Category: Payment

Incentive-Based Selling: Are You Incenting? or Dis-Incenting?

In many a post, I have presented a lot of info and asked a lot of questions around compensation.

My many-a-time rant tends to focus on retaining talent and fairness, and the sales rep’s ability to achieve quota and earn commissions.

But there is a problem in River City, and it doesn’t rhyme with “p”. It is in how incentives are being crafted.

Recently, I attended a webinar  about Crafting Commission Structures sponsored by Datafox. The webinar had two presenters, one from Zendesk, the other from Salesforce. Both of them were in the position of crafting compensation plans for their sales people.

First, the positive parts of the webinar: It was brief, focused and insightful. The speakers were articulate and informed and presented well. As a matter of fact, they probably don’t even realize they said something which annoyed me!

What did they say? Without realizing it, they said compensation plans were crafted so only a percentage of the sales force achieved them.

Let me back up and explain. Research has shown selling compensation models, i.e. quota attainment models, are actually dis-incenting to sales people. In my observation, for highly paid technology sales people, the typical scenario is a sales rep achieves quota one month (or quarter/semi-annually/annually) and are then reset to zero starting with the new compensation period. It is a Sisyphean task: sell, sell, sell and then get set back to zero. Daniel Pink discussed in his book Drive and in an article for the Harvard Business Review how this type of sales methodology doesn’t use intrinsic motivation to reward the rep and actually can dis-incent the rep since they never achieve a true finish line. His analysis created a significant backlash from those who said (IMHO from an emotional perspective) he was wrong (see this example, a person whose living is made off crafting sales compensation).

There is some truth in the disagreement, and I don’t deny that. But where I see the problem lay is in the quota itself.

In the area of sales with which I’m most familiar, information security sales, the advertised On Target Earnings (OTE) for outside sales positions is usually north of $200k. While I know several reps who earn and have earned considerably higher than this, I also know several reps who haven’t made quota, and here is why I have an issue–the truth is they were never supposed to make quota.

Based upon the Zendesk Senior Sales Compensation Analyst,
Strategy & Planning, Caitlin Ferson, the expectation is that between 40-60% of sales reps will achieve quota. Her explanation is that with current OTEs hitting such high numbers, quotas are being designed with an (implicit) expectation of failure. Which means 60-40% of your sales reps WON’T achieve quota.

Does anyone see a problem here?

My mantra of “If the sales rep is making money then the company is making money” is based upon the idea that the company is compensating the rep FAIRLY. Planning for a sales rep to fail so that the company doesn’t have to pay them is, quite frankly, immoral.

The company should be planning fairly for salary + incentive = achievable target for earnings. If it isn’t achievable, then don’t advertise the position for hire.

A great compensation plan is one where the rep achieves quota, receives commissions, and the company earns revenue. Call it simplistic, but it works.

Thinks, Inc. is a consulting firm which specializes in Smart Sales Operations. If you’d like for us to come and assess your chaos, drop us a line at contact@thinks-inc.com

Smart Sales Operations – Pipeline vs. Estimated Revenue

When I began speaking about Sales Operations, I mentioned there is some bleed between selling and sales ops. One of the critical pieces which companies focus on is pipeline. Where sales and Sales Operations depart, is how pipeline is used to estimate revenue and revenue is used to determine pipeline.

What do I mean? With a few employers, when I entered in an opportunity and my estimation of percent completion, the company then provided a calculated revenue equivalent for the opportunity.

For instance, if I identified a $100,000 opportunity, and was in the initial stages, having maybe had an introductory meeting, I would set the probability at 10%. My employer shows revenue of $10,000. As I progressed through the sales stages, the probability would increase, and so would the estimated revenue, for instance at 40% equaled $40,000.

There is a problem here though, because this IS NOT revenue. It is pipeline. By forecasting revenue dollars inevitably the company would begin looking at this number as real dollars–essentially “counting chickens before they’re hatched”. This, in turn, would lead to greater pressure on the rep to close the deal. And if the deal fell through, which does happen to deals, the company would go into a tizzy. No wonder reps sandbag their deals…

When I’ve asked different companies why they do it this way, they explain it is for budgeting purposes, resource planning, etc. Okay, I can understand the need for planning for resources and budgeting, but it shouldn’t be done off of imaginary numbers. If anything, it should be planned using pipeline probability. A $100,000 opportunity with a 10% chance of closing doesn’t represent $10,000, it represents ZERO dollars and a chance at $100,000 dollars! If the deal proceeds down the pike and gets to 70%, 80%, even 90%, it still represents ZERO DOLLARS.

As a tangent, this mentality is seen in the statistical situations. If you ask anyone what the likely outcome would be if they flipped a coin 10 times, they would say five heads and five tails. But if they are flipping the coin themselves and run into a streak, say, heads four times in a row, then instead of using statistics to predict the next toss, they use their human math and predict what the next toss will be. The problem is, statistically, each toss is 50/50. It doesn’t matter if there has been a streak of heads or tails, as each toss isn’t dependent upon the previous toss or the coming toss, only the current toss. Prediction doesn’t cut it.

Why am I so emphatic about this? Because if pipeline is set up this way, it creates a situation for management to scrutinize deals farther along the pipeline as needed revenue, without considering–among so many other things which can sink a deal–competition or buyer indecision. If you’ve sold before, then I bet you’ve had a customer sit on a deal decision for many months longer than expected or you’ve lost in the eleventh hour to your competition. These things happen to even the best sales people. But to be on the hook to management for a deal which doesn’t close because management is forecasting revenue, well, that’s just bad accounting. Not bad selling.

In Smart Sales Operations, Pipeline Percents represent confidence–how much confidence does the sales person have that a deal will close. Based upon that, estimates of potential revenue are either shown at 100% or nothing. If a company is trying to use some sort of percentage to allocate resources, then it should take the quote which is in consideration by the customer coupled with where it stands in the pipeline, and forecast resource availability. This is a topic within itself, but suffice it to say, resource availability is significantly different from estimated revenue–and I can’t bill my resources against estimated revenue. Only real revenue.

And if it hasn’t been sold, then potential revenue equals nothing. Once it’s been sold, it becomes real revenue.

Last, remember once you have real revenue, then the deal is truly done when the business gets paid real dollars–and the rep gets paid commission.

Thinks, Inc. is a consulting firm which specializes in Smart Sales Operations. If you’d like for us to come and assess your chaos, drop us a line at contact@thinks-inc.com

PS The Infrastructure Guy  and Smart Sales Operations are Trademarks of Thinks, Inc.

Smart Sales Operations – Setting Quota

Quota.

It is a loaded word, with multiple meanings and connotations for the speaker and the listener. It can be a source of frustration, relief or consternation. It can represent a perspective of hope for executives or a perception of sham for sales reps. Quota embodies a notion of achievement for performance, but many times the reward for performance is not well thought out in relation to the effort for achievement.

Daniel Pink in his book Drive talks about the how the quota/performance system is broken. How only in sales can someone work to achieve a goal and be told to achieve more the next time–essentially never getting a rest or recognition for a job completed. And while I have worked for sales companies who have tried to create reasonable quotas, I’ve also worked for companies who used a dart board for quota setting. In Drive many of the reasons for this appearance comes from the arbitrary feeling of quota setting aligning with the seeming capriciousness of company goals. The disconnect of tying these to the rep’s quota creates ensuing chaos. Admittedly, I will be coming back to this topic a lot since sales, quota and operations are tightly tied together, but this is my first swag at it–with a lot of anecdotes to start the ball rolling.

First anecdotal evidence…A friend of mine was hired as a sales representative into a territory where every previous salesperson had foundered and missed the company set goal. And, hand-in-hand with this, each of the previously failed reps ended up having a tenure of just over a year. He found the position because he had worked with the hiring manager years before, and they both agreed it would be a great fit for his skills so they signed him up. Braced with the knowledge of his predecessors and hoping the relationship with his manager would help temper the company’s prior foibles, when it came time to establish quota he figured the company would be reasonable. Nope. The target number came back doubled over previous year’s number; more than twice the revenue the territory had ever produced. In a territory which had struggled to produce $2MM in revenue, they set his plan at $5MM. After he picked his jaw up off the ground he asked why.

“Because we feel the territory can support it.” was the response. Huh?

By setting the my friend’s quota at a ridiculously high number, the company sent two messages without really realizing it. One, start looking for a job because you are going to fail, and two, we aren’t really paying attention to what’s going on inside the territory, only what’s on our spreadsheet of territory revenue estimates. A third possible message was, Oh, and we have to meet Wall Street’s expectations and you’re replaceable, so…here you go.

What this quota lacked was data. It had a lot of speculation and expectation, but up to that point in time, none of the speculation actually was accurate nor was the expectation being achieved.

At another company, quotas were set by looking at the prospective revenue spend of companies. If a prospect was a $100 million dollar company, then based upon “industry norms” it would spend 10% on products sold in the target category, which translated to a potential for $10 million dollar spend. Therefore, the thinking went, this prospect will potentially spend $10MM dollars this year and we should be able to sell them something.

This method is equally flawed, in many ways, and which I’ll expound upon later.

So, how do we start to align commissions with revenues? In my sales operations consulting, I’ve worked with companies who know the amounts of revenues they want to generate, but don’t understand what it might take to achieve–be it through sales efforts, marketing efforts, revenue incentives or commissions accelerators–they start from the wrong side of the equation to add growth. How? They look at the previous years revenues and say, “We want to be 10% bigger next year.” and then figure out how to distribute that burden among its sales people. What they should be doing is looking at it from the other side of the problem, since right now the company doesn’t know how to articulate the direction needed to set the revenues which creates the margin to set reasonable quotas. Meaning, they haven’t looked at their data to see where they should focus.

For example, if I was a $10 million a year company selling services and I was ready to bring on a rep, what would I focus on? On my data! First, I would analyze where my revenue in services was actually coming from as it might surprise you (the “what”). Next, I would analyze who and/or how those services were won (the “why” and the “how”). Was one rep particularly successful? Did the owner do it? Did the sales come through other channels? This matters, because figuring out where the seller is having success can fuel the enablement of methodologies to exploit that capability.

Let’s say it is a small business and the owner is the best sales rep (as is the case many times in small businesses). Making the owner’s abilities reproducible is critical to future growth. So teaching the keys to the owner’s successful selling will be very different than if the owner is looking to exploit a market segment or expand the business outside of its normal bounds. And analyzing the data would reveal this trajectory. From there I would look to see if there is any history or precedence for the sales being won to then calculate what I might expect a new rep to do (e.g. relationships, negotiating, etc.).

Ultimately, the purpose of hiring a new rep is to increase the company’s revenue. Which means the rep’s purpose is to sell and have the rep be successful–and by our current metric this means make quota. If the salesperson is struggling to meet quota, and the analysis hasn’t been done, the company will more than likely be doomed to repeat their sins when it brings on the next rep. When one adds in the cost of on-boarding, training and ramp-up time, it is too significant an investment to then just cut bait . By scrutinizing the needs of the job and really understanding what the expectation is for the salesperson, a quota can be set which allows the rep success and the company success. Some may read this as too indulging, but I would rather plan for success than be in a continuous mode of failure and clean up.

Because if the rep is making money, the company is making money. And that is success.

Thinks, Inc. is a consulting firm which specializes in Smart Sales Operations. If you’d like for us to come and assess your chaos, drop us a line at contact@thinks-inc.com

The Infrastructure Guy  and Smart Sales Operations are Trademarks of Thinks, Inc.

Smart Sales Operations – Front Office vs. Back Office – Getting Paid, Part II

Last week I talked about processes internally for taking an order to fulfillment so sales gets paid. Knowing you have dutifully addressed all the bumps and burrs impeding your order processing in the past week, I want to address the next big looming issue: Customer Payment.

Let’s go back to last week at Company X where the sales rep has received a PO. The order gets processed and pushed through the back office, the customer has received their product and/or services, and they have been invoiced.

What happens next? In an ideal world, the customer receives your invoice, smiles at the thought of the good work or product you’ve provided, and then happily cuts a check. And Company X, in turn, excitedly rewards the sales rep by paying the rep their commission due.

Did you notice a lot of smiling and a lot of processes happening? Daisy-chained together and executed without a lapse? Unfortunately, in our more accurate world, the customer hasn’t paid, for any number of reasons, and now the invoice is thirty-days old, the goods and/or services are sixty days past delivery–meaning the customer only has a vague remembrance of Company X–and you, the sales rep, haven’t seen a dime of commission.

How does this get rectified? In a sweeping generalization, many of these issues need to be dealt with up front. And I don’t mean in PO language (a topic for another post). I mean, talking to the customer about how an order gets processed, who on their side of the company touches it and ushers it through, and what obstacles loom which could stop your company from getting paid.

Herein lies the rub. This part of the typical sales cycle is either brushed aside or avoided because it is uncomfortable. It makes the rep anxious as they don’t want to be presumptive of the sale, and it makes the customer irritated, because of the aforementioned (potentially) but also this is typically not an area of expertise and they don’t have the knowledge or understanding to answer these questions.

One of the recommendations which was made to me by one of my former managers and a mentor to me, is to have the customer purchase something small from you. Whatever you can consider “small”, it is more the exercise in getting the flywheel moving so when the big purchase comes through, the axles are greased, the engine is ready at idle, and the wheels are ready to roll.

Why? Most companies have myriad documents to sign before they can engage in business. Non-Disclosure Agreements (NDA) and Master Service Agreements (MSA) are two big ones. Ask to see a copy of the company’s PO, especially if it may contain additional language. Many times customers will state their payment terms on their PO. It is quite a surprise to send in your quote which states payment is expected within 30 days of invoicing, and see this trumped by the customer’s PO which states that the customer will pay within 45 or even 60 days of invoicing.

To hammer the PO language catch example home, a former customer of mine had a clause on its PO which stated that if the customer paid within 30 days, they would take a 3% discount off the invoiced amount. We always received payment from the company on the 29th day. Another customer paid for services on a different timeline than goods–60 days versus 30 days. Each of these smells a little rank in terms of ethics, and due to the fast paced nature of business, these iniquities were allowed–with a lot of grumbling. Only when the customer was addressed about the difficulties their policies presented to us did they relent. But if we would have known about this upfront, the surprise for me and my back office would have been a lot less.

While many companies use their purchasing policy to create a mechanism for “float” it doesn’t have to be that way. If you have done the homework and asked the questions up front, you should be able to alleviate many of the speed bumps which get your company paid and you receiving commissions.

Of course, there is much more which can be done, but consider this is a musing’s first blush.

Your task for this week? Go to that customer who is always slow to pay. Ask them if there is anything you can do on your side to get them to pay on time. And if possible, help them streamline their process.

Any better ideas for Front Office vs. Back Office? I’m always interested in learning.

Thinks, Inc. is a consulting firm which specializes in Smart Sales Operations. If you’d like for us to come and assess your chaos, drop us a line at contact@thinks-inc.com

PS The Infrastructure Guy  and Smart Sales Operations are Trademarks of Thinks, Inc.