Special from World at Work, San Diego
“I get lots of questions on sales compensation,” says consultant David Cichelli, “but the number one sticky wicket is always quotas, closely followed by long sales cycles, and mega orders.”
Cichelli, who is Sr. Vice President at The Alexander Group, offered his tips at World at Work’s Total Rewards conference held recently in San Diego. Here are his tips for understanding and fixing quotas and other sticky wicket problems in sales compensation.
Sticky Wicket #1—Sales Compensation Quotas
The problem: The quality and/or accuracy of quotas is low.
Sales Comp Impact: Payouts do not reflect relative contributions.
Source of the Problem: Cichelli believes that quota problems stem from four sources:
- Irregular business cycles
- Poor forecasting (usually from finance or product managers)
- Weak quota allocation
- Governance issues, particularly rampant quota adjustments
Upstream Solutions: Cichelli offers five possible “upstream” solutions (that is, solutions that must be accomplished before the quota period begins, often by people not in the sales department).
- Business Cycles: Shorten quota periods to semi-annual or quarterly
- Forecasting: Invest in forecasting tools and modeling
- Quota Allocation: Redesign quota allocation process
- Visibility: Remove “uncertain events” from annual quotas (e.g., new products, mega sales)
- Governance: Restrict/review quota changes
Sales Comp Solution: In the sales comp area, Cichelli suggests issuing new quota policies, for example:
- Quotas cannot be over/under assigned by more than 5%
- After Q2, if 80% are above quota, reset quotas after payouts
- After Q2, if only 40% have reached quota, reset after payouts
- All quota relief must be absorbed by others (you’ll be surprised how fast this one curbs quota relief, says Cechelli)
Compensation.BLR.com, now thoroughly revamped with easier navigation and more complete compensation information, will tell you what’s being paid right in your state—or even metropolitan area—for hundreds of jobs. Try it at no cost and get a complimentary special report. Read more.
Sticky Wicket #2—Long Sales Cycles
The Problem: Long sales cycles (over 12 months) make setting quotas difficult.
Sales Comp Impact: Inaccurate quotas can significantly affect payments, making them either too high or too low.
Source of the Problem: The problem results from:
- The nature of the product dictates the sales cycle
- Quotas are poorly suited to measure long sales cycles
Upstream Solutions: As an upstream solution, Cichelli suggests discontinuing the use of quotas and moving to an account management model—with attendant business case plan and sales outcomes stated.
Sales Comp Solution: Cichelli suggests an Account Plan Key Sales Objectives approach. That is, reward for sales progression milestones:
- RFP completed and submitted
- Proposal is in the final group for consideration
- Letter of intent signed
- Contract Signed
Pay a contract signing award at time of contract win, says Cichelli. Use a payout table tied to revenue for example, $1 to $5 million sale, $25,000; $5-$10 million sale, $35,000, etc.
For residual revenue, Cichelli suggests a modest, declining incentive on future revenue that terminates within 24 months (e.g., .01 percent).
Try BLR’s all-in-one compensation website, Compensation.BLR.com, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide. Find out more.
Sticky Wicket #3—Mega Orders
The problem: Unexpected large orders.
Sales Comp Impact: Quotas were set without anticipating a large order; and excessive payment occurs. For example, typical weekly sales amount is $10,000; then one week sales are $85,000.
Source of the Problem: This problem arises from the “Business Mix,” says Cichelli. Among the predicable “normal” orders, an unexpected “mega” order occurs.
Upstream Solutions: Check job content, says Cichelli: Ensure that the job/system can correctly handle both “normal” and “mega” orders.
Sales Comp Solution: Develop a Mega Order Policy. Limit amount of revenue recognition for quota purposes—that is, cap quota retirement. Provide “modest” commission payout for additional dollars above the cap. (For example, first $15,000 goes to quota retirement with a full commission, then a .02 percent commission after that.)
In tomorrow’s Advisor, another of Cichelli’s sticky wickets plus an introduction to the all-in-one compensation website, compensation.BLR.com.