Increasing Share Value through Sales Compensation Design
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While many companies focus on increasing profit, and therefore shareholder value, relatively few focus the same effort on improving their multiple. So, what drives this multiple?
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While there are a number of factors that impact the share price of a company, the two basic drivers remain earnings (or profit) and the multiple applied to earnings.
Two companies with the same profit, working in the same overall environment, frequently have different multiples; these multiples dramatically impact the value of the company and therefore the share price.
For example, a company with a $10,000,000 profit and a multiple of 5 times earnings receives a $50 million valuation, while another company with the same profit and a 7.5 times multiple has a value of $75 million.
While many companies focus on increasing profit, and therefore shareholder value, relatively few focus the same effort on improving their multiple. So, what drives this multiple?
The first driver is economic expectations. If the economy is deteriorating, even though profits have not yet fallen, share prices will drop and multiples retract on expectations of leaner times. Despite the fact that this is outside of management's direct control, it is important to note that some companies do not drop as significantly as their counterparts.
This is due to the influence of the second driver, corporate expectations. These expectations are a function of the company's ability to lead the industry. Proven leaders typically have higher multiples than others in the same industry, regardless of economic expectations. One of the key leadership criteria is whether or not a company has a sustainable competitive advantage.
So if a company's compensation plans strengthen the company financially, increasing profit immediately and protecting earnings in a downturn, it would provide such a sustainable advantage.
Such a solution does exist today and has stood the test of time. It is particularly effective when the primary distribution channel is through people whose skill is key in binding the consumer to the company. Examples range from industries that use a typical sales force, like real estate and manufacturing, to professional service organizations, such as law firms and dental offices.
The companies that have used this bold new approach have experienced increased productivity from their existing staff and improved ability to recruit key revenue providers from their competitors. They typically have seen an immediate increase in profit and have been able to retain their lead even after competitors copied their strategy.
The essence of the approach is:
1. Design compensation plans so that after the company has recovered its costs plus a profit from each revenue-producing individual, those individuals can then receive substantially more of the revenue they bring in.
This drives productivity and immediately increases profit. It also creates a naturally cost-efficient environment and improves recruiting.
2. Offer choices that empower the individual to find the right compensation fit; usually this involves selecting the risk-reward relationship that works best for each revenue-producer.
This maximizes recruiting and retention and lowers the breakeven point of the company, increasing its survivability and maintaining profitability, even in a downturn.
If you have any questions, please call us, email us on hello@cmglobalpartners.com or schedule a demo here.
How to Introduce New Sales Compensation Plans
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Explain why changes are needed. When reps understand the issues and are consulted, they are more likely to buy into the solution.
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No matter how you introduce new compensation plans, expect your salespeople to move through several stages in their response:
Denial
Many salespeople will deny that a change is required and will want to keep their current commission program.
Rejection
Even after you've explained why the change is being made and discussed it with them, they will reject your reasoning.
Exploration
Sales reps will begin to explore their options, perhaps at a competitor's office.
Acceptance
Your salespeople come to grips with the reality that change is required and become ready to commit to the changes.
You need to be prepared for these stages, so you can help your sales force work through them. A consultative approach usually works best - share the rationale behind the change and help reps understand how both they and the company will benefit from the new plans.
Here are some more tips that can help ease the process:
1. Consult sales associates during the process of determining new plans. Although you may believe you know what your reps want, your ear may not be as close to the pavement as you think. Asking for input can provide useful information.
2. Explain why changes are needed. When reps understand the issues and are consulted, they are more likely to buy into the solution.
3. Analyze the impact of the changes. Typically, some salespeople will come out ahead, others will see little difference, and some will see at least a temporary decline in income. Focus on those who are negatively affected. How likely are they to jump ship? If you don't want to lose those reps, perhaps there are some low-cost perquisites you could offer to soften the impact.
4. Offer a choice. Allowing sales reps to choose among several compensation plans restores their feeling of being in control. It also lets them match their tolerance for risk to their compensation, and choose the plan that motivates them most effectively.
5. Don't make exceptions. It destroys the trust between you and your salespeople. You do run the risk of losing some reps, but you'll lose more if others see you making exceptions and feel they haven't been treated fairly.
6. Remember that salespeople leave a company mainly for personal reasons or lack of good management – not for compensation.
If you follow these steps, you'll ease the transition and make it much easier to successfully implement your new compensation plans.
How to Change Sales Performance Management Plans
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Here is the process we use, which typically results in a 98% retention rate, a 30% increase in sales in the following year, and significantly enhanced profitability.
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I was talking to a sales executive the other day who was concerned about introducing new commission plans to her sales force. Her firm has several hundred sales people, and she was worried that changing their compensation structure would cause a lot of disruption.
I explained that if you follow best practices for introducing new plans, you minimize the disruption, can retain virtually all of your sales representatives, and get them powerfully motivated to sell even more.
Here is the process we use, which typically results in a 98% retention rate, a 30% increase in sales in the following year, and significantly enhanced profitability.
Needs Analysis
We start by asking your sales force, sales managers, and support staff what they want. They're usually very forthcoming about what they like and what they don't like, what's important and what they don't care about, what they want changed and what they would prefer to keep.
If you're doing this yourself, don't skip this step. Even if you think you already know what they are going to say, take the time to consult with members of each group. You may be surprised by what you hear.
Competitive/Market Analysis
We analyze the competitive factors in your market and determine the potential for growth as well as possible areas of risk.
If you're doing the work, update your information about what commission structures your competitors are offering. If there any new competitors, make sure you include them. Then analyze what's happening with your market. Is it growing or shrinking? Is anything going on that will affect the demand for sales representatives?
Financial analysis
We build a business model of your company and look at where you are now in terms of revenue, expenses, and profitability. We interview top management to find out what your goals are and determine where you want to take the company.
If you're doing this yourself, take a look at your numbers and the trends. What are your goals?
Using all the information we've obtained so far, we design new compensation plans that meet your goals, address the desires of your sales force, and are competitive for your market.
If you're designing the plans, it helps to use software that lets you do what-if analysis so you can project the results of your changes. We think our software is the best for this, but you can use Excel too.
Risk Analysis
Once we have the plans designed, we run them through several tests. First, what are the implementation risks? We break your sales force into a number of groups and analyze the impact on each group. Given the market conditions and competition, who are you most at risk of losing?
For example, if top producers have been subsidizing the rest and we equalize the plans, are we at risk of losing mid-level producers? Perhaps not, because no competitor in town has a better offer for mid-level people. But there might be a group of new recruits who are at risk.
Then we determine whether the plans can be administered. There are some accounting systems that can't handle certain types of plans. There's no point in implementing a plan that you can't pay on.
If you're doing this, run some test transactions through your accounting system.
Calculate the results by hand and compare that with what your accounting system comes up with. Do they match?
Tweak Plans
Based on what we found out during the risk analysis phase, we adjust the compensation plans.
Introduce Plans
Once the plans have been finalized, it's time to introduce them to the managers, sales representatives, and support staff. We start with the managers, making sure every manager understands the plans inside and out, because they'll have to explain them.
Then we introduce the plans to the sales representatives, explaining the rationale for the changes and showing where sales force concerns and requests were addressed. We also sit down with each associate and show them what they would have made last year on the new plan. We show them how they will benefit. If a choice is now being offered, we help them make their selection.
This is the most important step. If you're doing it yourself, spend the time it takes to make sure everyone involved really understands what's happening, why you're doing this, and what it means for them.
When you follow this process for developing and introducing new compensation structures, you stay in control. You can project what your results will be ahead of time, and manage the whole process with confidence.
How to Make Each Sales Associate a Profit Center
View each sales associate as if he or she were an individual company. (Your firm as a whole is then like a big conglomerate.)
Are some members of your sales force subsidizing others?
In some companies, the top producers carry the burden. In others, it's the mid-level or lowest producing members of the group.
Either way, it's not fair.
Consider treating each sales associate as a separate profit center.
View each sales associate as if he or she were an individual company. (Your firm as a whole is then like a big conglomerate.) Does each sales associate bring in more revenue than it costs to have him or her on board?
If not, what can you change to generate a profit?
You might want to create a commission structure designed specifically for new hires that allows you to provide the training and intensive support services they need to be successful – while ensuring that you recoup those costs. When associates are ready, they can move up to a commission structure designed for solid mid-level producers.
You can create another set of commissions for top-producing sales associates who don't need a lot of support and want to do things their own way.
When you set up commission structures like this, you can do a better job of meeting the needs of the sales associates. You can provide a higher level of support to those associates that want it, while offering independence to others.
You're also virtually guaranteeing corporate profitability. When you make a profit on each member of your sales force, it's hard not to make a profit on all of them put together – which makes your company more stable financially. But what's more important is that you are treating all members of your sales force in a fair and consistent manner.
At Risk of Losing Your Top Producers?
In our work with hundreds of sales organizations, we see many making the same mistakes with regard to their top producers. To keep from losing your best sales reps, here's how to avoid these common pitfalls.
By David J. Cocks, CEO
Are you at risk of losing your top producers?
In our work with hundreds of sales organizations, we see many making the same mistakes with regard to their top producers. To keep from losing your best sales reps, here's how to avoid these common pitfalls.
Reward proportionally to their contribution
In many organizations, top producers are carrying the load for the new reps and other low producers. This just isn't fair. You need to design your commission structures so that even lower producers generate a profit for you. That way, you can afford to pay your top reps more. Fair warning... if you don't figure out how to do this, one of your competitors will!
Remove disincentives to greater production
Sales reps often stop working once they reach a certain level, either because their commission gets capped or they are concerned that their territory will be reduced. When you remove these disincentives and structure commission plans correctly, you can motivate your top reps to keep working hard year round, increasing revenue and profits substantially.
Occasionally we'll run into a situation where the disincentives are in place because the CEO doesn't want anyone else making more than he or she does. But this isn't an appropriate comparison. The compensation sales reps receive is based on short-term revenue; CEOs are typically compensated over the long term with ownership or stock options. You should be delighted when you have sales reps making more than you do!
Reward the right behaviors
Sometimes compensation plans are so complicated that the reps can't figure them out or they end up rewarding unproductive behavior. You want to design plans to focus on what's most important for the company, which usually is increasing market share and operating profit.
Maintain consistency
Some organizations will introduce a compensation plan, then halfway through the year when the results aren't what they expected, they change the plans. Their top people get frustrated and leave.
You need to model the results of your compensation plans before you introduce
them – using a modeling approach that has been proven accurate in the past – so you know what's going to happen before you launch the plans. Then you can leave them in place for a full year before tweaking, giving your sales reps the predictability they need.
Well-designed plans retain your top reps, who are so important to achieving your revenue goals, and reduce the hiring and training costs associated with high turnover.
They're a solid investment in your future.
Why Choice Matters
One of the issues we discuss often with managers is why offering a choice of compensation plans is such a smart strategic move for the business, especially in this market. Here is what we tell them...
By David J. Cocks, CEO
One of the issues we discuss often with managers is why offering a choice of compensation plans is such a smart strategic move for the business, especially in this market. Here is what we tell them...
The fact is no single compensation plan is going to be able to address the needs of all members of your sales force.
People have different levels of experience and ability. Some need more training and support; others don't want the services and prefer to be independent. Some are more willing to take risks; others value security and having a predictable income.
When you offer only one option for compensation, you are not meeting the needs of everyone who works for you as well as you could.
The result is that you leave open the door for competitors whose plans do a better job of meeting the needs of specific individuals.
The way many managers deal with this is to make exceptions. But special deals erode trust and leave some people feeling like they are not being treated fairly.
Offering a choice of plans solves these problems.
When you provide a variety of options, you allow each sales associate to choose the plan that most effectively motivates them. They can balance their need for risk and reward, as well as for support and independence.
You can design new plans that motivate more effectively than what you had before – you can remove disincentives to greater production and inspire sales people to new heights.
You can introduce a true merit-based system that fairly rewards all sales associates, regardless of their level of productivity.
This also gives you the opportunity to address legacies – outdated and unprofitable compensation structures that no longer serve the purposes for which they were designed. Instead you offer a selection of other options and let each person make their own decision. Giving people this level of control makes it substantially easier to convert your sales associates to new plans.
But what's more important is that you are introducing transparency into the compensation system. You are treating everyone with trust, respect and fairness. Instead of secretive special deals, you are showing integrity by publishing an official set of plans and letting people choose.
The result is a much stronger, more competitive business, where recruiting and retention become significantly easier.
NEW PRESS: Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth?
CM Global Partner's CEO, David J. Cocks, has recently been interviewed by David Massover in an Ebook titled Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.
CM Global Partner's CEO, David J. Cocks, has recently been interviewed by David Massover in an Ebook titled Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.
We are thrilled to share the below with our community - below note from David Massover:
Being a front line sales manager or the executive that front line salespeople report to is tough - and even tougher when they have a personal quota to meet.
So which is it? Should front line sales managers sell to their own accounts and if so how much - and how does that impact their ability to help the salespeople who report to them do better...
In other words, which role is right - individual contributor or team leader?
In many cases, it is a little of both, and in most - not enough of the leader part, and a lot of conflict between the two roles!
To help open up this question, I interviewed six sales experts from a variety of perspectives and compiled their interviews into a “simulated panel discussion eBook” called Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.
But the increase in productivity is the most powerful benefit. It is not at all unusual to see productivity gains of 30% in the first year sales representatives are given a choice of compensation plans.