SALES COMPENSATION
Sales plans: preparing for recession
With the threat of recession looming, sales teams are likely to find it more and more difficult to attain targets that were set in more optimistic times. A recent article from Tom Knight and Mark Masson of Axiom Consulting, appearing in Workspan magazine, examines this situation and argues that companies need to make adjustments to their sales incentive plans in order to avoid the potential negative consequences.
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To help, they provide a three-step approach to develop strategies to effectively adapt to the changing situation.
Economic downturn is likely to have a number of consequences for sales, most notably that with falling revenue, sales incentives and commissions will probably decline. In turn, this could mean there is a greater chance of demotivation among sales professionals and the danger of staff leaving for more lucrative positions.
Similarly, from a company perspective, sales costs as a proportion of revenue and profits are likely to rise and recruitment costs resulting from staff turnover may also increase. In response, the authors argue that by designing effective contingency plans, companies can emerge stronger and more competitive as the economy revives.
The three steps they propose are:
auditing compensation lines
assessing pay versus performance
evaluating goal setting.
1. Auditing compensation lines
Knight and Masson argue that during downturns, sales costs come under much closer scrutiny as companies seek to improve earnings in the face of falling revenue. Many companies react to this situation by making across-the-board cuts in sales remuneration, but the authors reckon that this is a risky strategy because it ignores the possibility that certain products are likely to be more recession-proof than others.
In contrast, they believe that firms need to determine which products may still sell despite the downturn and focus their efforts in these areas. This can be achieved using a more strategic approach by breaking down costs into multiple dimensions along such lines as:
geographies/markets
products
customer segments
sales strategies
sales roles.
By doing this, the authors argue, the discussion moves away from wholesale cost cutting to cost optimisation, focusing on those products that may still be potentially good sellers despite the downturn. In this way, managers can debate where and how much cost should be incurred given the changing environment, thereby increasing the odds that strategic objectives are achieved.
To illustrate this, an example of an insurance company that rather than cut costs wholesale, reallocated them across several measures significantly increasing the emphasis on new products which proved a successful strategy.
2. Assess pay versus performance
Another important step to follow is to model the relationship between sales incentives and performance under various scenarios as well as examining actual outcomes.
To illustrate the effect of a slowdown in the economy, the article provides two graphs of pay versus performance, one for a normal economy and another during recession. In the normal year there is a strong relationship with the top sales people earning significantly more than their less successful counterparts. In contrast, in the recession year, there is a weaker relationship and the gap in earnings between top and bottom performers is much smaller with top performers experiencing a big drop in earnings with poor performers relatively unaffected.
In response to this situation, the authors argue that the decrease in incentive remuneration should be spread out among the whole salesforce so that the lowest performers share in the losses in order that those of the best performers are mitigated. This, they argue, will reduce the risk of staff turnover while also supporting motivation levels among top performers.
3. Evaluate goal setting
The third step of the approach is to assess and improve methods of goal setting. The motivational potential of compensation plans is heavily dependent on goal accuracy, the report argues, but many companies do not follow consistent policies in this area.
Instead, they attempt to implement “timely resets” to goals as market conditions change. Unfortunately, the authors state that this approach rarely works as such resets are slow to occur, increase in frequency and magnitude, and lead to demotivation of sales staff and a loss in management credibility.
In contrast, they argue that companies should:
Track, report and discuss performance versus goal frequency.
Resist across-the-board adjustments as these are rarely the right solution and they weaken the return on incentive spend. Instead, managers should make changes at the lowest possible level of measurement (account or territory).
Set guidelines for intervention in advance, as this enhances credibility because it manages sales professionals’ expectations.
Assess sales and profit potential – conduct account-level assessments of revenue and profit potential, particularly on those accounts that make up 80% of the company’s revenue and profit to inform goal setting.
Set year-to-date goals – to enable sales representatives to “catch up” on incentive earnings over the course of the year unlike when using all-or-nothing monthly or quarterly goals.
A final word
“Following these steps allows managers to anticipate changes, make fact-based decisions, set and manage expectations, and maintain motivation, ultimately increasing goal-setting accuracy and ensuring they emerge less scathed from the downturn . . . When designed and executed well, contingency plans not only optimise sales costs, but also motivate and retain sales professionals, thereby enabling the company to emerge stronger and more competitive from a down economy.” - Tom Knight and Mark Masson, Workspan, May 2008.
Want to know more?
Title: "Sales compensation - planning for a down economy", by Tom Knight and Mark Masson, Workspan, May 2008.
Availability: Contact WorldatWork, 14040 N. Northsight Blvd, Scottsdale, Arizona, USA AZ 85260, tel: 001 480 951 9191 or email: worldatworkjournal@worldatwork.org.
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