Sales Planning Webinar - Full Transcript
Art Gehring: Our speakers today both have extensive experience in sales planning. Liz Cobb has over 20 years experience in sales compensation, including consulting, and software automation. Ken Cramer has been providing process improvement, software solutions and CRM compensation and territory design for over 12 years.
And without further ado, it's a pleasure to introduce Liz Cobb. Liz?
Liz Cobb: Thank you, Art, and thank you all for attending. It's my pleasure to be meeting with you today on this webinar. Today you're gonna learn a number of things, but primarily we're gonna focus on best practices for effective sales plan and territory design, both of which are important elements in your sales planning process. We're gonna teach you how to define the job roles and how to write clear and motivating incentive plans, and we're gonna do all of that in just a brief 45 minutes.
Before I get started on that, I really want to emphasize why you wanna do it in the first place. I think we all believe that incentives absolutely can drive revenue, reduce your turnover of your sales team and improve the overall sales motivation of the team.
But have you ever really stopped to think about what your sales comp plans really communicate? Given all those things that you say they will accomplish? I can tell you that over the years, I've probably read thousands of different sales plans, and I would say 900 of them, at least, are often quite difficult to read and interpret, and I think people really should be sitting down and thinking "What am I saying to sales through this?" because the sales reps will always find the money.
So you want that strategy to be clear, so that they actually drive the behavior of those plans, drive the behavior of the team, in the ways that you intended, because believe me, if you are not clear, the sales rep is gonna have free carte blanc to do whatever they wanted, and you'll have all these unintended consequences.
In fact, at least one of you has submitted an unintended consequence in advance, and I will talk about that when we get there. We also want you to focus in this, and learn about how you're territory structures can enable success, because that's another major ingredient in this process.
So, are your structures set up to do that at this time?
And finally, it's really a lot of money we're talking about here, and it's not just the money you're spending on the incentives, which can be a tremendous amount, maybe up to 10% of the overall revenue, but the mismanagement of them as well, which can be very costly.
I have a slew of examples. I have three I wanna highlight here, cause they're very classic. The first one is a company where the vp of sales has compensated on selling product into the channel, and the people who reported him were compensated on sales out of the channel. In this particular case, it came to light because the vp of sales was over 100% of quota, and all the people reporting to him were only 60%, and they didn't really know how to figure out why.
It took three weeks of the compensation administrator's time, digging through the nuance of these sales comp plans to figure out that one was paid in the channel, and the other was paid out, and what happened is the vp of sales stuffed the channel, to the tune of about $8,000,000.00 worth of inventory that never ultimately was sold to end users. Very costly to the company, and outside of that incentive management budget, other classic examples are when the sales and services teams don't work together because the sales team is giving away the service, and the service team is compensated on profit of their services and ugly things can happen between a team, but in one company I was with, they undersold services to the tune of about $2,500,000.00.
Again, money lost outside of the incentive budget. In the last example is a case where they couldn't really, they had such convoluted administrative assistance, they weren't paying accurately, and what happened is all the top performers started to leave, because they weren't getting their incentive pays. Like the top end, where they belonged.
And that not only lost time and training those top performers, but also in the lost revenue opportunity because the good guys all walked out the door. Unintended consequences also happen, that are more subtle and not quite as expensive as those big ones I just described. But a lot of things happen that are good signals that your comp plans need overhaul, and the first one here that I mentioned is that the team, most of the team isn't making quota.
That's really not a good thing. You wanna have a team of winners, people who are getting you to your revenue goals. So you want at least 60% of your group making or exceeding quota. But I've seen this many times where it looks as though just one or two people, the top performers, are carrying the load for the whole team. There are a lot of reasons for that, and we'll go into that in this webinar.
Another unintended consequence I've run across is heavy discounting of multi-year contracts, so that the rep can get paid this year, but the discounting is so heavy it really doesn't benefit the company in the long run. And then, lots of companies might be selling old products instead of supporting new ones, because they can't figure out what the new strategy really ought a be, and again, in the example that was submitted to us, where the sales reps are pushing products, there's a lot of different ways to interpret that unintended consequence.
One might be holding sales from one quarter to the next. Another one might be over pushing the product in too aggressive of a fashion, maybe in a banking situation, and in that case I'd say don't measure that incentive at all. Don't reward people for that behavior. So there's different ways to interpret that intended consequence as is probably the case in all of yours.
I just strongly encourage you, as you start your planning process, to go ahead and talk to your team and your executive management and make sure you understand what unintended consequence are happening in your organization, leading into the planning process.
One other set of general thoughts. I've said it once before, but I'm gonna say it again. You know it anyway. Sales people follow the money, so make sure your plans are clear, and the goals that you're setting are really the ones that will help your company.
The second one, which is not as obvious, is reward at the point of persuasion. It's just a basic tenet, and if you ask yourself this question all the way through your process, you'll probably readily understand the answers to your own concerns about what the plan elements ought a be. The point of persuasion is the point at which the sales person can help the customer make choices, and if it's not the sales person, it's a different job role, it might be the lead gen.
In that case, the point of persuasion is getting your lead to set up for a demo or something else. So think about the metrics that most reflect the control your individual has over changing how your customer's going to act. So now we're going to get into the nuts and bolts of this. We've outlined a five step process, the first one being identifying the sales channels, and your go-to-market strategy, along with the job roles involved within them.
The second is establishing the territory coverage. The thirds are really the nuts and bolts of the actual plan elements themselves. Fourth is to model costs to make sure that you can afford these plans that you're doing, and finally producing documents.
You notice all of these steps follow the market strategy, so when you're kicking off this design process, it's really most effective if the market strategy is already set. Sometimes you can't make sure the whole thing is set, but definitely the key pieces should be in place before you go down this road. On that note, I'll go to the first one, which is setting up the channels and job roles.
I've got two main areas on this screen, and they are so inter-related, but I'll start with the second one first. The job roles are many, and I think you can think of all the customer facing job roles as being eligible for some kind of incentive, and you have to identify that as part of the process, but there's a number of roles around lead generation, a person who's actually doing closing, the direct sales rep who's signing the orders, passing on to customer service for retention, and account management to go selling back into the existing customer base.
So these job roles are often one person, depending on the stage of the company, and you may wanna be splitting them out as you grow, so that's where the top part of this screen comes in handy, so looking at the multiple stages a company can go through, or the product itself, it's really important, and it's important to be mindful when you shift from one stage to the next.
In stage one, you are introducing new product to new markets, and there you want a job role of a closer who's actually quite capable of finding new business, often referred to as the "hunter" role. And sometimes in a startup company, they are also doing these other functions as well. But as the company grows, and it's product becomes more popular in the marketplace, and you go through fast growth, if you're in stage two, you really need to be thinking about splitting out some of those job roles, making them separate, and give each one of them their own metrics.
Perhaps as you because focused on a particular industry, or certain types of named accounts that you've got that were really special in getting the company off the ground, so think about where you are in stage one, or stage two. Or maybe you're in stage three, at which point your market's fairly penetrated, and margins become a lot more of something that you wanna focus on, because you've got a lot of competition, and there's a lot of price cutting going on.
So you might wanna use margins as your metric in stage three, and then finally in stage four, when the market is fully saturated and you need to retire the product, you probably want to take away the first three job roles and really focus on account management until those products go away. And sell the new products into the existing base. So think about where you are in the timeline of your company.
The second stage is working on the territories, and I'm gonna pass this over to my colleague, Ken Cramer, to work on this. Thank you.
Ken Cramer: Thank you, Liz. Some of the things to take into consideration while around territory coverage models and why they should change, is typically, companies need to ensure that the same strategy used in designing your comp plans is put in place while designing the territories. For example, if you are paying out on, incenting on selling a new, particular product line, you need to ensure that your territories are designed in such a manner that that product line is emphasized in creation of those territories, so that they're balanced evenly across each of them.
The things that you need to be concerned with, while balancing territories, is a combination of that opportunity and the workload, the account prospect information and also taking into account geography. Realignments typically occur because of growing or shrinking sales forces, which could be caused by new competition in the market, new products being brought to market, mergers and acquisitions and the like.
The objectives of optimizing territories, things that you need to be concerned with while creating these territories, are that each of the territories are balanced with regard to that strategic metric. So again, that goes back to that incentive compensation plan and the key elements. You need to take the same elements into consideration while balancing the territories that you do while emphasizing in your compensation plans.
You want the work load or opportunity to be equivalent to the rep capacity. You don't wanna overload reps such that they can't service all the possible accounts and opportunities, but you also wanna be able to fully utilize all those sales resources that you're paying for. You need territories that are configured such that the reps can work efficiently. You don't want them driving out of their way to service one account, when it could be more easily maintained by a different territory.
This will enable more accounts to be serviced by the same rep. And you also want those territories to be designed with that right amount of workload and opportunities that the reps will build the best relationships with those accounts and have the right amount of time to service those accounts. And lastly, the balanced territories will lead to setting equitable quotas, and this goes back into one of the elements in stage three of the planning process.
You need these equitable territories so that the quotas can be more equitable and your resources are being used to their fullest extent. The process that most companies go through, the evolution that they follow, is such that if you're looking at this blue line here, a series of dots, each one of these represents a territory.
As you'll see here, going from top to bottom, this is the way most companies start out or end up, after going through multiple changes within their company or their market, but not necessarily changing their territory alignment. This dotted red lines represent kinda the upper and lower balance that you're looking for, that sweet spot that the amount of work or opportunity that you want each territory to have, and as things evolve, typically companies will have a good amount of territories that are overloaded, and a good amount of territories where the reps are being underutilized, and ideally, you are looking to stay in that middle ground.
So the yellow and the green lines represent a balance effort after the fact, green being optimal, which most companies won't come up with, but yellow being a more realistic end result, after going through a balancing exercise.
This next slide shows geographically an unbalanced set of territories. Multiple things are wrong with this. You'll notice here that in the middle, this red section, which is part of the same territory next to it, is actually kind of an island within the light blue territory. That means a rep is driving through somebody else's territory to get to his or her accounts to service them. Obviously that's not ideal, those should be maintained within that same account, the same territory of that blue area.
You can also see up in the legend on upper left, the amount of opportunity in each of these territories and what that relates to as a percentive average. So you can clearly see that some of these territories only have 35% of average of some of the others, and some others are upwards to 180% of average, meaning they have almost twice as much work or opportunity than other territories.
Clearly this is not an equitable situation. Reps realize it's not fair. Some are overloaded and able to cherry pick, but will ultimately lose market share, because they can't service all those accounts, while others simply don't have the work, to be able to come close to hitting quota. This second screen shot here shows how things are balanced after we go through the optimization process.
The majority of these territories are between that 80 and 100%, 20% target. You can see if we wanna tweak things further, we can select a small amount and looking at the spot on the left shows the gain or a loss, if you were to move that specific area from one territory to the next. You'd no longer have islands of territories that people have to drive through somebody else's territory to get to their accounts. They're compact, more manageable and easier to service the accounts within each of those territories.
The impact of some of the situation where reps don't have the right amount of capacity or the right amount of opportunity. This graph is an example from a previous customer of ours. This tan line shows the capacity of each of the reps. The dotted blue line shows the opportunity for each of those territories. Having that gap there, the first thing that you'll notice is that at capacity, we're losing opportunity.
There's not enough territories to be able to service all the opportunities our accounts in the field at this point in time. You also see here on the left hand side, that these territories are all overloaded territories. They have more opportunity than a rep can service. And the ones on the left, well, they're not reaching that area. These are reps in field resources that you're paying for, but simply don't have an opportunity to be utilized to the fullest, or reach their opportunity, or reach their quotas that are set for them.
The red areas on each of these indicate opportunities that are lost because again, you are beyond that capacity, so they can't possible service all of them, and on the right, this is resources that are lost that you're paying for. Another way to view this, in conjunction with the quota attainment, and this is a curve that, for those of you who do the incentive compensation for your companies recognize, is not what you're typically looking for.
When you have overloaded territories, the result is to have overloaded overachievers, people exceeding quota and getting multipliers, and when you have resources that don't have enough opportunity, they'll underperform in the eyes of management. And what that result is, is very few of the people in the sales force are reaching quota at 90 or 100%, where you would really expect the majority to be, as Liz had said earlier, you're looking for a good 60% of your sales force to be reaching quota, and in this situation you're not getting that, and this is actually a double whammy, because not only are you not getting 60% of your sales force to reach quota, those that are reaching it are far exceeding it, and costing you more than you were expecting to pay out in incentives because the accelerators kick in.
Now after going through a balancing exercise and optimizing the territories, again, we've noted here that we should add a couple territories so that the opportunity and the capacity are equal to one another, and that virtually all the territories are coming in at approximately the same level for opportunity or workload for each of them. So at this point in time, the territories are equitable.
The reps feel that they have an opportunity to reach quota. They don't think that the other reps have much better territories than them. We have the ability to show that each of them has the equal ability to reach their quota, based upon the accounts in their territories. When you have this, you end up with that bell curve that you're looking for from that quota attainment perspective.
The majority of your reps are between 80 and 110%, where you expect them to come in, and therefore your costs of incentives are much more in line with what your expectations are. This also give you the ability to recognize who the superstars are. If somebody's coming in 130, 140, 150% of quota when their territory has the same amount of opportunity in it as all the others, then you know they really are a superstar. They're not just appearing as superstars because they have an overload of territory.
It also means you're doing a great job for market share perspective. They're achieving the best results you could possibly expect. Conversely, the underperformers are probably underperformers because of their own doing, not because of the territory that you gave them at the beginning of the year to work on.
So some of the best practices that I hadn't touched on yet, just to hit upon before I turn it back over to Liz, we typically recommend building territories from the bottom up. Using that lowest common denominator, you have the ability to get the best and most balanced territories across the board. You build territories around the customers and not your sales force. Sales reps often leave and customers hopefully will stick around significantly longer, and you won't lose them.
It's very important that territories get built in an equitable fashion and when reps leave, you have the ability to find and replace reps in certain areas, giving them an equitable territory. If you keep creating territories around reps, you'll be moving them more often. It'll be harder to have them balanced. Involve the field managers throughout this process. This is their bread and butter. This is, a field manager owns reps, owns accounts, is looking to hit certain numbers, and anything you do to change their life is important to them, so work with them throughout the process.
Make them realize how things are being set up, and give them the ability to tweak and change things based on their welcome knowledge of their reps, of their accounts and so on. And again, I mentioned this earlier, but the key variables that you're using to balance the territories need to come from the corporate strategy and go into the comp plans. The same things that you need to drive this alignment on, you don't wanna be creating comp plans that dictate one behavior and creating territories that are focused on something different than that.
So just to reiterate some of the benefits of optimizing your sales resources, increasing revenues and market share, decreasing the cost of sales, creating the equitable territories will reduce territory, there's a sense of fairness that the reps see. They realize that they have an opportunity to make their numbers in that all the territories are created equal. And again, this information, the amount of workload and opportunity going into each territory is something that's directly related into setting quotas. It needs to go into your compensation plans.
This is something that will go into the plan elements that Liz will talk about in stage three, and also the numbers that come out of here will work into the plan modeling in stage four. At this point, I'll turn it back over to Liz.
Liz Cobb: Thank you, Ken. As Ken mentioned, now getting back to our five step process, and we're in step three, where we look at defining the key plan elements for each job role. So this exercise is gonna have to be done for every job role that you've defined, and there are four primary areas that I'm focused on. One is summary level information about the position as a whole, the job role as a whole.
It's critical for alignment of strategy, for alignment across the team, and for benchmarking the pay for outside competitive market evaluation. The second one is defining the measures and the goals. Hopefully you will have done a lot of the thinking about the measures and what they should be, and the quotas, when you did your territory planning and thought about the job role definition.
And then, defining the rates and formulas, which really drive the amount of upside potential you're gonna get per role, and then finally the payoff timing, which is very important for managing cash flow, and rewarding people at their point of influence. I'm gonna go through each step.
The first is the plan summary. Here I actually introduced some jargon on things like the target total compensation, or TTC, and that is the amount of money you're gonna pay for the position, on average, when you add both the base salary and the incentive component, at 100%. And it's really important to have your eye on what that TTC value is, so you can compare the job role to other similar jobs in the marketplace that you might be competing against or recruiting from.
It's important to properly estimate your budget overall, which finance really cares about, and looking at equity across the job roles, to make sure for the scope of this type of job, are you paying what you really think you should be paying for that skill level. Something that's really in the focus for human resources department, so TTC is actually the primary number that helps you focus on alignment.
Next to that is the concept of leverage, which is how much you're putting at risk for the incentive. Portion of somebody's pay. You talk about mix as being the mix of salary and incentive, and often use things like a mix of 50/50, which we see in this graph over here on the right, where I've got, and you have types of positions where the individual has a lot of influence over the buying decision, probably your direct sales reps, so they might have 50% base and 50% incentive at 100%, and if they're really carving out new markets, you wanna give them a lot of upside potential, so they can make a lot of money, if they are a superstar.
And again, the less influence they have, probably the lower the mix that you're gonna look at, and the lower the amount of upside. So these are key components that you are looking at. We've gone and created a matrix of these mixes to just further give you some guidance, and we've got two axes here, where the x-axis is looking at people whose job function it is to sell to existing customers or to sell existing products to existing customers, all the way out to looking at new markets and new products, and then on the yeah-axis, we're looking at the variation of the level of control somebody has, going from a team oriented kind of position to high individual content, and control.
And if you look at kind of how this plays out, positions that are very, they have less risk associated with them, and therefore less incentive, is a group of people who are working as part of a team, and they are selling existing products to existing markets, where it's kind of formulaic. And at the opposite end of the spectrum, you might see a situation where people are selling new products to new markets, and they might have a mix of 40% base and 60% incentive, cause they have a lot more risk and they have more control, and they are looking for the new markets themselves.
These are people who believe they can do all that, and they can get to those upsides, so looking at that end of the market, really the maximum you see is typically something where there might even be zero salary and 100% incentive, and that's often found in positions like real estate or insurance, where the individual's in total control of the sale.
So that should give you some guidelines on the summary. Next, we're going to the second phase, which is the performance measures and the goals, and I can't say this enough, but a good plan must be measurable and keep it simple. We recommend no more than three measures. That is definitely the best practice. It's very hard for some companies to stick to, but try to stick to that.
And also, make sure it's measurable. So measure things like sales volume, margins, units sold, product mix, new accounts, and don't measure those kinds of things that really aren't the strategic objectives. Things that might really belong under "Why are you paying your managers to work with the people?" Things like input to the CRN system, which is very important, but your manager should be making sure that the people are doing that as part each of their base salary.
And also, don't measure things that happen in the past, that really are not points of influence today. I've seen a lot of plans where sales reps are getting some type of annuity pay for not doing anything, and that doesn't really help further your objectives as a company. Now the goals - every measure should have a goal, and that should be determined as you look at territory coverage, and make sure that they are balanced and equitable across the people in the different job roles.
And the other thing about measures is to be very specific about the crediting terms. Basically, you're gonna have an accounting system that's feeding into how you're calculating your incentives, and you really need to be very clear to the rep and to the administer what is being measured. And by that, we mean what's really the value? Are you giving reward for the value of the first year sales if it's some kind of subscription business, or is it on a particular net invoice, do you include sales tax, or not? Be clear.
And be clear about who gets credit, because in team oriented selling, which is almost everybody these days, your margins can terribly erode if you are not careful when you're adding up all the quotas and all the costs that go along with each job role. And be sure you understand when they're eligible for payment, whether it's booking or shipment, and how exceptions will be managed.
So, you wanna be looking at things like, when people start late, or they get terminated or a leave of absence, be sure that you write down the rules around that. The third area's the rates and formulas. Here we've got the way you shape your curves, and whether or not you decide something to be a commission or a bonus. I think you can see in this graphic what the various elements or shapes of curves are, and how they would play into the total target leverage that you wanna get.
And I just wanna say that a lot of people look at thresholds and caps, and caps are really bad, because they are very demotivating, and thresholds are probably a little more justifiable if you're giving a high base, but it's often really very motivating to give people rewards for the work that they are doing early on, so we recommend both. No thresholds and no caps.
The fourth component is payout timing, and here I just wanna make one big, huge point. Remain relevant. And what I mean by that is pay as close as possible to the event which was the point of influence. So if you're looking at people to be hunters, pay them close to booking. If you're looking at people to do retention, pay them after the shipment and renewals.
So be very mindful of that. There are a lot of other considerations cause it's a huge balancing act between your finance department who's trying to manage cash and your sales department which is looking at the point of influence. And there are a few guidelines if you've got very long sales cycles or long order fulfillment. I have cited a few here, and if you're in that situation, you can look at things like, if you've got a very long deployment, pay a certain portion at booking, and another portion when you actually receive the cash, and that's a good way of putting focus in the right place.
So, now what I'd like to do is, say, you've done this - these four steps - for each one of your job roles, and please, please, please take a look at cross roles. Usually people get quite tired after they've gone through a few of these, and they kind of leave several roles til the end. And I wanna take a moment to take you under our product and actually - before I do that, sorry - I'm going to do one more slide, cause I think most people have something that looks like this.
This is a compensation summary by assignment with a ton of handwritten notes all over it. Well, that's a useful tool, and we would like to take a moment to show you in our software other things that you should be looking at. So in addition to just looking at the target total costs, you can see here each one of these plan pods represents a job role.
You can also see the leverage opportunity, so this is a high risk position as sales manager, as is the sales rep. So I'm presuming that they are hunters, and you can see at each level of attainment where you want it to go. And the product themselves is very much the team player, works with the group as a whole, and has less leverage and less risks.
But don't stop there. Don't just look at those pieces, but also look at what the measures are, and what the incentive components that you are looking at. So here, I want you to focus on the idea that these are a team of people, and they have a common metric, which is really important, cause you can get a sense of what the goal is for the team as a whole, $9,000,000.00 for the sale manager, the individuals are at 1.5, and the product consultants are sharing the team goal.
That's a good way to look at alignment across job roles. And then have an individual metric that is more related to the role itself. It's also important to kind of get a sense as a whole payout of the position. So you can look at it at various levels of attainment, and you can look at it by component, cause you wanna be looking at what each one of these formulas are gonna pay out.
And you wanna look at that by job role, because that's how they look at it. When I say the sales rep looks at a plan and says "Show me the money." This is what they're really looking for. "Where do I put my emphasis?" If you have too many of these measures, they won't be able to focus on any of them. If you put too little amount on any one of the payouts, they're not gonna focus on it.
All key things to be looking at as you're designing your plans. So, back to the presentation, I have, after you've done all those things by job role, and you looked across the job roles for alignment to strategy and equitable pay, the next thing you wanna do is model the costs. And there are a lot of things you're looking for when you're modeling the costs. You wanna check for the full allocation of all the quotas. You did all that hard work on territory, it's possible that you haven't created enough job positions or something's gone awry in all your efforts.
It so easy to get lost in the details. You wanna check for the full allocation of quotas. You wanna know your cost of sales, and you wanna review very clearly those direct roles versus the overlay roles. And compare to last year. The bottom line on modeling costs is no surprises. You don't wanna surprise your reps as you roll out the new plans. You don't wanna surprise your management midyear when the costs have gone amuck.
So again, I'm gonna spend a moment and show you a little bit about what I'm talking about in terms of looking at it in our product, so we help you with this process by allowing you to enter in all of your employees, looking at their historical attainment - this is what they did last year - and then looking at their projected attainment and in this case my model has both of them so that you can see really what would happen if everybody forms just like they did the year before, and bold sales quotas, are they allocated properly?
So you look at the total sales being rolled up if everyone's at that same percentage. You look at the total incentive costs, and what that is, is a percent of total sales, and you look at the ratio of direct to overlay, to make sure you can afford those extra positions, and you're not paying too much of those incentive costs.
And you can look at what that bell curve of attainment is, cause you do wanna continue to seek to have that based on the territory balancing and again, you want a team of winners. So that's modeling costs, and then the last step is producing the plan documents.
And here, I just wanna talk about a couple of points. One is, make them clear and motivating. Again, of the thousands of plan, I can't believe most of 'em all start with 20 pages of text and very little graphical feedback. And what the sales rep needs is finding the money. So show them how they're gonna find the money, and don't make them have to read 20 pages to figure that out.
That's it. You probably do need a number of pages, because there are terms and conditions that matter, and I've listed them here, and they're all things that would be important if anything went awry with the individual employee and you ended up in a court of law, because this is, in fact, a contract you have with the employee, and you do wanna have your lawyers review it in the end, because these are all terms that should be spelled out clearly, so there will be no ambiguity in case something goes wrong with a given employee down the road.
So, look at eligibility, to find that clearly. The effective period of the plan, the credit rules, any transition policies, and what happens in those exceptions. Customer returns, etc.
So, in summary, we hope we've given you - it's very hard in 45 minutes - a total overview of the process and help you get started on your journey this year, and you will agree that the benefits of effective plans are more motivated teams, and increased and more profitable sales. Thank you very much.