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What Your CEO Needs to Know About Sales CompensationConnecting the Corner Office to the Front Line
By Mark Donnolo
AMACOMCopyright © 2013 Mark Donnolo
All right reserved.
Chapter OneYour Revenue Roadmap: Driving Your Sales Strategy with Sales Compensation
ON A CHILLY MORNING IN SACRAMENTO, I sat perched on a vinyl bench seat, warily eyeing my rolling workplace for the day: an 18-wheeler, windows fogged from the cold, vibrating slightly as its engine idled. My tour guide, Cliff, was a driver sales rep for a major brewing company. Cliff climbed into the cab and slid over to the driver's seat, and we pulled away from the distributor's warehouse toward a 10-hour day of sales calls to convenience stores, supermarkets, bars, and restaurants.
As we drove, we talked about how Cliff sold beer. He had been with the company for a number of years and was very successful, but he explained that his role had changed. "Two years ago, I was selling cases of beer to store owners," he said. "Now, I'm trying to make the beer they already have move faster. I check the signs, inspect the coolers, and try to get our beer in the best position." In addition to being a driver sales rep, Cliff had also become a bit of a marketer, since the company had changed his objectives a short time ago.
In the parking lot of a convenience store in a gritty urban neighborhood, Cliff dragged down a hand truck. I followed him to the back of the store and into a huge cooler that held cases upon cases of light beer, regular beer, and premium beer in 12-ounce, 16-ounce, and quart containers. Cliff looked through the stacks, pulled the expired boxes, and loaded them into the truck. He then lugged beer from the truck and packed it into the cooler. As he did this, he talked to the store owner about what was selling and what was not. Then he detailed the cooler display at the front of the store, making sure the facings of cans and bottles were aligned and that the packaging and tags for the week's specials were clearly displayed.
The brewery Cliff worked for had recently changed its sales strategy. The old approach was to sell as many cases of beer as possible, as often as possible, to as many retailers and restaurants as possible. Cliff and the other driver sales reps were paid cents per case commission to load more cases into the coolers, rotate the stock, and pull out old beer.
Eventually, the brewing company realized that pushing more bottles and cans into the back room of a retailer wasn't necessarily selling more beer to the customer. With competition at the point of sale increasing over the years, sales out were less driven by stocking the cooler and more driven by effective marketing. Strategically, what was important to the brewing company was selling beer to the end consumer. The company learned that the consumption of beer was driven by TV, radio, and social media advertising. Point of sale advertising, the company discovered, was another driving force.
For years, the company had missed the opportunity to mobilize the driver reps and had motivated them toward the wrong goal. It had mistakenly promoted a transactional model of selling into the back room. Finally, it realized what actually sold beer: product placement, use of signs and displays, and matching price points with competitors. But the question remained: How did that translate to the sales organization? How could this strategy convert to incentives that were meaningful to the driver sales reps? The quest for that answer found me undercover in a convenience store cooler, wearing a starched uniform with "Mark" neatly scripted above my left shirt pocket.
We worked with the company to determine how to motivate the sales organization with performance indicators that could ultimately steer consumer preference. The company moved its sales compensation plan off a purely volume-based plan and connected it to the metrics and activities that drove beer consumption. It developed performance measures that were focused on merchandising, such as the number of facings, positioning the product closest to the cooler handle, the placement of signage at the retailer, the location of large displays, and competitive matching. If its competitor's malt liquor was in 32-ounce bottles, then the company made sure its 32-ounce bottles of malt liquor were positioned right next to them, hopefully with a larger number of facings.
By understanding what influenced the purchase of beer and connecting it to something that was important to the driver sales rep, the company was able to change the behaviors of the reps and get them to sell more beer. Now, Cliff did not just talk to the store owner about how many cases of beer he wanted and yesterday's baseball scores. Cliff also talked to him about how the beer was selling and ideas he had about improving the marketing of certain products. Cliff talked about the positioning of the product and displays, and he had statistics on how much that could increase the volume. The store owner listened because he knew Cliff's advice was in his best interest.
Because Cliff's compensation changed, his conversations changed. Because his conversations changed, the results changed. This retailer had struggled with the sale of premium beer brands in this particular market, but the store owner had seen a dramatic improvement in those sales over the past 24 months because of Cliff's marketing.
The company and Cliff had learned an important lesson about translating the new sales strategy to the front line. The customer had learned an important lesson about how to improve the results for his business, and together the company and the customer saw significant improvement in results, demonstrating the power of sales compensation and its connection to the sales strategy.
Aligning to the Strategy
One of the first things our firm does when we look at sales compensation is understand the sales strategy. We ask: How should the priorities of the business be represented in the sales compensation plan?
One of the ironies of sales compensation is that while it's a tactical program, it can churn up issues that are actually bigger misalignments of sales effectiveness. For example, Cliff's original sales compensation plan paid him for generating pure sales volume, an activity that was out of alignment with the company's strategy of positioning product competitively and playing an adviser role to help the retailer grow its business. A transactional plan like this would ultimately cause a breakdown in the company's ability to achieve its goals. Sales executives have to be able to distinguish between issues that are related to sales compensation and those that are indicators of bigger strategic challenges. They have to know when they have a sales process issue that needs to be fixed.
Mike Kelly, former CEO and president of The Weather Channel Companies, began his career years ago at Fortune magazine. There, Kelly worked directly with the business customer—sometimes the CEO of the company—who would have a personal preference for a business magazine, whether it was Fortune or Forbes or BusinessWeek. Because the decision maker was at a senior level in the organization, it was important to understand the corporate strategy. When Kelly took over the sales organization of a new magazine, Entertainment Weekly, he took that customer orientation with him.
Traditionally, a magazine would research target companies and try to prove to clients and agencies that their audience was the right audience, as opposed to trying to connect customers and advertisers to the subject matter. But Kelly implemented a customized, consultative approach, connecting advertisers to entertainment marketing. Unfortunately, Kelly explains, "We over-customized it, and the organization had a hard time making money."
Entertainment Weekly was scheduled to be profitable after two years, but by year five it was still losing money and Kelly was feeling some pressure. "We would always point to our growth. Our circulation growth was great, our revenue growth was great, and everybody assumed, 'Okay, at some point or another we're going to get to profitability.'"
Kelly enrolled in an executive education class at Columbia University where he met Professor Larry Selden, who talked about an idea called customer segmentation. Selden told his class that the best companies understand not only who their customer is but also what their customer's needs are. They group their customers based on needs as opposed to what they want to sell them. By segmenting his customers, Kelly could understand the profitability of each customer and each customer segment. Then he could align his resources against those customer segments that were most profitable.
"It was revolutionary for me," says Kelly. "No one—and certainly no one in the magazine industry—thought that way. All revenue was good revenue. And we typically thought our biggest customers, our highest volume customers, were the most profitable customers."
So Kelly took the customer segmentation idea back to Entertainment Weekly, and his team analyzed the profitability of all of the advertisers and all of their segments. They figured out that cable advertising was starting to explode. Networks wouldn't let cable channels advertise on television because they thought they would steal viewers. So cable had to buy print advertising; it was the biggest, broadest reach they could get. Entertainment Weekly had a smattering of cable channel advertisers, but it hadn't been a big focus. Kelly and his team had concentrated on what everybody else was concentrating on: automotive companies and health and beauty companies. They were big advertisers that had a lot of appeal, but they were price sensitive. Kelly, however, realized that the cable television advertisers were actually Entertainment Weekly's most profitable advertisers because they paid full price. This was because they were time sensitive—they had to be in certain issues of the magazine because a show was on a certain night—factors that compelled them to pay a premium.
Kelly completely changed how his organization thought about who its customer was, who its most profitable customers were, and how it should go after its customers. He realigned the sales force, putting more people and sales incentives on the most profitable categories with strong growth expectations and fewer resources against the customers for whom it was really just a price buy. Kelly says:
We were supposed to lose money that year. We made money. And then we went on to have 30 percent CAGR [compound annual growth rate] for the next five years.
I learned that sales is sales. But there are principles of finance that if you apply them to sales, including incentive plans, you can accelerate what you do. I've brought that to every other job I've had. We really try to understand who the customer is and what our value proposition is to that customer. Then we segment those customers so we understand who the most profitable ones are and who they aren't. We put our resources behind that profit.
If your compensation plan doesn't align with the strategy and the segments you want to target, then you're going to be working at cross-purposes. It's hard work to get an organization, any organization, to start to think differently. And in most companies, sales is product-focused or platform-focused. They're going to go sell their product wherever they can. When a company becomes more customer-focused, all of a sudden it starts to define the product mix based on what the customer needs are.
The sales compensation program can support that customer focus, run counter to that focus, or create confusion. In Kelly's case, the priorities of the sales strategy were well represented in the sales compensation plan, and it drove the desired behavior.
The Four Layers of the Revenue Roadmap: Connecting Your Sales Strategy and Compensation
When thinking about sales strategy and sales compensation, it's critical to have a framework. "The comp plan is the caboose, not the engine," says Doug Holland, director of human resources and compensation for ManpowerGroup North America, a global workforce solutions company. "Compensation should never be driving the strategy. The strategy drives the compensation. It's incredible, especially in times of stress, how that message can kind of get lost. Comp issues are often symptoms of bigger problems, and it's the easiest, most tangible thing to look at. The challenge is: Do we have the right job designs? Do we have the right people? Those are harder conversations. That's often the struggle with comp plans."
We developed the Revenue Roadmap from our decades of work with hundreds of high-performing sales organizations. The Revenue Roadmap identifies four major layers, or competency areas, and 16 related disciplines that must connect for the organization to grow profitably, as identified in Figure 1-1. Each of the layers is discussed in detail below.
The first layer of the Revenue Roadmap, Insight, informs the organization about customers, the market, competitors and how the business is performing. Insight is the highest level competency. It involves understanding the voice of the customer, the macro market, competitor moves and performance, and the performance of the business. That understanding will drive certain decisions to the next downstream level, which is Sales Strategy.
Listening to the voice of the customer is a critical starting point. Sales leaders must understand the needs and expectations of their customers and their own performance relative to those expectations. That insight allows leaders to see any gaps and determine where they can improve value proposition, sales coverage, and the sales process.
Sales leaders also need to consider what's going on in the macro market environment, especially as it relates to their industry. Certain shifts in the economic environment can, over the long term, drive decisions about the sales strategy and how they might plan for where the market is going, as opposed to where they are right now.
In addition, it's essential to know how competitors are performing from a growth and financial perspective. Sales leaders also have to understand their competitors' offers to the market and how competitors are positioning their products and services.
Finally, sales leaders should look at the company's historic and projected revenue and profit performance. This evaluation should consider whether growth has come through the retention of current customer revenue, the penetration of customers through increased usage or additional products, or the acquisition of new customers. By understanding the business performance, they can see where they've been strong and where they've been weak, and they can adjust their sales strategy accordingly.
The second layer, Sales Strategy, defines the sales organization's action plan to achieve its goal. The sales strategy will drive decisions concerning product and service focus, concentration on certain markets (i.e., segmentation and targeting), value propositions, and the resulting approach to market.
First and foremost to the strategy, it's critical to define the core and strategic products and services the business provides. In many companies, these are developed based on the needs of certain customer segments. Too often, however, products and services are internally driven and may not align naturally with customer needs, requiring a significant change in the offer or value proposition.
The organization determines how it will organize and prioritize customers and prospects through its segmentation and targeting. The most effective segmentation and targeting considers characteristics such as customer industry, sales potential, profitability, common needs, and overall fit with the sales organization's business. It's important that segmentation and targeting flow into a plan that's actionable by the sales organization. Simply defining the segment at a high level is not going to answer the sales rep's question: "Who do I go see on Monday morning?"
The value proposition goes beyond what the sales organization communicates to customers and articulates the organization's understanding of the customer's business and issues, what the organization can accomplish for the customer, and how the organization differentiates itself from the competition. The highest level value proposition is usually communicated at a company level. To be effective for sales, however, the organization must convert its value proposition to sales messages that can be communicated at the segment level, customer level, and deal level to adapt to changing situations and customer needs.
Finally, when developing the approach to market, sales leaders should incorporate decisions about products, services, target segments, value propositions, and potential sales resources into a plan that can be executed by the sales organization. The Customer Coverage layer converts that plan into action.
Customer Coverage, the third layer, identifies how the organization will use its channels, roles, processes, and resources to go to market.
Sales channels outline the overall routes to market, whether they're third party companies such as resellers, referral partners, or retailers, or whether they're part of the company sales force, which could include a range of sales jobs. Sales leaders need to base the selection of their sales channel mix on factors like how the customer prefers to buy, how channel partners might improve the overall product offer, their ability to reach customers in different markets, and the financial efficiency of using lower cost channels to reach certain customers or conduct certain types of sales or service transactions.
Excerpted from What Your CEO Needs to Know About Sales Compensation by Mark Donnolo Copyright © 2013 by Mark Donnolo. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Chapter 1 Your Revenue Roadmap: Driving Your Sales Strategy with Sales Compensation....................7
Chapter 2 Lapdogs, Dobermans, and Retrievers: Motivating the Breed that You Need....................41
Chapter 3 The Reverse Robin Hood Principle: Differentiating Top Performers....................66
Chapter 4 Performance Metrics: Measure Twice, Pay Once....................96
Chapter 5 Big Deals: Aligning and Motivating Strategic Account Sales....................124
Chapter 6 A Quota Quandary: Setting Equitable and Profitable Sales Goals....................158
Chapter 7 Managing Sales Management: Understanding Roles and Rewards....................183
Chapter 8 Making Change: Communicating and Implementing the Sales Compensation Plan....................209
Chapter 9 The Role of the C-Level: Getting Involved in the Right Way....................232
Chapter 10 Your Strategic Sales Compensation Report Card: Grading Your Plan and Taking Action....................250
Most Helpful Customer Reviews
I've been in sales operations for over 20 years running sales and service models large in scale and small in scale, models selling legacy, mature products and models selling cutting edge, leading technolgy products and services. Establishing, developing, implementing, tracking, and paying sales teams is both an art form and a science. Mark seems to have figured out that "secret sauce". He blends solid, logical and quantitative standards with those more qualitative and creative in nature. His thought process is sound and when his ideas are put into action, successful and productive sales teams are always the result. This is a must read...whether your teams are successful or not. With the landscape ever changing, the principles in this book are necessary and critical tools.
This weekend I completed "What your CEO needs to know about sales compensation" in record speed. In my experience I have read many compensation books and never before has an author linked theory with actual examples while keeping you entertained. Mark Donnolo kept a sense of humor while he educates. This is a must read for any leader - whether in sales or not.
Excellent. This book makes the topic of sales compensation accessible and puts it within context of the broader sales strategy for the executive and manager. Interesting stories and interviews with executives that make the topic relevant rather than academic. I found it engaging rather than technical. Great for corporate leaders, sales leaders, and managers in the organization that need to design incentives or understand how their incentive plan should really work.