Perspective - Fall 2009

Debunking the Myths of Sales Compensation

Money not the only motivation

By Simmi Mehta and Jon Randall

WATSON WYATT research shows that employee engagement is a leading indicator of financial performance. Employees who are highly engaged tend to perform at higher levels and be more productive, driving corporate productivity and performance. And compared with other employees, highly engaged employees are five times as likely to believe passionately in what their organization stands for in the marketplace.

Given the direct impact of your sales force on top-line performance, keeping sales employees engaged is the key to achieving business objectives. But, what factors affect sales employee engagement? And, how can you ensure your human capital programs are supporting sales force engagement?

Using insights from Watson Wyatt's global employee attitude research, this article debunks some common myths about what drives sales employee engagement and offers suggestions on ways to optimize sales force effectiveness.

A leading indicator of financial performance
Watson Wyatt research shows that employee engagement is a leading indicator of financial performance. Employees who are highly engaged tend to be more productive and perform at higher levels. In fact, compared to other employees, highly engaged employees are five times as likely to believe passionately in their organization and more readily identify with the company's products and customers. In turn, companies with highly engaged employees have 16% higher 5-year total shareholder returns, 50% higher market premium, and 26% greater employee productivity than employees with low engagement.¹

Implications for managing sales employees

By knowing the right engagement levers, and keeping these in mind as they design and implement human capital programs, organizations can optimize employee engagement, and help drive achievement of business results. But, what about that segment of the workforce with the most direct impact on top line performance - the sales force? Here too, the research provides some helpful insight.

A common perception of sales employees is that they are primarily money-motivated and self-managing. As long as you can offer a compelling incentive opportunity (so the thinking goes), strong producers will thrive and stay with the company, weaker performers will either find a way to improve, or self-select out of the organization. In this Darwinian "survival of the fittest" approach, sales management focus tends to be on top performers (the 80/20 rule) rather than improving the performance of lower performers. The majority of time is spent monitoring and driving quota achievement, while softer "people management" activities such as performance coaching, employee development, and career planning programs take a back seat.

Is this a smart strategy? Not if your goal is to drive sales performance through a highly engaged sales force. The research shows that programs, such as performance management, talent management and career development are important - yes, even to sales employees. Indeed, in Asia, highly-engaged sales employees are over 6 times more likely than their less-engaged colleagues to believe their company provides helpful career planning tools and resources, such as coaching, self assessment, career paths, and clear competency frameworks². Highly engaged sales employees in Asia are also 8.4 times more likely to believe their company does a good job of helping poor performers improve their performance.

Top Drivers of Sales Employee Engagement

In fact, globally, the top three areas of greatest impact on sales employee engagement are performance management, change management, and pay program alignment and appreciation.

This insight suggests some powerful opportunities to increase sales force effectiveness by achieving higher levels of sales employee engagement.

Acting on the Research Findings
Performance Management

Many organizations have developed company-wide performance management programs. However, ensuring that these programs are meaningful and adding value to sales employees may require some tailoring. The following checklist can help pin point potential opportunities:

Have you identified and clearly communicated sales-function-specific performance and competency expectations that are linked to your company's go to market strategy and selling process? As the "face to the customer" your sales force is in a unique position to shape customer perception of your company's brand, based on the nature, integrity and value of interaction. In particular, for companies that are shifting their go-tomarket strategies (e.g., from "product push" to "needs based" selling; from a focus on Sales Reps to Key Account Managers; from individual selling to team selling, etc.), competency frameworks can help clarify important new sets of skills and behaviors
that are needed and expected.
Have you identified those key winning skills and behaviors of your top performers that are most directly explaining their high performance? With the right programs and processes in place, some companies are successfully replicating key skills and behaviors of their peak performers, helping to lift the performance of all sales employees.
Do performance management and career development frameworks exist to help managers have meaningful conversations with their front-line sales teams about expectations, development, and career progression opportunities? In Asia, particularly in markets such as China and India, being able to more clearly describe career progression and the ways in which the company supports skills development is helping a variety of companies more successfully compete
for sales force talent.
Have you trained and equipped your managers to engage in the performance and development discussions - and are these happening? Do you monitor the value sales employees are deriving from performance coaching discussions with their managers?

Taking the time to assess and, as necessary, refine your sales force performance and talent management programs can be well worth the effort: In Asia, fully 91% of highly engaged sales employees agree that they understand the measures used to evaluate their performance, know how these measures are linked to company strategy and goals, and feel recognized by their immediate supervisor when they do a good job. Moreover, highly engaged employees in Asia are more than twice as likely to believe their performance reviews have helped them improve their performance then their low-engaged counterparts.

Change Management

Another common perception is that employees, including sales employees, are suspicious of change, and therefore embarking on change is risky and likely to reduce employee engagement. In fact, Watson Wyatt research shows that change actually present opportunities to increase employee engagement, as long as change is carefully managed.

Over the course of every employee's career, there are "engageable moments" - the times and events when employees form or amend attitudes about their employer. These moments are critical junctures in the employee-employer relationship, where companies have the opportunity to either increase employee commitment and line-of-sight to results, or to diminish these drivers of employee engagement. By recognizing and managing "engageable" moments organizations can help drive higher performance.

For sales force employees, "change" can take many forms, such as a new customer segmentation strategy, a redefined selling role, a new sales process, a re-defined territory, or a shift in product mix. The good news is that each of these changes presents an "engageable moment" and therefore an opportunity to increase sales force engagement - if handled properly.

One key to turning "change" into a positive experience for employees is to deliberately involve them in the change process. This may seem counter-cultural to Asian companies, where many retain "top down" management styles. Yet, in Asia, highly engaged sales employees are over 11 times more likely than employees with low engagement to agree that the management at their company does a good job of involving employees in decisions that affect them³.

Pay Program Alignment & Appreciation

Across Asia, Europe, North America and Latin America, "Rewards" (Compensation & Benefits) is one of the top three driver categories of overall employee engagement. Not surprisingly, it's also a key driver for sales employees. Indeed, in Asia, highly engaged employees are 18 times more likely to be satisfied with their pay than less engaged employees.

However, in interpreting this finding, it's important to think beyond simply the magnitude of rewards as the key driver. In our experience, how rewards are structured and communicated has a significant impact on their "engagement" value. For example, overly complex sales incentive plans with too many metrics tend to diminish sales employee focus and dilute plan power by spreading rewards too thinly. Similarly, plans with confusing payout mechanics tend to create ambiguity around earning opportunities, which in turn tends to lower employee engagement. This is especially the case for plans with multiple performance hurdles, gates, and payout dockings. From the employee's perspective, these plans were designed to "not payout."

Often, we find the most immediate "quick-win" opportunity for sales incentive plan improvement is to simplify both design and communication, while ensuring close alignment with selling strategy and priorities. The resulting clarity of the pay-for-the-right-performance "deal" tends to significantly increase employee engagement and drive superior focus and sales achievement.

Conclusion

Contrary to popular perception, sales employees are not exclusively money-motivated and self-managing. Rather, the research shows that skills development, career progression, manager recognition, and input into changes that affect them are powerful drivers of sales force engagement - in addition to a well crafted sales incentive plan that drives the right selling focus. Smart companies are implementing people management programs that are carefully tailored to the needs of the sales force in order to drive higher engagement and reap superior results.

1 2008/2009 WorkUSA, Watson Wyatt Worldwide
2 and 3 2008/2009 WorkAsia, Watson Wyatt Worldwide

The True Cost of Turnover

By Tom Tice

RESPONDING TO the current recession, companies have turned toward downsizing as an effective way to cut costs, and competitors have seized this opportunity to recruit top sales performers. Downsizing companies risk losing their best sales and marketing talent, particularly if they lack a strong retention program. And the negative impact of losing salespeople - which is never good for either costs or revenues - is even more relevant during a recession.

Watson Wyatt research shows that in recessions no resources are more in demand than strong market developers and closers. For years, conventional wisdom has held that the cost of hiring a replacement for an exempt employee is about one and one-half times the exiting employee's annual salary. Based on our analyses of sales forces over the past decade, we believe the conventional wisdom is flawed. The true cost of exiting salespeople is much greater.

Traditional cost-calculation models don't take into account many soft and unexpected expenses. Watson Wyatt has developed a model that considers all factors and provides a more reliable cost estimate.

The traditional method
The traditional method of calculating the cost of turnover is to estimate the actual out-of-pocket costs. These costs are accrued during three periods in the process:

The notice period, during which the individual exits and the organization adjusts
The vacancy period, during which the position is open pending a transfer from within or a hiring from outside the company
The hiring and transition period, during which identified candidates are vetted, selected and matriculated and reach minimum role performance targets

We call the out-of-pocket costs associated with each period "green costs." Green costs include real money spent for recruiters, extra pay for unused vacation time and so on.

A true-cost approach

The traditional method provides just one part of the complete picture. It ignores two categories of both real and opportunity costs. Watson Wyatt's true-cost model incorporates all three types of costs:

Green costs: The actual out-of-pocket accounting costs traditionally used to assess the complete cost of turnover
Hidden labor costs: The cost of labor to deal with the exit
Hidden opportunity costs: The cost of lost revenues resulting from the vacancy and lower team performance

Our process design work demonstrates consistently that turnover in a sales force affects no fewer than six roles, in addition to the exiting employee and his or her replacement:

An HR transaction manager assigned to the direct sales organization
An HR administrative assistant who handles the termination as an exception to the shared services or self-service call center
An HR recruiter
The HR staffing specialist who sets up appointments for candidates
The sales supervisor who is involved in the screening process
The manager of the sales supervisor, also involved in the screening process

That's a significant number of people whose time is diverted away from meeting production goals to deal with the transition. Our research shows the cost of labor for this group during the notice, vacancy and transition periods is significant. To replace a typical direct-channel industrial salesperson, it ranges from 25-to-100 percent of the actual out-of-pocket costs.

An exiting salesperson also affects the sales revenue stream in unexpected ways. Not having a salesperson making sales calls can reduce revenues. Surprisingly, however, this has less of an impact than might be expected. Many direct-channel sales efforts have been automated; customer contact is no longer the sole responsibility of the field salesperson. Once established, ordering is much more independent of the field rep than it once was. As long as the sales position is eventually filled and the orphaned customer base is given personal attention, sales revenues are not greatly affected.

What does affect sales revenues, however, is the hidden opportunity cost of reduced morale. When a salesperson leaves a team, the team's sales production can decrease from 3-to-5 times the out-of-pocket costs of the exiting salesperson. Watson Wyatt's model includes this in its cost assessment. When sales executives see this hidden cost, the importance of developing retention tools to motivate the employees left behind becomes clear. Determining the true cost of turnover is essential to any sales organization. Once they fully understand these true costs, companies can strengthen their retention programs to ensure they remain competitive - during the recession and the eventual recovery.

- Tom Tice is a senior consultant with Watson Wyatt Middle East LLC

Jon Randall
Director
Sales Effectiveness
& Compensation,
Asia Pacific
jon.randall@watsonwyatt.com

Simmi Mehta
Senior Consultant
Sales Effectiveness
& Compensation
simmi.p.mehta@watsonwyatt.com