By David J. Cocks
Can applying a strength-based LEAN Six Sigma methodology augment and improve sales force compensation plan development? In short; YES.
Traditional LEAN Six Sigma
The traditional application of the LEAN Six Sigma method for sales force compensation begins by defining the pain, conflict, and waste in a company’s sales compensation strategy. But focusing on problems saps motivation and has negative effects on sales staff retention.
Instead of conducting a LEAN Six Sigma analysis with the hope of correcting a perceived problem and an ultimate return to the even-keel state of business mediocrity, a strength-based approach draws attention to the strengths of the company as well as the sales team, and subsequently initiates changes that encourage continuous improvement and growth of both the company and individual sales representatives.
Serious Consequences Result From Poorly Designed Compensation Plans
In the past, sales force compensation plans have been based on conjectured industry standards, competitive pressures, and outdated notions of objectivity. When exceptions are made for specific individuals, the unfairness quotient increases, eventually leading to the loss of vital members of the sales team.
Imagine a sales representative who refuses to continue pursuing sales after reaching a poorly-designed predetermined compensation cap, or a company that loses a large percentage of its forecasted profit by promising unsustainable compensation to a sales team livewire. In both circumstances, someone stands to lose money and gain a mindset of resentment.
Strength-Based Approach is More Effective
When the strength-based LEAN Six Sigma process is applied to sales force compensation, significant benefits accrue to both the company and individual members of the sales force.
Begin by thinking of your sales representatives as customers.
Just as you offer your regular customers products and services, consider how you can offer your sales executives a unique bundle of compensation and benefits that attract them to your company, motivate and retain them.
With a strength-based approach, you can find the strengths of the company through the eyes of your customers (i.e., the sales representatives), who are in the market and aware of the strengths and weaknesses of your competitors.
A Strategic, Strength-Based Discovery Methodology
When CM Partners starts working with a client, we do interviews with the sales representatives and management team to identify those strengths. We use a narrative interview style, with 21 questions designed to identify the strengths of the company as well as the individual sales executives. Of the 21, only one is compensation-related. For example, we ask “Why did you join the company, and does that still hold true today?”
Some interview questions help us identify issues that might be holding the company back, such as “Are there any policies that are unfair or make it harder for you to do your business?” and “Is there anything we are doing today that, if improved upon, would be really useful?”
Unlike internal company surveys, which are often designed around existing policies and agendas, this approach brings us in as an unbiased third party that can offer an environment of total confidentiality. Sales representatives typically respond very well to this approach. They are eager to share their thoughts and help make the company better. Often, they are ahead of us, telling us how to improve things before we even get to those questions.
When designed like this, the interview process is a critical component of the solution, allowing the sales team to feel heard and helping bond them to the company.
War Room Involves the C-Suite
Once the interviews are complete we analyze the results, looking for common themes, and present the results to the C-suite in what we call a “War Room.” We discuss the perceived strengths and barriers, focusing on the opportunities and continuous improvement.
Executives join us for a productive exploration, focused on learning to see the strengths in their process and looking for ways to improve what they have, communicate more effectively, and get creative about addressing issues.
Coming out of the War Room, we craft a framework for a strategic approach to sales compensation. Then a mathematical layer is added.
Adaptive Algorithmic Business Model Validates the Compensation Strategy
We connect sales compensation directly to the profit and loss statement (P&L), creating an adaptive algorithmic business model that incorporates predicted sales distribution and expenses, and is compared with competitors’ plans.
The company can now develop a new compensation strategy that builds on the strengths of the business; addresses pain, conflict and waste; and delivers a powerful and sustainable competitive advantage.
It is possible, for example, to create different compensation plans to address various product lines, or to design specific plans for top producers who are willing to trade greater risk for a higher payout. With the model, compensation plans can be designed that sound very different and appeal to different sectors of the sales team while meeting the same profitability requirements.
The model acts as a validity check – it allows the company to analyze the results of the projected changes with a great deal of precision – to know ahead of time what impact the sales compensation changes will have on revenue, profitability, sales force retention, recruiting, productivity, and shareholder value.
CASE STUDY: Revenue Increases to 209%
To illustrate the strength-based approach, let’s look at one client we worked with. When we asked the question “Is there anything that the company is doing that if improved upon could really be useful?” the sales force mentioned that the matching 401K retirement plan for salaried employees was very attractive. But they were not able to take advantage of it because they were independent contractors and not eligible to participate.
After discussion in the War Room, the company decided to implement a CMGP wealth-building program that followed approved SEC guidelines and would apply to the sales force as independent contractors. This program was build into the newly created sales compensation programs.
The sales force was very pleased, stating that this was the best program the company had created for them and that it “beat the competition hands-down.”
In the following year, the company saw a significant increase in production from the existing sales team and was able to attract more top sales talent. Gross revenue increased to 209% and company operating profit rose to 191%.
As you can see, with this approach, the sales compensation plan development process builds on the company’s strengths, and relies on the collaborative efforts of the entire team, not just the sales department or managers alone.
Benefits From Applying Strength-Based LEAN Six Sigma
Why does strength-based LEAN Six Sigma work for sales force compensation?
- Allows a narrative process improvement – Sales and sales compensation are processes, not policies. When a company’s management treats sales compensation as a dynamic process that requires input and feedback for evolution, instead of a stagnant company dogma, significant improvements are possible. For instance, most sales processes are 85% pure waste. Considering sales force compensation as a process allows the team to identify and reduce the waste that is impacting the company and the top sales representatives.
- Doesn’t rely on sales volume metrics – Traditionally, when a member of a sales team closes a sale, there is a documented increase in sales volume and the sales representative receives predetermined compensation. Inherently inefficient, this method is like a manufacturing company that only develops cost-per-unit metrics for good parts but fails to calculate the loss of scrap or reworked items. For instance, consider the time spent on unclosed sales or manipulating a sale to better fit a needy client. However, when companies connect sales force compensation with the P&L, they are able to see how the sales process influences overall financials.
- Manageable contribution-based sales compensation – When executives consider sales force compensation, they often only see an unmanageable tide of money that ebbs and flows with sales activity. By modeling contribution-based sales compensation plans, executives can more accurately predict the effects of a sales tsunami or drought on other aspects of their business.
- Provides bottom-line insight – Executives who consider the development of sales force compensation plans a process improvement can see improvements to the company capital, and not only the sales volume. Also, the methodology allows for successful waste remediation that can improve efficiency and provide the company with previously lost funds.
Issues in Implementing Strength-Based LEAN Six Sigma
Despite the benefits of adopting a strength-based LEAN Six Sigma process for designing and managing sales force compensation, resistance to change can stand in the way of its successful implementation.
- Emotional attachment - Often, executives are unable to clearly observe all the moving parts of their company’s machine and instead rely on a nebulous impression to make decisions. Consequently, they fail to recognize the problems or innate waste in their processes. Similar to manufacturing, sales force compensation requires LEAN tools and processes to eliminate waste and discover obstacles to success. For example, an executive that blindly trusts their established sales force compensation plans are competitive and comparable to other contender’s plans can expect to lose their tops sales talent, customers, and market share. Electing to preserve personal comfort and maintain sales compensation plans that are based purely on conjecture will eventually cause unnecessary setbacks.
- “Status quo-or-die” management – Some executives do not consider sales or sales compensation as a process, but a management decision that once made must be maintained like it is company policy. This is the same as if a manufacturing process has internal policies that are self-imposed and are keeping the process from being improved yet management does not view it that way.
- Aversion to change – Consider an executive who does not classify sales force compensation as a process, but rather a static policy. Since companies do not normally track the efficaciousness of policies, the executive does not have access to relevant compensation metrics. Essentially, the executive does not know what they do not know. The data dearth eliminates their ability to identify factors that compel preemptive changes and is subsequently limited to resolving crises discovered after damage is incurred.
- Fear of loss – Sometimes, a company’s management is reluctant to effect financial changes due to preconceived, and often unfounded, beliefs that the change will cause their company’s future financial failure. Citing the absence of a well-defined method on which to model new compensation plans, they automatically refuse to move forward. This is similar to a manufacturing company refusing to improve quality because they believe it will cost them too much money.
- Donning business blinders– In many companies, executives draw conclusions about their sales based on an erroneous perception of their company’s current state of sales force compensation. When executives see the valid current state through the strength-based lens, including the ever present LEAN visible waste, they can transform their decision making and sales process in to a more profitable and competitive model.
Focusing on what works raises energy and motivation. A strength-based LEAN Six Sigma approach to sales force compensation creates a committed and focused sales team that continues to generate sales and actively engage in an improvement initiative. Creativity is higher than that generated by following traditional improvement methods, and innovation is therefore easier to achieve. Leveraging current or past knowledge of experiences and successes from within the system provides great resources for the next generation of sales force compensation plans.
Authored by David Cocks, CEO, and Kevin Klump, Director, of CM Global Partners. CM Global Partners specializes in applying LEAN techniques to sales force compensation. Over the past 20 years, the company has developed innovative compensation plans that are in use by more than 65,000 sales professionals around the world. David can be reached at david@cmglobalpartners.com.