Legitimacy of Management

It is the purpose of the organization, and the grounds of management authority, to make human strength productive.

It is the task of management to make the institutions of the society of organizations, beginning with the business enterprise, perform for the society and economy, for the community, and for the individual, alike. This requires, first, that managers know their discipline.  It requires that they know management.  The first task of the manager is indeed to manage the institution for the mission for which it has been designed.   The first task of the business manager is, therefore, economic performance.  But at the same time she faces the tasks of making the work productive and the worker achieving, and of providing for the quality of life for society and individual.  But a leadership group also has to have legitimacy.  It has to be accepted by the community as “right.”  They need to ground their authority in a moral commitment, which at the same time, expresses the purpose and character of organizations.  

There is only one such principle of morality.  It is the purpose of organization, and, therefore, the grounds of management authority, to make human strength productive.  Organization is the means through which man, as an individual and as a member of the community, finds both contribution and achievement.

ACTION POINT: Use your position of authority to bring out whatever strength there is in the people you are responsible for.

Absolute vs Relative Performance V

...sales representatives see the incorporation of hitting management-established goals as a logical evolution to their pay program. 

Most sales reps are astute when it comes to dissecting a sales compensation program.  The first question most reps will ask when relative performance metrics are introduced is: "How will the goals be set?"  We have been part of successfully implementing relative performance metrics into sales compensation programs that were previously based on absolute measures many times.  In these instances, success was due in part to accountability within the sales organization.  Sales representative may not have been paid on achieving objectives such as monthly or quarterly sales goal, but the goal was important to them because their manager made it so.

In these situations, sales representatives see the incorporation of hitting management-established goals as a logical evolution to their pay program.  On the other hand, there are companies in which an almost irrational fear of the sales force exists.  In these companies, the view is that the sales force will leave the company en masse if their pay program were to change to a system that links any portion of their pay to achieving objectives.

Some questions to consider in order to get a sense of how well relative performance metrics would work based on the degree of accountability in your organization are:

• Do goals exist for sales reps today?
• If goals exist, do sales reps pay attention to them?
• Does a sales manager regularly meet with sales representatives to review performance?
• Does the company have a history of success when emphasis is placed on short-term objectives-for example, product promotion?
• Are sales reps special deals mostly absent?

ACTION POINT: If most of the answers to the questions are "no," an absolute approach will be less disruptive and easier to implement.

Absolute vs Relative Performance IV

It is better to not waste time discussing goal-driven program options if a company is unable to implement them.

Assessing the feasibility of using relative performance metrics is the first challenge your sales compensation design team should tackle.  If relative measures are not appropriate, the sales compensation structures and mechanisms available are rather narrow as you are essentially left with absolute program options, the most common of which are detailed later in this chapter.  

It is better to not waste time discussing goal-driven program options if a company is unable to implement them.

ACTION POINT: Does enough accountability exist within our sales organization so that we can use management-defined objectives?

Absolute vs Relative Performance III

Sales rep incomes are tied to goals, budgets, or quotas, creating a degree or accountability for the rep to contribute his or her part of the company's overall objectives.

The distinction between absolute performance is critical when considering sales compensation options.  A sales executive once explained the difference between absolute and relative performance in the context of sales compensation by saying, "On approach is sales rep regulated and the other is management regulated."

The point the executive was making is that relative measurements mean that performance is evaluated relative to management expectations.  Sales rep incomes are tied to goals, budgets, or quotas, creating a degree or accountability for the rep to contribute his or her part of the company's overall objectives.

By saying "rep regulated" the executive was expressing his view that the the only accountability that exists under an absolute program is the amount of income the rep wants to earn.  In other words, the rep is solely accountable to himself or herself and the income the rep wants to make.

ACTION POINT:  Decide how you want to manage performance expectations.

Absolute vs Relative Performance II

It wouldn't matter if the sales rep that generated $1MM missed his or her budget by 30%, was down 20% in sales from the prior year, lost 200 basis points of margin, and had sales in only 2 out of 10 of the company's product categories... 

From a compensation perspective, absolute performance means more is better.  A sales rep that generates $1MM in gross margin would earn more than a sales rep that generated $900K in gross margin using an absolute measuring approach, such as a straight commission program that pays 15% of gross margin dollars.  

It wouldn't matter if the sales rep that generated $1MM missed his or her budget by 30%, was down 20% in sales from the prior year, lost 200 basis points of margin, and had sales in only 2 out of 10 of the company's product categories while the sales rep that generated $900K in gross margin was up 25% from the prior year, beat their budget by 10%, increased gross margin percentage, and had sales balanced throughout the company's product categories.  None of this would matter because in absolute terms, $1MM is better than $900K.

ACTION POINT: Understand that absolute performance make everything but the the total GP irrelevant.