Organizations and Individuals

The more the organizations grows, the more the individual can grow

The more the individual in an organization grows as a person, the more the organizations can accomplish-this is the insight underlying all our attention to manager development and advanced manager education today.  

The more the organization grows in seriousness and integrity, objectives and competence, the more scope there is for the individual to grow and to develop as a person.

ACTION POINT: Keep learning.  Take full advantage of your company’s educational benefits.

Misalignment Identification

There are two key questions to ask when assessing whether your current sales compensation program is misaligned with short-and long-term strategic objectives. 

Because of the criticality of alignment in assessing the effectiveness of a sales compensation program, it is important that you clearly understand what exactly alignment means.  It is easy to think that any commission program is aligned with a company's strategy--simply because more sales generate higher incomes for sales representatives.  However, a deeper and more critical examination is required to assess how aligned a sales compensation program is with a company's strategy.

There are two key questions to ask when assessing whether your current sales compensation program is misaligned with short-and long-term strategic objectives.  The first question is: Do the prevailing programs penalize sales representatives for achievement of the objectives?  This question isn't meant to be figurative, but literal.  If a company sees a long-term strategic opportunity in products that have below-average margins, but the company uses a commission matrix in which gross margin percentage heavily influences the commission rate, the existing program could very easily penalize a sales rep for supporting the corporate strategy.  Another example would be a company that wants to grow its services business, but allocates an unrealistically heavy overhead allocation charge to gross margin dollars generated from these accounts before it calculates commissions.  In these cases, misalignment clearly exists and there is not doubt that changes are necessary to establish alignment.

The second question to assess alignment is: Do the prevailing sales compensation programs encourage sales representatives to achieve the desired objectives?  The answer to this question is much more subjective.  There are some clear alignment indicators--such as whether strategic business pays a higher commission rate or whether bonuses exist for achieving territory goals that are tied to the company's strategic goals. However, "encouragement" is difficult to quantify.

ACTION POINT:  Establish strategy first and then align compensation.

Getting Aligned

A sales compensation program's virtue is not the inherent value of the commission rate used or the balance between fixed and variable pay.  How aligned the program is with the company's objectives and how supportive it is of the company's sales management processes is what really matters -- and dictates its value.

Upon realizing that the data from exhibit 4.1  did not reveal a relationship between company performance and compensation delivery it became necessary to pursue a different approach.  Interviews were conducted with dozens of senior executives and they shed light on what appeared to be the real differentiators between companies that were gaining market share and those that were not.  Specifically"

• "There is a strong relationship between share gainers and the alignment of their structures with corporate and sales objectives."
• "Share gainers have effective sales management processes in place."
• "There were clear differences between market share gainers and market share losers with respect to how incentive structures were developed."

Although the structure of a sales compensation program program is important, its effectiveness is subservient to the clearness of a company's strategy, an organizational structure that supports the strategy, and the existence of an effective sales management function.  A sales compensation program's virtue is not the inherent value of the commission rate used or the balance between fixed and variable pay.  How aligned the program is with the company's objectives and how supportive it is of the company's sales management processes is what really matters -- and dictates its value.

The conclusion from the data alone in exhibit 4.1 is often that sales compensation structure does not matter.  Nothing could be further from the truth.  The correct interpretation of the chart is that the structure of the sales compensation program, by itself, will not produce top performance.  

ACTION POINT:  Companies that abdicate strategy to the sales force and rely on their sales compensation program to manage their sales people will not be top-performing companies.

Getting Aligned

This is a direct measure of income at risk...

Understanding the exhibit below is essential to seeing that their are countless options in sales compensation plans and that market share gain or loss is not related to the sales compensation plan.

Each point on the scatter diagram represents a single distributor survey respondent.  The horizontal axis represents salary as a function of total compensation and runs from zero (100% incentive) to 100% (all salary).  This is a direct measure of income at risk: 100% salary indicates there is nothing at risk; zero salary indicates that all of the compensation is at risk.

The vertical axis portrays the respondents market share gain or loss relative to industry growth provided by their trade associations.  The values run from -10% to +10%; the bold line in the middle reflects no change in market share.

To validate that the at-risk component relative to total compensation is irrelevant to market share gain or loss, simply sleet any range on the horizontal axis and take note that the there is a nearly identical number of responders below and above 0%.

ACTION POINT: If there had been any relationship between share gain and incentive structures, it would have appeared as a concentration of businesses on the market share gainer side without a corresponding concentration on the market share loser side.

Effective Sales Incentive Design

There is absolutely no relationship whatsoever between a  company's sales incentive plan structure and its gain or loss of market share.

Sales compensation is all about alignment.  In 2003, Indian River consulting conducted an broad study of wholesale distribution compensation practices.  They found and presented the following:

"There is absolutely no relationship whatsoever between a  company's sales incentive plan structure and its gain or loss of market share."

The statement was bold and went against the grain of conventional thinking; however, the illustration below shows their is no relationship between compensation mix and market share gain.  Is shows the relationship between salary as percent of total composition and market share gain or loss.  The table contains a fundamental insight that needs to be clearly understood.  It presents compelling evidence that

"there is no perfect pay plan.'

ACTION POINT:  Pursue market share growth first.