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The Warning Signs and Potential Changes to Consider

By: J. Mark Davis, Managing Principal, Valitus Group, Inc.

During uncertain economic times, the pressure on a sales force to continue to produce is never greater. Trouble is, during periods of economic uncertainty, that kind of continued productivity is not always easy to sustain. When the economy softens and the air waves are dominated by doom and gloom economic forecasts, I am frequently asked whether changes should be made to the sales compensation plan to reflect the realities of the softening market.

Before considering potential changes, it’s important to validate that the underperformance is owing to market forces outside the sales force’s control as opposed to simply reflecting an unproductive sales team. Once you establish that it truly is the broader economy at play, you’re ready to consider which changes to the sales compensation plan are most appropriate. However, let’s first consider the warning signs to watch for.

The Warning Signs

The following are five tests for whether sales compensation change should be considered.

• Aggregate revenue well off quota – If first quarter results for the sales force as a whole (or by division, channel, or region) are well off the planned run rate, this is the first clue that something’s amiss. Confirm that the first quarter underperformance is an aberration from prior years’ results.
• Too few reps performing at quota – A “normal” performance distribution will see 55 to 60 percent of the sales force perform at or above quota. Another way to look at this is to calculate the median quota attainment level for each key segment of the sales force. One would ideally see the median quota attainment at or slightly above 100 percent.
• Too many reps below threshold – The threshold (i.e., the minimum performance level required to earn any incentive) is typically modeled expecting 90 to 95 percent of the sales force to exceed that level. Be wary of 25 percent or more of the sales force performing below threshold.
• Too few reps at or close to excellence – The excellence performance level (i.e., where the full upside incentive potential is earned) is typically modeled expecting 10 percent of the sales force to achieve or exceed it. If no one is achieving excellence, let alone coming close to it, it may signal the need for change.
• Increase in quota adjustment requests – For sales organizations operating under a quota-based incentive plan, quota adjustment requests are to be expected. Watch for a significant spike in the volume of such requests, particularly from heretofore strong performers.

If your organization is experiencing any number of these symptoms, then it is worthwhile to consider making adjustments to the sales compensation plan. The point here is that sales compensation management requires actively monitoring results. In other words, don't wait until performance levels are suffering to begin regularly evaluating the results of your sales compensation plan.

Potential Sales Compensation Changes

While it is generally not advisable to make changes to a sales compensation plan within a plan year, changes may be necessary in order to keep a sales force engaged and motivated during difficult economic times. As opposed to wholesale change, the following represent potential plan adjustments that are likely to keep the overall framework of the sales compensation plan in tact.

• Reduce threshold – If significantly more than 10 percent of the sales force is falling below threshold, consider lowering the threshold performance level. Threshold is the minimum acceptable performance level, below which no incentive compensation is earned. Calculate the 5th percentile quota attainment level on a year-to-date basis as a starting point to see what a more reasonable threshold may be.
• Reduce excellence – Likewise, if no one is achieving excellence, you may need to reduce the excellence performance level. Excellence is the outstanding level of performance for which one earns the defined upside incentive potential. Again, calculate the year-to-date 90th percentile performance level as an indication of a more realistic excellence performance level.
• Adjust the incentive rates at key points on the performance continuum – If you need to adjust the performance range, a corresponding change to the associated incentive rates also may be necessary. For example, if the former threshold of 80 percent of quota paid 50 percent of the target incentive, a new threshold of 70 percent of quota may pay only 40 percent of the target incentive. Likewise, if the excellence performance level is reduced, you may need to reduce the amount of incentive paid for the new, lower excellence performance level.
• Reset the performance measurement clock – If performance is measured on a cumulative year-to-date basis, severe underperformance early in the year can leave salespeople feeling like they’re swimming with a boat anchor tied to their ankle. Consider resetting the performance measurement clock with the start of a subsequent quarter or month, thereby wiping the slate clean from the tough start to the year.
• Introduce a SPIFF – A SPIFF is a special, temporary incentive that sits outside the core sales compensation plan. It should reward for results that are complimentary to that which is rewarded in the core sales plan. Examples might include achieving a fast start to a subsequent quarter or generating revenue from a defined list of new accounts.
• Adjust the annual revenue quota – I mention this option last for a reason, recognizing that a downward adjustment to a top-line commitment may not be possible. However, at a minimum, one should validate the assumptions that led to the top-line revenue number at the beginning of the year. Also, validate that the allocation of the aggregate number down to the individual salespeople makes sense. Where an over-assignment of quota is the norm, ensure that there wasn’t too much over-assignment as the top-line number cascades down into the organization.

The Call for Leadership

Regardless of the course of action, it is important to actively communicate management's expectations and support. Whether or not sales compensation plan changes are made, visible and vocal sales leadership is crucial in tough economic times. Be clear with performance expectations. Regularly communicate management's commitment to leading the team through the abyss. If the plan is changed, over communicate the rationale for the change and the objectives for the sales team, as well as for the sales compensation plan itself, for the balance of the plan year.