The complete guide to sales force incentive compensation: how to design and implement plans that work

511 Pages·2006·2.26 MB·English

by  Andris A. Zoltners

The Complete Guide to
Sales Force
Incentive
Compensation
How to Design and
Implement Plans That Work
Andris A. Zoltners,
Prabhakant Sinha,
and Sally E. Lorimer
AmericanManagementAssociation
NewYork•Atlanta•Brussels•Chicago•MexicoCity•SanFrancisco
Shanghai•Tokyo•Toronto•Washington,D.C.
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LibraryofCongressCataloging-in-PublicationData
Zoltners,AndrisA.
Thecompleteguidetosalesforceincentivecompensation:howtodesignand
implementplansthatwork/AndrisA.Zoltners,PrabhakantSinha,andSallyE.Lorimer.
p. cm.
Includesindex.
ISBN-10:0-8144-7324-5
ISBN-13:978-0-8144-7324-5
1. Salespersonnel—Salaries,etc. 2. Incentivesinindustry.
3. Compensationmanagement. I. Sinha,Prabhakant. II. Lorimer,SallyE. III. Title.
HF5439.7.Z65 2006
658.3(cid:2)2—dc22
2006012201
(cid:2)2006AndrisA.Zoltners,PrabhakantSinha,andSallyE.Lorimer.
Allrightsreserved.
PrintedintheUnitedStatesofAmerica.
Thispublicationmaynotbereproduced,
storedinaretrievalsystem,
ortransmittedinwholeorinpart,
inanyformorbyanymeans,electronic,
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Printingnumber
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To Linda, Sally, and Prabha, who make writing
books easy and enjoyable.
—AZ
To Joe Balintfy, my teacher and mentor,
who taught me to always keep learning.
—PS
To my husband, Al Cotrone, and our children,
Jamie and Jack, with love.
—SL
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This page intentionally left blank
Contents
Preface viii
Acknowledgments xi
Chapter1 Sales Force IncentiveCompensationand the Successful
Sales Organization
Introduction 2
The Drivers of SalesForce Compensation Change 12
The SalesForceCompensation Challenge 17
The SalesManagement System 19
The Role of Incentive Compensation Within theSales
Management System 23
Diagnosing SalesForce Issues 29
How This BookIsOrganized 32
Chapter2 ReviewingaCurrentIncentiveCompensationPlanand
Setting Objectives for a New Plan
Introduction 40
IsItReally an Incentive CompensationPlanProblem? 41
AnOverview of aSales Incentive PlanAssessment Process 44
Assessment of CurrentSalesCompensation Plan Consequences 45
AssessmentofCurrentSalesCompensationPlanConsistencyand
Compatibility 76
Developing NewPlanObjectives 83
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vi Contents
Chapter 3 Plan Design Fundamentals
Introduction 93
Sales CompensationPlan Design Terminology 94
Chapter4 Plan DesignPart 1:DeterminingtheCorrect PayLevel
IsYourSalesForce Pay Level Correct? 108
The Range of SalesForce Pay Levels 112
How to Determine the RightSales Force PayLevel 115
Conclusion 137
Chapter 5 Plan Design Part 2: Finding the Best Salary–Incentive
Mix
Introduction 141
DoYou Have the RightPay Mix? 143
The Range of Salary–IncentiveMix 151
How to Determine the RightSalary–Incentive Mix 160
A PayMix Scorecard 179
Chapter 6 Plan Design Part 3: Selecting Performance Measures
Are YouUsingthe Most Appropriate Performance Measuresto
Determine YourIncentivePlanPayout? 184
Types of Measures 187
How to Determine the Most Appropriate SalesIncentive
Measures: AnAdvisory 192
How to Determine the Most Appropriate SalesIncentive
Measures: Specifics 198
Chapter 7 Plan Design Part 4: Determining the Right
Performance–Payout Relationship
Introduction 226
Isthe Most Appropriate Performance—Payout Relationship
Usedfor Determining the Incentive Plan Payout? 227
Representing Performance—Payout Relationships 228
Decision1: BonusPlanor CommissionPlan? 231
Decision2: Progressive or RegressivePlan? 237
Decision3: Caps or No Caps? 243
Decision4: Payfromthe First DollarorfromGoal or aFraction
ofGoal? 245
Decision5: Single Measure or MultipleMeasures? 251
Concluding Insights 261
Chapter 8 Evaluating Proposed Sales Incentive Compensation
Plan Alternatives and Selecting a New Plan
Introduction 265
AnOverview of Candidate SalesCompensation PlanAssessment 267
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Contents vii
QuantitativeAssessmentofaCandidateSalesCompensationPlan 271
QualitativeAssessment of aCandidate Sales Compensation Plan 295
Future-ProofingAssessment of aCandidate Sales Compensation
Plan 306
Conclusion:FromObjectives to Reality 308
Chapter 9 Setting Effective Goals and Objectives
Introduction 313
Are Your Sales ForceGoalsAppropriate? 314
Types of Goals 327
How to SetEffectiveSalesForce Goals:a Five StepProcess 330
TrackingPerformanceAgainstGoals 369
Goal-Setting Recommendations 372
Concluding Insights 375
Chapter 10 Increasing Sales Force Motivation Through Sales
Contests, SPIFFs, and Recognition Programs
Introduction 378
Sales Contestsand SPIFFS 380
RecognitionPrograms 403
Insights 407
Chapter 11 Making an Effective Transition with a Major
Incentive Compensation Plan Change
Introduction 410
Sales Incentive CompensationPlan Change andthe Sales
Management System 415
ChallengingSales Incentive CompensationPlan Transitions 421
A SalesForce ChangeProcessFramework 435
Chapter 12 Incentive Compensation Plan Administration
Introduction 454
Isthe Incentive CompensationPlan AdministeredWell? 458
ICPlanAdministration Systems and Processes 461
How to DesignanEffectiveICPlanAdministrationSystem 476
Summary 489
Index 491
About the Authors 000
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Preface
The use of incentives for effective sales force management is a two-edged sword.
On the one side, the right incentive plan can inspire and energize a sales force to
workhardtoachievechallenginggoals.Incentivesprovidesalespeople,whooften
face rejection, with the motivation to keep going and to perform the difficult
work of finding new accounts and closing sales. They also set expectations for
salespeople of what is important to the company. Incentives help to hold sales-
people,whooftenworkaloneandunsupervised,accountableforresults.Theyare
apowerfulrecognitionofasalesforce’sefforts.Incentivesareanimportantmeans
through which many firms reinforce a sales-oriented culture and attract high-
performing achievers to the sales job. Paying for performance helps a company
hire and retain salespeople who are highly motivated to do what it takes to drive
companyresults.
On the other side, incentives also create many sales force management chal-
lenges. Incentives can inspire mercenary, greedy sales force behaviors that create
short-term sales, but conflict with long-term company success. Incentives can ac-
tually reduce motivation and lead to turnover among salespeople who feel that
they are not getting as much incentive money as they deserve or who feel that
others who are performing worse are making more money. Incentives also limit
sales force flexibility and reduce management’s ability to control the sales force
through means other than money. Sales strategy changes (such as changes in
customer responsibilities, product emphasis, or selling activity focus) that are in
thecompany’sbestinterestmaymeetresistancefromsalespeople,iftheyfeelthat
the changes will reduce their personal income. Other company employees may
feel that sales force incentives are excessive, thereby hindering teamwork among
departments and compromising customer relationships. Finally, sales incentive
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Preface ix
programs can be costly to manage, requiring considerable investment in internal
supportsystemsandpeopleand/orsubstantialfeespaidtoconsultants.
TheCompleteGuidetoSalesForceIncentiveCompensation:HowtoDesignand
Implement Plans That Work was written to help firms harvest the positive aspects
andeliminateormitigatethenegativeconsequencesofusingincentivecompensa-
tion as a means of motivating salespeople. The right incentive plan, when imple-
mented effectively, can help a firm attract and retain the best salespeople and can
motivate the sales force to engage in activities and behaviors that drive sales suc-
cess. On the other hand, the wrong plan or a good plan that is implemented
poorly has the potential to do considerable harm. Salespeople may feel discour-
aged and let down. The best sales candidates may not join the company, good
salespeoplemayleave,thesalesforcemaynotbemotivatedtoworkhardorspend
time effectively, relationships with customers may suffer, and sales performance
may fail to reach company expectations. With an ineffective incentive plan, the
considerablemoneyspentonincentivesgeneratesvery lowincrementalsales.
OurgoalinwritingTheCompleteGuidetoSalesForceIncentiveCompensation:
How to Design and Implement Plans That Work is to create a comprehensive and
highlypracticalbookthatisuniquewithinthecompensationliterature.KashRan-
gan, Malcolm McNair Professor of Marketing at the Harvard Business School,
sumsupthebook’scontributionwhenhewrites:
‘‘Thisthirdbookintheremarkableseriesonsalesforcemanagementprovides
a strategic overview as well as an in-depth guide to the subject of incentive
compensation for the sales force. The book is brilliantly architected along
three important dimensions for the reader. First is the strategic overview for
top management provided by a compelling 3-Cs framework, which serves as
the platform within which each of the twelve chapters fits. Second is the in-
depthtreatmentofthedesignissuesinthefirsthalfofthebook.Eachchapter
is illustrated with problems faced by managers in a wide range of industries.
The examples are crisp and the accompanying figures and descriptions make
the problems come alive. The proposed solutions are nuanced and rich in
detail,reflectingthedeepexpertiseoftheauthorsonthetopic.Finally,inthe
last several chapters, the authors provide many practical tips and a wealth of
advice on implementation issues. If your firm has significant sales force activ-
ity, this book is not just a ‘must read,’ it is a ‘must act upon’ if you want to
improveyourbottomline.’’
The book is designed as a sourcebook for sales, marketing, finance, and
humanresourcemanagersandexecutives—anyonewhoisresponsiblefordesign-
ing,implementing,and/oradministeringasalesincentivecompensationplan.We
draw on our extensive experience consulting with companies on a wide range of
strategicandtacticalsalesforceissuestopositionsalescompensationeffectivelyas
one component of a successful sales management system and advising how to
avoidthecommontrapofusingchangesintheincentiveplantofixproblemsthat
originate elsewhere within the sales management system. We use hundreds of
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