Businesses face change at a faster rate today than at any other time in history.
A recent WSJ article noted it took landline telephone 75 years to hit 50 million users. Other industries took significant time to hit the 50 million user milestone as well— airplanes 68 years, automobiles 62 years, light bulbs 46 years, and television 22 years.
Reaching 50 million users was achieved by YouTube in 4 years, Facebook in 3 years, and Twitter in 2 years.
Then there is Angry Birds which took all of 35 days.
While new business models have disrupted industries with lighting speed, many assumptions around employee engagement, motivation, and adaptability are rarely questioned. This is especially true with salespeople.
In a world of rapid change, survival depends on double-checking long held assumptions. Yet marketing and sales executives rarely question the underlying assumptions used to design sales compensation plans. Typically, half of a sales and marketing budget is spent on sales force compensation. But does anyone actually have a sales compensation plan that is proven to be effective? The short answer for most companies is no.
Just as CMOs are constantly pressed to demonstrate ROI for their marketing expenditures, so too should CSOs provide proof that their pay plans drive results.
We need to take a page out of the marketer’s playbook and apply it to sales. Executives must start proving whether the conventional wisdom underlying sales compensation plans is effective. The following builds the case for sales compensation testing and how to do it.
The Value of Testing
The core assumptions about sales compensation plan design date back to the 1980s – probably even back to the tin men days of the 1960s. But sales and marketing executives have no proof that a sales comp plan rooted in these old assumptions will maximize sales performance in today’s world.
Many companies use history (prior sales results and associated incentive payouts) to model new plan designs and compare model payout results to prior payouts. This classic sales compensation modeling approach is necessary and important, but insufficient. It is a “rear-view mirror” approach. Essentially, classic sales compensation plan modeling says: “Let’s pretend that this newly proposed plan was in place last year, and then model how pay and performance would have been different.”
Traditional sales compensation modeling just does not stand up to today’s rigorous ROI “proof of concept” standard that is applied to most marketing programs. As marketers now know, testing is the best way to prove the effectiveness of a program or campaign expenditure.
While field tests are common in marketing, they are rarely done for sales compensation plans. This must change.
Field tests for sales forces have the potential to keep companies agile in this age of change. They can validate new pay plans much sooner than the traditional implement and wait approach. Typically, it takes a year to find out if it the new plan failed, partly succeeded, or hit the mark.
By the time you get feedback on a new design under the traditional approach, your marketplace could have changed again. Playing catch up in an environment of accelerate change is a strategic mistake.
We understand the argument made by sales leaders against sales compensation testing. They are concerned that comp plan tests can endanger revenue and profit goal achievement. The real question is can they afford not to conduct field tests? We believe sales compensation plan adjustments and changes will need to happen much sooner than in the past in order to keep pace with changes in the marketplace.
We also understand the objections to testing made by human resources professionals. They worry the sales force will complain about fairness. If the test if great, those without the test will cry foul. Of if the test is a flop and payouts are low, those salespeople will complain bitterly. One response is: If salespeople stop complaining about sales compensation, then something is very wrong, like pay must be way too high. Another response is: Salespeople often complain about fairness; that is just part of the job of managing salespeople. The challenge is to weigh all perspectives and develop sales compensation plans that are competitive with the labor market and are proven effective.
What would a sales compensation field test look like? A new incentive plan would be applied to a test group of actual sales reps in specific territories, and their pay and performance levels would be compared to a control or similar group of sales reps where the pay plan was unchanged. Generally speaking, if performance is higher for the test group, the incremental gain is attributed to the new pay plan. The converse would apply as well. If performance is worse for the test group, the new/test plan failed.
It is important to identify a control group that is comparable to the test group. It makes no sense to test a new compensation plan in North Dakota and assert the results have relevance for salespeople covering Manhattan.
It is also important to have a true control group. If you test a new comp plan for Chicago salespeople but run a price promotion at the same time in New York City, then you can’t compare Chicago and New York results. In other words, you can’t run concurrently overlapping test events. Protecting the integrity of a sales compensation test requires coordination across the marketing and sales departments.
Another testing consideration is duration: how long should the test last? In general, a year-long test is too long, and a month is too short. Part of the duration decision depends on the length of the sales cycle. If the prospect-to-close cycle is three months, then the test might need to last six months. Another factor that impacts test duration is the time it takes to communicate the test to salespeople. If the communication cycle is a few days and there is a relatively short sales cycle, then the test could last two to three months.
Core Assumptions to Test
There are three main assumptions about human behavior that are long held yet seldom questioned by marketing and sales leaders.
- People do more if paid more. This is the founding principal for all compensation plans including variable pay and sales incentives. Academic studies show this to be true under certain conditions. In one study, higher productivity was realized only when the extra pay was provided as a gift — no strings attached . There is more nuance here than commonly perceived. Many would agree salespeople are different from the general employee population with a larger appetite for risk and reward. But we hear many clients suggest “sales reps are coin operated,” which is just an over simplified view of what motivates and drives them. By field testing sales incentive plan changes, you can determine which design structure best motivates your sales team.
- People do more if asked to do more. This is the basis of setting sales goals and quotas. Quota based sales incentive are most prevalent today (75% – 80%). However, issues and challenges with quota setting is a frequent chronic complaint from sales leaders and salespeople. Tendencies to inflate quotas to ‘cover’ shortfalls is widespread. The best designed sales compensation plan will not necessarily motivate or drive performance with quotas poorly set or viewed as unfair. Finding the right balance between motivation and fiscal responsibility is the holy grail of effective sales incentive design. Field testing varying quota setting approaches to validate the best approach should be far more common.
- Cash is king. While other rewards such as contests and recognition are increasingly prevalent, the vast majority of sales incentives are cash based. Effectively designed sales contests and recognition programs are necessary elements in the sales incentive portfolio. Other rewards can have a cost-effective impact on performance but need to be properly designed and tested to understand what option actual moves the needle.
Major Design Criteria to Test
There are five well-established standards for effective sales compensation program design:
- Keep it simple. For sales incentives to be effective their needs to be a clear link the action (closing a sale) and the payout. Many talk about how the plan design should fit on the back of an envelope so that a rep and calculation their payout when the deal is inked.
- Limit performance metrics to 3 or 4 max. The more metrics used the less clear, direct, and focused the sales incentive.
- Use accelerators but don’t over-engineer. Tier plans motivate but to a point. Many reps discount the top tier or two as unachievable.
- Do not cap sales incentive plans. If people break through with fabulous performance, why punish them and not pay for their tremendous result?
- Use thresholds sparingly. For example, set a threshold like 80% of quota when there is a large installed base of business, and then only pay for sales over the threshold amount.
Sales compensation plans designed with the above basic principles are candidates for field testing when it comes time to change the plan. Field testing can validate or dispel some long held foundational assumptions that sales incentives are built. Some additional assumptions that may warrant testing include:
- Quotas keep reps honest and on track.
- Reps focus selling efforts based on the highest payout / commission rates.
- Highly leverage plans (50/50 – 60/40 salary/incentive pay mix) drive performance for all reps.
- Cash based contests can spike short-term performance.
- Cross selling means more money for reps who will jump at the opportunity.
- Salary makes some reps content and unmotivated.
Filed tests can provide additional insights to determine if the current pay mix (i.e., split between salary and incentive cash compensation) assumptions are accurate or not. For example, does an 80/20 pay mix (80% base salary, 20% incentive compensation) motivate most of your salespeople? It would not be unusual to find certain pay mix levels are motivational for some reps but not all. Such a finding might lead you to explore a mix of compensation plan designs that better fit the territory, amount of recurring versus new business, etc. In other words, the days of “one size fits all” may need to become a design assumption of the past.
Field Testing Requirements
Field tests have three main requirements in order to be successful. Initialing a field test without satisfying these requirements is to engage in professional malpractice. Here’s what is required:
- Identify the treatment and control groups. The portion of the sales team to use to test plan design changes is the treatment group. The remaining sales force continues under the existing plan is the control group. This way results between the two groups can be compared to validate plan design changes are appropriate or not.
- Have a feedback mechanism to see how salespeople respond to plan design changes. Feedback metrics can capture either outcomes (e.g., increased sales, number of new deals closed), behaviors (e.g., new account management or closing tactics used, additional time spent selling), or perceptions (i.e., how reps feel about the new plan). It is always better to measure behaviors which are more closely linked to revenue and profitability.
- Keep the treatment and control groups separated. It is important that neither group has outside interference with bias the results.
Field Testing Guidelines
Here are some basic guidelines for conducting field tests.
- Start a test with change options that are simple and easy to execute. Better to start with low hanging fruit than more complex changes. As you gain more experience with field testing it will be easier to construct tests for more complex design changes.
- Focus on short term results. Best to identify changes that can be captured quickly — monthly or quarterly are ideal. The sales cycle will help guide you. If results take 6 months or longer to capture, field test for plan changes need to be planned well in advance.
- Concentrate on individual reps. You are looking for a correlation between the stimulus (e.g., incentive plan change) and the response (e.g., increase sales, deals closed, etc.). Individuals may react differently but trends will appear.
- Test the primary premise to see if “proof of concept” is valid. The goal is to prove the plan change works or not. If results are positive the plan change can be refined and implemented. Otherwise the plan change requires additional work and testing.
- Analyze test results. It is worth seeing the impact by different data slices — territories, customer account segments, reps at different performance levels, etc. Additional insights may help refine the plan change or send you back to square 1 with more information.
Benefits of Field Testing
The primary benefit of conducting field tests on sales compensation plans is it validates a new plan design and avoids broad implementation of a faulty plan design. If you are trying to change or redirect behavior, field tests can provide the fact base for finding which plan design features are most effective in driving the results you want.
Field tests can change sales compensation design decisions based on conventional wisdom to plans designs validated by fact-based experiments.
Field tests can validate new plan designs prior to full-scale implementation. They also can save companies from wasting time and money by avoiding ineffective sales compensation plan designs and implementation efforts.
Traditional modeling of new sales compensation programs is an essential part of the design process but unfortunately only provides a rear-view mirror approach. It assumes if the new design was in place, reps would change behavior. Field tests provide a “through the front windshield” view. You can actually see if plan changes will modify behavior and improve results or not. It eliminates the guesswork and assumptions that marketing and sales executives have relied on for decades.
In a business era where agility is akin to survival, field tested sales compensation plans may make the difference between staying ahead of the completion and falling hopelessly behind.
Kevin O’Connell is Managing Partner at Accelerate Consulting Group, a sales effectiveness consulting firm.
Mark Blessington is President of Mark Blessington Inc., a sales and marketing consulting firm.
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