Businesses face change at a faster rate today than at any other time in history, making the calculation of sales compensation more important than ever. 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. These results are also key to the calculation of sales compensation plans.
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.
Sales Compensation Testing Proves Its Worth
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 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 accelerated 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.
Sales Compensation Test Design
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.
In the next article in this series, Kevin O’Connell and Mark Blessington dig deeper into the testing of sales compensation calculations, as well as related criteria like core assumptions about sales compensation that also benefit from testing.