OBHR 202 PERFORMANCE MANAGEMENT AND COMPENSATION - PowerPoint Presentation

1. OBHR 202 PERFORMANCE MANAGEMENT AND COMPENSATIONWEEK 9Sales Compensation Reference: Remuneration Handbook Chapter 10Not Peer Reviewed

2. OVERVIEWThe objectives of this session are to learn more about:- Design of total remuneration strategy for sales force employees Types of sales force remuneration plansAdvantages and disadvantages of sales bonus or commission schemes The use of decelerators Study the elements of a sales remuneration planCross-selling incentivesSales manager incentivesIncentives for relationship management

3. KEY SALES REMUNERATION DEFINITIONSMIXRelationship between the base salary and incentive-opportunity component. Mix is expressed as a % of target total remuneration, which is the pay level for achieving expected performance. E.g. 90/10 plan reflects a mix of 90% base salary and 10% incentive opportunity. LEVERAGERepresents the upside earning opportunity. Common leverage for sales positions is a “double” or “triple” – meaning, two or three times the at-risk portion of the mix equals the upper earning opportunity for the top 10% of all performers.Example: A sales job with a target total remuneration of $100,000, an 80/20 mix and triple leverage would have a base salary of $80,000; target incentive earnings of $20,000; and a target upside leverage of $140,000 = [($20,000 x 3) + base salary]

4. KEY SALES REMUNERATION DEFINITIONSCOMMISSIONA commission is a type of incentive. Can be expressed as a % of sales, a % of gross margins (profit), or an amount per unit sold. A commission-only remuneration pay is sometimes referred to as full commission or straight commission. BONUSA bonus is also a type of incentive.Bonus payment is tied to actual performance compared to a goal (e.g. sales quota). Expressed as a % of salary, a % of defined target incentive award, or a flat amount. A bonus is also a type of incentive.E.g. A bonus of 25% of base salary may be paid if 100% of the sales quota is achieved.

5. INCENTIVE FORMULAUnlinked Incentive FormulaAdjusted-value Incentive Formula Linked Incentive FormulaEach performance measure is its own incentive plan. Bonus/commission earned for accomplishments against one measure, regardless of the other measures. Too many unlinked measures may motivate sales reps to to maximise earnings by doing what is easiest to accomplish. Value of performance measures vary to reflect their relative importance. Example: Product A may be worth more for each sale than Product B. In such a case, point value for Product A sales may be worth 10 points, and Product B sales may be worth only 5 points.Linking 2 or more measures can ensure that objectives are achieved in order of priority. 4 types of linked formula design – hurdles, multipliers, modifiers and matrices. An incentive formula relates the pay opportunity to performance achievement.

6. KEY DESIGN FACTORSThe first step in designing a sales commission plan is to define its purpose. A strategy statement should define how the remuneration plan is to be utilised to help the organisation achieve its business goals.Organisation mission and vision statementsOrganisation business plans and strategic objectivesOrganisation life cycleInternal factorsExternal factorsOrganisation philosophy and cultureTotal Remuneration Strategy

7. KEY DESIGN FACTORSELIGIBILITYTARGET TOTAL REMUNERATIONMIX & LEVERAGEPERFORMANCE MEASURESINCENTIVE FORMULAFORMULA FEATURESSCHEME RULESWhich jobs will be included in the plan?At what market percentile should base & incentive opportunities be set? What is the salary-incentive ratio and the maximum incentive?What is the desired level of production? What strategic measures must be met? Will bonuses/commission, or both be used?What are the caps, thresholds, performance & payment periods?What are the rules of the schemes – e.g. merger/buyout, retrenchment etc.

8. TYPES OF SALES REMUNERATION PLANSSALARY & STANDARD BONUSConsists of basic salary plus a target-related bonus to be paid out at set levels in relation to the achievement of organisation sales targetsSALARY & INDIVIDUAL BONUSSame as for the salary & standard bonus, but is geared to the achievement of individual targetsCan be a mixture of sales and other factors (e.g. retaining customers)SALARY WITH STANDARD BONUS & COMMISSIONThere is a bonus in relation to overall sales levels and other targets, plus commission paid as a percentage of sales revenueCan be subject to “accelerators” or “Ddecelerators”SALARY WITH INDIVIDUAL BONUS & COMMISSIONSimilar to above, but the bonus element is related to the achievement of individual targets, both sales and non-salesSALARY PLUS COMMISSIONBasic salary is set in relation to the market, and commission as a percentage of sales is paid in additionIn some cases, basic salary can be set very low as an incentive to generate salesCOMMISSION ONLYIndividual is on his/her own, dependent on maintaining a high level of sales for survivalSALARY ONLYUsed when product sold does not lend itself to incentive payments or when the use of incentives could be construed as unethicalCompanies may award profit sharing or even non-cash incentives

9. REMUNERATION MIX GUIDELINESRemuneration implicationSellingOrder takingMedium sellCold sellingProduct valueHigh valueMedium valueLow valueHigher salaryLittle or no commissionMarket related monthly salaryMedium commissionLittle or no salaryHigh commission135710You can rate the sales function on a scale of one to ten where order-taking or easy selling is scored 1, and really difficult or cold selling is scored 10. Another useful guide to setting the remuneration mix between basic salary and commission percentages is the value of the product.

10. SALES ROLE AS DRIVERSAnother way to help you decide on the remuneration mix is to determine the predominant sales roles.Sales role / ElementsTransactionSolutionsConsultativePartnership /AllianceKey elements of the value propositionProduct features, cost and availabilityProduct sets/ Bundles Operating costsCreativity ProfitabilityRisk managementStrategic positioningShared risksKey focus of the roleProductsSolutionsDiagnostics adviceBusiness strategy integrationKey skills of the roleProduct knowledge and pricingCreativity to see alternativesBusiness skills and acumenValue creationProject, resource and budget expertiseKey measures of performanceNumber of accountsRevenueProduct and service sales growthAccount profitabilityPerformance-based agreementsBase/variable pay mix0/100 – 50/5050/50 – 70/3070/30 – 80/2080/20 – 100/0Variable pay vehicleCommissionCommission/incentive/bonusIncentive/bonus/commissionIncentive/bonus

11. Realign for growth Optimise Hold share Reap profit GrowSALES ROLES CHANGE FOCUS OVER TIMEIt is important to remember that as the business evolves and the strategy changes, the focus of the sales role also shifts.LaunchNew product or solutionSelf-directed market-makersBest product or solutionBigger, better market-makersLowest priceAccount managers, administrative rolesBest valueSpecialised skills, team sellersUnique approach by segmentAdaptive sellers, new talentSALES APPROACH AND RESOURCESTYPICAL SALES REMUNERATION PRACTICESUncapped, flat commission, no or small base0/100 – 50/50Base plus ramped commission, bonuses40/60 – 60/40Base plus commission, and bonus capped60/40 – 80/20Base plus bonus, recognition, capped, team plus personal 70/30 – 80/20Base plus commission or bonus, new metrics, no entitlements40/60 – 80/20

12. ADVANTAGES & DISADVANTAGES OF BONUS SCHEMESADVANTAGESDISADVANTAGESPermit flexible design, to encourage and reward various individual & group behavioursProvide for a basic salary element to cover basic needs and free the representative to attain higher remuneration needs through the bonus schemeEnable payments to be timed to suit business and its need to retain good employeesProvide protection against fluctuations in third-party demand levelsMake equalisation of reward easierUnderpin business strategyLink between effort and reward can be weakObjectives may be unattainable or difficult to appraiseConfusion between bonus & merit paymentsBonus schemes can be more complex than commission schemesThere can be a confusion between bonus and merit paymentsReplacing one with the other can be demotivating, unless the rationale is properly communicated

13. ADVANTAGES & DISADVANTAGES OF COMMISSION SCHEMESPay is linked to sales volumes/ profitabilityThere is a maximum financial incentiveOnly uccessful sales reps will staySales costs related to salaries vary with the measure of performance chosenOffer great flexibility by paying different commission rates to promote different productsEasy to understand and monitoPayments can be closely linked to the income receiveFrom the sales rep POV, commission schemes keep up with inflationAllow sales force to be truly self-employedUncertain/fluctuating earningsSales reps can be tempted to overstock customers or push goodSelf interest > Loyalty Management has little financial control over earningsManagement has little disciplinary controlSchemes may emphasise sales at any priceNon-selling services are discouragedLess pay security. May cause recruitment/retention problemsDrives only one part of the balanced scorecard ADVANTAGESDISADVANTAGES

14. THE USE OF DECELERATORSDecelerators produce a “regressive” commission line – which pays out a lower percentage once a given sales threshold is reachedThe reasons for using decelerators are:To avoid “windfall” pay-outsWhere high sales are not directly attributable to extra sales effortWhere the correlation between “selling” the product to the customer and the size of the eventual order is lowIf a maximum earnings level is thought necessaryTo encourage new orders by reducing the commission value of repeat businessWhere there is a danger of sales exceeding production capacity

15. ELEMENTS OF SALES REMUNERATION PLANFactorsDescription in planPurposeRole of sales representatives; plan importance.Plan overviewBrief summary of plan features.EligibilityList of jobs that are included in the plan.Plan componentsDescription of remuneration elements: salary, bonus and/or commission.Plan qualifiersPresentation of all qualifiers, for example, threshold, definition of a sale, house accounts or split credits, windfalls/shortfalls, caps on incentive earnings, and others.Legal statementRelevant and/or organisation-specific statement indicating rights to change the plan.Related to administrative arrangements, for example, joining, leaving, retirement, retrenchment, leave, maternity leave.AppendixSupporting documentation, for example, salary ranges, commission rates and product categories, incentive calculation illustration.

16. CROSS-SELLING INCENTIVESRemuneration for making multiple sales – usually of different product lines, to the same customer.This method supports the fundamental principle that the more needs satisfied per customer, the greater the stability, retention, and profitability of the customer. BUT! In most companies, a salesperson would always try to sell a product to new customers instead.WHY? New sales focusGreed factorsFear factorCustomer ownership

17. SALES MANAGER INCENTIVES DESIGN GUIDELINESEXAMPLE AEXAMPLE BEXAMPLE CPrimary RoleTo act as a “seller” by growing revenue and/or unit volume because:More volume equals more profit.Market share is small and opportunity exists to grow.All sales are “good”To maximise sales profitability by producing profitable sales because:Profit flexibility exists Field sales costs are largeField sales costs are largeTo develop HR by developing the sales personnel in the sales unitbecause: The selling process is varied and complex.On-the-job training has an immediate favourable impact on business results.Performance Measures Volume in money or units Volume (preferably compared to a goal) or profit contribution (for example, gross margin less controllable selling expenses)Volume and sales representative productivityPlan Concept Use an override commission (for example, based either on a percentage of total sales produced by all sales representatives in the sales unit or on a percentage of sales representatives’ earnings).Use a target incentive remuneration opportunity. The bonus opportunity should be weighted equally between volume attainment and profit contribution performance.Use a target incentive remuneration opportunity. The bonus opportunity should be weighted equally between volume attainments and, for example, the number of sales representatives reaching the sales quota.

18. INCENTIVES FOR RELATIONSHIP MANAGEMENTA HAPPY CUSTOMER BUYS MOREIncentive remuneration should revolve around retaining & increasing the current buying levels for a group of customers Relationship management is tied to increased income or profitability of the customers rather than the product mix attributable to the groupWell suited to individuals who sell and manage relationships with institutions rather than individuals or householdMany larger companies house relationship managers within their principal suppliers to facilitate more rapid service and better understanding of their needs Designing incentives for relationship management shares many of the challenges of cross-selling incentives (also difficult to obtain supporting data on which to set performance standards and associated incentives)

19. NEW SALES ROLESThe world is changing, and the next wave of new sales roles are here which need to be included in the remuneration design.End-user Sales SpecialistRetention Sales SpecialistNew Customer Acquisition SpecialistTelephone Account ManagerService Consultant

20. SUMMARYIn this session, we have discussed:- Design of total remuneration strategy for sales force executives Types of sales force remuneration plansAdvantages and disadvantages of sales bonus or commission schemes The use of decelerators Study the elements of a sales remuneration planCross-selling incentivesSales manager incentivesIncentives for relationship management