Interview by Online Publications with Liz Cobb

Author: Online Publications   (Email the Author)
Published: 4/1/2008

Online Publications: Good morning. Please tell us about your personal background as well as about the background of your organization.

Ms. Cobb: Good morning Hugh, I�d be glad to. I�ll start with the company I recently started, Makana Solutions, where I am also CEO. We help organizations design and build effective sales compensation plans quickly. In terms of my background, I�ve been involved in the incentive compensation automation space since 1991. This is my third entrepreneurial venture in that area, so I have a lot of experience working with companies in the various job roles that are involved in designing or administering incentive pay. Incentive pay often involves the CFO, the VP of HR, and certainly the VP of sales. I have tons of experience looking at good plans, bad plans, and all the issues that are involved, and keeping on top of incentive pay. I have an undergraduate degree from Vanderbilt University, where I majored in math and computer science, and also earned a master�s degree in computer science from Arizona State University in 1977. I have spent a lot of time involved in the incentive compensation space, working with companies with very large database applications and managing a lot of data.

Online Publications: Why is sales compensation important?

Ms. Cobb: Most people think of sales compensation as the incentive pay, or commission, that is paid based on a sale through a sales representative. It�s really much more than that, and there�s a huge amount of money that�s being allocated for that pay. If you look at discretionary spending in the US, it�s probably about $500 billion worth of sales commissions and incentives and bonuses that are being paid out per year. When you compare that to other discretionary spending, like how much you spend on clothes, it�s about $200 billion. That�s a huge amount of money an executive can use to direct and communicate the strategy of the company to each individual person and let them know what his or her role is in achieving that company�s strategy.

Online Publications: How should human resources be involved in this process?

Ms. Cobb: Well, the incentive comp is absolutely part of the total target compensation, and human resources is responsible for understanding all compensation issues, ensuring equity of pay across job roles, and potentially benchmarking that pay relative to the industry�s competition. So, it�s really important that HR be involved in the sales compensation planning process. HR professionals can add a lot of value by being a neutral party and by providing insights to the sales team as to what the right amount of leverage and mix should be for each role. They can provide benchmark data and summary data relative to those job roles. In other words the goals that are being identified; how people get credit for those goals; payment against those goals, policies, and procedures; all of these things are in the venue of the HR department. The HR department really should oversee all the compensation plans to make sure that they are fair, equitable, and clear. Ultimately, these incentive compensation plans are legal contracts that the company must stand behind.

Online Publications: What are the best practices in this area, and also what are some of the reoccurring serious errors that you�ve seen companies make in the process?

Ms. Cobb: Well, let me start by talking about best practices. There are really quite a few best practices and ways of thinking about designing your incentive compensation plan, but there�s not any one magical pattern that�s going to work for everybody. A key to going about designing the right plan is understanding your company�s strategic objectives and all the job roles that might be eligible for incentive pay, as well as understanding what those job roles are in terms of their level of influence over the customer behavior. There are potentially a lot of different job roles that might need to be looked at: in fact all the job roles that are customer facing, from lead generation to telesales to direct sales to channel sales. There might be account managers and customer service representatives and then all the levels of management above those positions. So ultimately, about 40 percent of the workforce might be eligible for some kind of incentive pay. One best practice is to step back and understand each job role, what it has to do, and its point of influence over the customer. The second best practice is to look at what is the total target compensation for each job role and define what the mix of base salary versus incentive pay will be. The best practice is: the more influence a position has over the customer�s buying behavior, the higher the incentive pay. So, a highly leveraged position might be 40 percent base salary, 60 percent incentive. Or if you�re in the insurance industry, it might be 100 percent incentive. There are many other job roles such as customer service that might be about 15 percent incentive and the rest would be the base salary. Take a best-practice look across all the job roles, look at the mix and the leverage, and then look at potential upside opportunity for meeting and exceeding goals, as well as what you get paid if you don�t meet your goals. Getting a real perspective across all the job roles is a great starting point. Another key best practice is to only measure what is measurable. So look at those goals and define metrics that can be measured quantitatively, not subjectively. You don�t want to measure based on �Joe said so� or �Bob said so.� You really do want measures that are tangible, such as revenue, or bookings, or number of new customers, or number of leads: Things that are very quantifiable. Make the definition of those very clear. People need to know what it is that they have to do and know how they are going to be measured. Then also give them a very clear understanding of what they�ll get paid if they accomplish that goal. When that�s all clear, it�s quite motivating. When it�s not clear, we see the key mistakes that people make, which was the second half of your question. So, the number one mistake is not being clear. The number two mistake is not being consistent across those job roles. This is often the case when the person designing the plan is in a different department than those implementing the plan. They have different thoughts, which are not pulled together by any one person. They end up having different goals that don�t necessarily align with each other. The HR department can look across each job role and make sure they align with each other so teams work together instead of pulling apart.

Online Publications: Okay, why has the interest in automated solutions recently been heightened?

Ms. Cobb: There�s been a lot of automation that�s occurring in other areas of the business, such as the back-office accounting and customer relationship management. For the most part, many of those applications are now up and running smoothly. You�re taking information from the accounting system for your measures, and you�re serving it up in reports through the customer relationship management system to show the results. And people have been filling the gap with spreadsheets, which are not sufficient. They are error prone. They don�t allow reporting capability, and now there are some solutions that are coming to the market, like Makana Motivator, that help people pull that all together.

Online Publications: Well then let�s expand on that. What is different about Makana Motivator?

Ms. Cobb: One of the key differences with Makana Motivator is that we have spent an enormous amount of time on the experience of the user. And, we spent a lot of time on the user interface, so that the people who have the domain knowledge or the job responsibility can actually create the plans themselves. Historically, the solutions that have been out in the market have had measures, rules, and formulas that were automated by programmers, and the compensation people weren�t able to create them themselves. So one way in which we�re unique is that we empower that end user. The other thing that�s unique about us is that we have delivered our software as a subscription service on the internet, so you don�t have to do a big implementation upfront; you can log in and start using our product. In fact we offer a free trial. The new software-as-a-service delivery model has actually heightened the interest in automated solutions at this stage.

Online Publications: Often a lot of human resources professionals see this technology as something that�s only for larger companies. Could you talk about how this product is geared to small- and medium-sized organizations and meets the needs of those organizations?

Ms. Cobb: It�s true that many of the legacy systems are aimed at the bigger organizations�in part because of the programming requirements to automate the business rules. Makana Motivator is aimed at the small- to medium-sized business because we want to empower the end user to be able to point and click and get graphical feedback on what their plans are. They can do it themselves. I�ve learned that with a lot of small- and medium-sized organizations, there�s a pent-up search for best-practice information, and at Makana we have a deep amount of knowledge about incentive best practices. As part of our training, a customer gets to work with one of our compensation professionals and can ask those one-off questions, such as �What do you think the mix ought to be for this particular job role?� �How do I think about leverage?� �Is my measurement clear enough?� We have that kind of dialogue with our customers as we�re going through training on the product, offering our best-practice advice, and it�s something that we continue to add to our service. Usually, the person in the small- to medium-sized organization who is doing the comp design isn�t doing it fulltime, so they need access to best-practice information, and that�s something that we specialize in providing.

Online Publications: In those companies with all the best practices, do you see their sales compensation system being a good recruiting tool to get the quality of sales force that they�re looking for?

Ms. Cobb: Absolutely. A lot of companies would say one of the primary uses of their sales compensation is to attract and retain employees. The emphasis on attraction is really important. If you�re growing your company quickly and you�re recruiting people from other industries, you have to have a sales compensation program that looks attractive to these people. People are savvy in the market place. They�ve had incentive plans before. They understand how rewarding it can be if they meet or exceed their goals, so the stars, especially, are looking for a well-designed plan that gives them a high upside potential of earnings. It�s a very key piece of attracting talent and also retaining it. With a poorly designed plan that underpays strong performers, the sales force eventually turns over. The star people who bring in a lot of extra business leave the company, and what you�re left with are the people who are underachievers. So, it�s important not only to have a good sales compensation program, but also to maintain it and make sure it continues to be something that will attract and retain your employees.

Online Publications: In closing, as we move forward in this area, what do you see as some of the challenges and pitfalls of sales compensation, especially as it relates to utilization of technology?

Ms. Cobb: I think one of the challenges is people�s attachment to some legacy plan structures that no one really even knows where they came from. When you ask the person who�s managing the plans about them, they say, �Well, I don�t really know why that�s there. It�s always been there.� What I�ve found, upon a lot of digging, is that usually the plan gets brought into a company based on the VP of Sales� prior company. Many times these plans are not matched to the strategic objectives of the company. One of the pitfalls is not being able to take a fresh look. We provide you the guidance of designing the best plan. If you�re trying to shoehorn an old plan structure that�s complex and convoluted into that, automation probably won�t go as smoothly. Often these complex layers of plans don�t motivate. As you put them into our system, job role by job role, you start gaining a view of how they work together. The goal is to use the software to analyze the data and start with a strategy to improve the plans. Make sure the plans reinforce the strategic goal of the company rather than just taking what you have and automating it.

Online Publications: Anything else in closing?

Ms. Cobb: I�d just like to reiterate the importance of sales comp and the fact that it is such a large piece of a company�s expenditures. Next to salaries, incentive pay is the second -largest expense item, and companies should take a close look at how they�re using it to maximize its advantage, because it does motivate people. If plans are well designed, it�s going make a huge difference to your company and help you achieve your goals and exceed expectations. It�s an important lever in motivating employees to do the right thing.

Elizabeth Cobb Chairman and CEO Makana Solutions

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