy and reshape their motivational mental models to fit the new world of sales, they can take full advantage of what the new world has to offer.

Donald P. St. Clair is vice president of sales and marketing at OEM SALES in Troy, MI. He is also a doctoral candidate in the Weatherhead School of Management at Case Western Reserve University.  He can be reached at donald.stclair@case.edu.