Conquering Compensation Challenges
Sales Performance Management in Manufacturing
By Mark Donnolo
Manufacturing has undergone a radical transformation in the past 20 years, with a significant increase in technology, machine efficiency and reliance on ERP software. As the industry has shifted, so too have sales performance and sales compensation requirements.
Sales performance management and sales compensation issues arise when incentives aren’t properly aligned with C-level goals, sales people lose focus during long sales cycles and performance measures aren’t realistic. To ensure the sales organization is driving company success, sales leaders should tackle these challenges in the context of a sales performance management plan.
Challenge One: Translating C-Level Goals to the Front Line
C-level goals are the focused business objectives of the company’s top leadership, used to set priorities for the sales organization’s strategy and compensation plans. In manufacturing, strategic goals include revenue growth, profitability, asset utilization and inventory management. The sales incentive plan is the communications device used to translate these goals to the front-line sales representatives.
It’s essential to have these metrics accurately forecasted and communicated to balance demand through sales with manufacturing capacity. Unlike other industries, if sales outsells the company’s production ability, customer experience and product quality can suffer.
An important principle of incentive plan design is to measure and pay for what the plan participants can control or influence while also accounting for the needs of the business. A smart incentive plan will give a sales representative a challenging but achievable target and measurable milestones. Typically, these performance measures include pipeline development and closed deals for new customers and retention, along with cross-sell and upsell for current customers. Often, depending on the size of the organization, you will have a mix of both “hunters” and “farmers” balancing out your sales organization.
Solution: Working with an industrial manufacturing company that had difficulty keeping the sales organization engaged and performance-focused, we determined that the sales team didn’t think they had control over the elements they were measured against. Overall, the team members didn’t have a clear understanding of how they were performing or what incentive pay they could expect. The original incentive plan included measurement of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), but sales reps felt they had no control over the company’s expenses, and the measurement of overall profitability had too many variables. This lack of clear targets for plan participants led to confusion, apathy and lack of retired quota.
The solution was to identify measures that could be influenced directly by sales reps but would also drive company profitability. By shifting the focus and the incentives for the reps to be compensated largely by the revenue and gross profit in their own territory, the company allowed the sales reps to better control their own earnings potential. The overall company finances were still critical, so the total company profitability was still measured, but not as large a percentage as the individual rep territory. This clarity greatly increased sales rep motivation, awareness of performance needs and positive results.
Incentive compensation planning, while usually driven by sales leadership, sales operations and general management with input from other key departments, should include sales team members from an insight and assessment perspective. Through interviews, sales call observations, focus groups and surveys, team members can weigh in on the positives and negatives of current incentive plans and share how their roles influence the sales cycle. A sales organization that has a voice in the assessment and design of an incentive plan usually adopts the plan more readily and regards it as a tool for individual and company-wide success.
Ultimately, meeting the objectives of the plan means meeting the objectives of company leadership. The message is woven into the measurement.
Challenge Two: Motivating Sales Reps through a Long Sales Cycle
Many manufacturing companies sell products that require major capital expense from the customer and have a long sales cycle that can extend a year or more. If the sales mix doesn’t account properly for several decision makers within the account and the long progression from lead to opportunity to conversion, companies are likely to experience attrition of sales team members. This can extend the sales cycle even further.
Solution: Sales incentive plans need to have a correctly balanced pay mix, setting base salary and target incentive pay to keep salespeople engaged and motivated during the sales cycle. This can frequently mean that the pay mix is shallower for long sales cycle roles, for example, 80% base salary plus 20% incentive pay. The incentive pay must be attractive enough to make the time investment worthwhile for sales team members while giving them enough salary to stay the course; a difficult balancing act. The salary must also consider any sales training that new recruits must undertake before being given a territory.
Along the way, measurements in a sales incentive plan may be focused on progress toward a sale and not just the sale itself. While a short sales cycle plan may only focus on revenue, a long sales cycle plan may include pipeline creation, sales qualified opportunities as well as the revenue that is generated. For one manufacturing company, a strategic milestone in a long sales cycle is a customer or prospect request and receipt of a significant proposal. Another point of measurement is a prospect accepting an invitation to participate in a test or product prototype stage. Rewarding these strategic milestones along the way to a sales closure also provides opportunities for sales leadership to communicate shorter term goals and to coach team members through the intricacies of a complex sales process.
To motivate and retain top performers, a company may offer vesting of incentive pay (above quota) on a two- to three-year schedule, enhancing value of earnings with overlapping vesting and further incentive funding to keep the sales rep engaged and looking ahead to future financial benefits of role longevity.
Another critical part of maintaining sales staff during long sales cycles is offering non-financial incentives to stay with the company. Top talent with applicable skills for the technology industry may be tempted by unique offerings from companies in that sector, which is accustomed to competing to hire and keep strong employees.
Strengthening a broader employee value proposition beyond a sales comp plan can enable manufacturing to compete with technology industry roles. In addition to incentive pay, focus on intangible rewards, quality of life perks, career coaching and other elements can help manufacturing companies compete for and retain top sales talent.
Challenge Three: Setting Effective Quotas
How do you know if your quotas are off base? The most obvious indicators would be if less than 50% of the sales organization is reaching or exceeding quota, the sales team overall is missing earning targets and employee turnover increases. In manufacturing companies, quota setting should be based on the characteristics of the products, sales cycles and customer markets.
Solution: Detailed metrics, including prior purchasing patterns, customer needs, demographics and characteristics are important to developing a realistic projection for sales. For large capital expense products, sporadic or episodic purchase patterns can make quota setting difficult. Heavy equipment or infrastructure products might only be purchased every few years. Quota setting in these cases requires deep dives into customer needs, buying scenarios and market research. Account planning can also be a helpful complementary element. Intelligence developed when forecasting the company’s direction and strategic approach can identify potential obstacles that require specific approaches, as well as new customer or market opportunities on the horizon.
Quota focus should be evaluated to determine if a general or more segmented model is most effective in meeting the organization’s overall goals and rewarding elements which sales can control. For example, in one organization, transitioning a generalist sales model to a focused new customer acquisition and current account management sales model – based on the company’s structure and sales ability to control those factors – turned around a five-year history of decline in quota attainment and returned the organization to growing sales revenues.
Quota setting is usually driven by a mix of sales leadership, finance, and sales operations with some input from product marketing. Initial proposed quotas are circulated to the business units, product leaders and major geographies who will evaluate how these goals are allocated to the front line. Ultimately, quotas are finalized at the highest levels of the organization. But during development, it’s important to keep the process transparent. To avoid perceptions of unfairness or a quota re-set as punishment for previous shortfalls, demonstrate that goals are based on market research findings and opportunity models that show a path to achievement. Involve as many sales leaders as is feasible in the process to ensure quotas are finalized through dialogue and feedback, rather than handed down without input from the sales team.
It’s a marathon, not a sprint, to achieve realistic but potential-based quotas that all areas of the sales organization can understand and own.
When looking at your sales performance management and sales compensation program, consider the underpinnings of your C-level goals, sales cycle characteristics, and quotas to build plans that align with the business.
Mark Donnolo is managing partner of SalesGlobe. SalesGlobe is a leading sales innovation firm that works with Fortune 1000 companies focusing on sales innovation, sales strategy and sales performance management challenges. Visit www.salesglobe.com for more information.