In many industries there is a concern about where the economy is headed in 2008 and, thus, how it will impact business results. Economists have predicted that if the US economy dodges the recession bullet, many companies - particularly those with global operations - could have a reasonably good year in 2008 (defined by earnings per share growth of 10% over prior year).¹
However, if things take a turn for the worst - the rate of unemployment increases and consumers stop spending - company leaders may have to rethink their forecasts for business growth and profitability. Because sales compensation represents a significant proportion of selling expense in many industries, this is sure to be an area of focus and concern. The purpose of this short is to suggest how to prepare for change in sales compensation plans if change is required due to a serious economic downturn.
VALIDATING NEW PLAN OBJECTIVES
Going into the new year, it is important to confirm that management's objectives for the new plan are: 1) clearly stated; and, 2) correctly reflected in the plan design mechanics. CF's most recent on-line survey of what companies intend to change in its plan for next year showed the following:
- 35% were changing their plans to improve sales productivity, reduce selling expense or some combination of both
- 31% were changing their plans to reflect a shift in business priorities that require a change in performance measures, weights or both
The important take-away from our survey is this: Validate that the 2008 plan design is aligned with management's requirements for business performance. Thus, if business performance falls short of forecast the required change(s) may be relatively minor (as explained later below).
IS THERE AN INCENTIVE TO GET OFF TO A
FAST START?
¹ Business Week, December 31, 2007/January 7, 2008 Double issue, page 43.
The year-end "sales push" (to make or beat plan) often results in sales people mortgaging the first quarter of the new year by pulling sales into the last quarter. CF's research shows that sales teams who get off to a fast start in Q1 achieve the annual plan 67% of the time. Thus, if the new sales compensation plan has a provision for a fast start incentive (e.g., Q1 achievement bonus) it is important to confirm that this feature has been effectively communicated to the sales force.
KEEPING SALES REPS IN THE GAME
For most companies, achieving the annual business plan depends on getting "the sales reps in sales compensation game". Our research shows - particularly in B2Bs sales environments - that when less than 45% of sales people are on track to make quota, a company will not achieve its business plan. Being in the game and, "in the money" makes a difference in sales behavior, particularly for a company's better performers.
There are three warning signs that would suggest that management needs to take corrective action through sales compensation when times get tough:
- Slower Q1 performance - compared to current plan year; compared to same quarter prior year.
- "Run rate" performance shows a substantial number of sales reps (e.g., 70%) may not make/exceed goal
- Below plan and lower participation rates affect all channels, all regions and, thus, is not an aberration
When this is the case, we suggest the following change strategies:
- Re-set the top line goal
- Re-set the performance range (threshold/ excellence levels)
- Re-set incentive rates
- Do both #2 and #3
- Introduce SPIFFs (incentives out-boarded from the plan)
For copies of previous Sales Compensation "Shorts", please contact us.
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