Each year, the Alexander Group conducts the “Sales Compensation Hot Topics Survey” to capture current trends, answer popular questions and examine topics of interest identified by our clients and consultants. We have gathered some compelling information on the following topics: demand for new sellers, use of stock, ASC 606, first-line sales manager pay programs and the pay practices for specialty customer contact jobs.
- Sales Personnel—New Hires: With the improving economy, we asked participants if sales personnel labor shortages were emerging. At this time, the results suggest “not yet.”
- New FASB Regulations—Revenue Recognition: ASC 606: While these new guidelines will affect accounting practices, they have yet to alter sales crediting practices for sales compensation purposes.
- Performance Measure Categories: Used in Primary Sales Job: Among seven performance categories (production, strategic, productivity, customer experience, activities, citizenship and compliance), production is the dominant performance criterion for sales compensation purposes.
- Sales Compensation Practices for the First-Line Sales Manager: For the most part, sales leadership aligns the incentive program of first-line sales managers (FLSMs) with the sellers they supervise.
- Specialty Customer Contact Jobs—Pay Practices: Jobs with more customer “influence/persuasion” are more likely to have more dollars of target compensation devoted to incentive compensation. Product and vertical sales specialist jobs have the highest portion of pay devoted to incentive among 14 sales affiliated jobs.
Survey participants receive a full report of over 60 pages with findings, observations and detailed charts. This year, over 105 companies participated in the 2018 Survey. We gathered data from July to August 2018 and published in September 2018. Participants receive a full copy of the survey results.
If you would like to participate in future surveys (yes, they are free), send a note to firstname.lastname@example.org with your full contact information. Put “Survey Panel” in the subject line. We will add you to the invite list.
Download the Executive Summary of the 2018 Sales Compensation Hot Topics Survey.
Sales compensation costs are to grow 2 percent in 2018 maintaining modest cost level increases, according to the Alexander Group’s 2018 Sales Compensation Trends Survey©. Companies have budgeted these historically modest increase levels for the last five years. However, as workforce capacity is absorbed and full employment brings wage inflation pressures, sales compensation costs could increase.
*Source: The Alexander Group’s Sales Compensation Trends Surveys
Sales compensation plans produce varied earnings based on sales performance. Some sales personnel will exceed the target pay for exceeding target performance. Many will earn target pay for achieving target performance and others will underperform and receive less than the target pay amount. This distribution of performance and payouts is a normal outcome of individual sales performance. Many factors affect this outcome, but mostly sellers’ efforts drive these results. Setting aside producers who earn a percent of each transaction (e.g., real estate, financial advisors, traders and manufacturers reps), management establishes a target earnings amount for each sales job. The target earnings amount is comprised of two primary elements: base salary and target incentive amount. Sales management and finance fund annual increases to cover market-driven increases in labor costs. HR gathers compensation market pay level and trends data to inform management on the cost increase. Each year, management budgets this increased amount. In 2018, survey participants estimate 2 percent growth in target total compensation for the primary sales job. Looking back, the estimate for 2017 was also 2 percent and the actual outcome was 2 percent, a fortunate occurrence.
Most sales departments anticipate 5 percent growth in revenue for 2018. The sales force contributes to productivity improvement by achieving 5 percent revenue growth while only incurring a 2 percent increase in compensation costs. Each year, such a “gain” provides a “productivity lift.” Not all sales departments can make this contribution. In fast growing markets where headcount is expanding rapidly, sales costs could increase at a rate faster than revenue production. This is one of the anticipated investments that high-growth companies assume—hiring sellers prior to having revenue to fully support their loaded costs. However, more mature markets will often expect a productivity gain from the sales force by providing compensation funding increases at a lower rate than revenue growth.
Perfect Storm or Pot of Gold?
Now here’s the challenge: What if sales management gets it wrong? What if the sales volume growth estimate is too low? As sales management assigns quotas at the start of the fiscal year, the assumed (soon-to-be-proved-wrong) growth rate rolls through the quotas matching the too-low annual objective. Of course, the company is eager to celebrate the higher than anticipated revenue growth. But these outcomes can trigger unexpected sales compensation payouts far above the budgeted amount. Because of incentive accelerators paid above the target performance, the cost increases of the compensation program can far exceed the initial budget set at the start of the year. This results in a perfect storm for the company and a pot of gold for the sellers. Meanwhile, the opposite can occur when management overestimates the annual growth and assigns overly ambitious goals to the sales force. In such a case, nobody wins: The company does not hit its sales objectives, and sellers are paid less than target compensation levels.
Cost of Labor
The cost of labor—what to pay salespeople—is a market-informed decision. Revenue growth estimates establish sales quotas. Payout formula provides for performance-based earnings. Even in a perfect world, it’s hard to balance all these conditions for optimum outcomes.
Wage inflation is the function of both demand and availability of talent. Today, sales leaders believe they can find the sales talent they need without accelerating target earnings, thus keeping pay levels in line with modest labor market practices. Meanwhile, alternative sales channels, such as digital selling, telephone and e-commerce, will continue to modulate the absolute demand for sales talent. We can test this assumption of continuing modest wage increases with the arrival of a robust economy. Perhaps sales compensation wage inflation will increase…or, maybe not.
Sales compensation is a mission critical pay program helping to drive sales performance. It’s in integral part of the revenue team’s management process. However, it’s also a human resources program, part of the compensation package given to employees. Marketing people also have a keen interest in sales compensation as it directs sellers to achieve product objectives. It is also a costly expense for the company, frequently of high interest to finance. Not surprising, the general manager of the division also wants to ensure the sales compensation program aligns with business strategies.
Who own sales compensation? The 2017 Sales Compensation Trends Survey provides insight into this question. More than 120 companies provided responses to governance and accountability questions. The responses provide a helpful overview of contemporary practices regarding sales compensation management. However, notice in the responses below, most “ownership” questions never identify a dominant owner—a greater than 50 percent response rate.
Sales Compensation Program Ownership
Many companies (40 percent) assign ownership of the sales compensation plan to sales management/sales operations. The division leader (CEO, COO, president or general manager) is the second most cited owner of the sales compensation plan.
Sales Compensation Redesign Efforts
Most companies redesign their sales compensation program on an annual basis. Often, the changes are minor while other companies undertake a major redesign effort.
Once again, sales management/sales operations (40 percent) undertakes responsibility for the redesign effort.
Our preference is for companies to use a “sales compensation design task force” (28 percent) to review the sales compensation program. Such a taskforce approach can bring together the diverse objectives of sales, HR, marketing and finance.
Confirming the importance of the sales compensation program, 48.8 percent of the companies require the leader’s (CEO, COO, president or general manager) approval.
Sales compensation provides alignment between seller efforts and business objectives. Senior leaders want final approval authority to ensure this alignment.
What about day-to-day program management? Almost 50 percent (48.8 percent) of the companies assign this task to sales operations (see the following chart).
Questions from field managers and plan participants regarding plan application often arise daily. And, sales compensation programs often have many tracking and reporting issues regarding quotas, sales crediting, adjustments and revisions. Sales operations is ideally suited to monitor and manage the program on a day-to-day basis.
Finance (32.8 percent) or sales operations (31.2 percent) are the typical administrators of sales compensation: calculations, record keeping and reporting.
Who Own Sales Compensation?
While the data from the 2017 Sales Compensation Trends Survey does not provide conclusive ownership answers, the trends suggest the following:
- Ownership: sales management/sales operations
- Redesign: sales management/sales operations
- Final Approval: CEO, COO, president, general manager
- Program Management: sales operations
- Program Administration: finance/sales operations
About the 2017 Sales Compensation Trends Survey
More than 120 companies participated in the survey, which was conducted in November and December of 2016 and published in January 2017.
Do sales compensation programs differ from country to country? The short answer is “yes,” but in some surprising ways.
The Alexander Group’s recently published 2016 Multi-Country Sales Compensation Practices Survey took an in-depth look at sales compensation practices among companies that have sales personnel in numerous countries. More than 110 companies provided detailed information about worldwide sales compensation practices. Here are some of the noteworthy findings:
- 87.4 percent have corporate sales compensation principles governing sales compensation.
- 76.6 percent of the companies favor additional global consistency in their sales compensation practices.
- 80.9 percent of the reporting companies have a responsible party leading global sales compensation practices.
These trends point towards increasing global consistency in sales compensation practices and fading local differences. However, country-to-country differences continue to exist. Unique local practices continue to be evident in target pay, pay mix, teaming and local regulations.
Compensation professionals correctly set target pay levels using local market pay surveys. However, most global compensation schemes have a job valuing method that sustains the internal ranking among jobs even though target pay levels are set at the local level.
Pay mix reflects the degree of “risk” in the sales compensation plan. Leadership divides the target total compensation into two components, a base pay and a target incentive (base/incentive). This ratio varies from country to country for the same job. However, the variance is not as divergent as many observers presume. For the “account manager” job, the U.S. (60/40) has the most aggressive pay mix while Japan (68/32) has the least aggressive pay mix.
Another local factor affecting sales compensation plans is the degree of teaming in the incentive plan. Often cited as a cultural norm, the degree of teaming (incentives earned based on group results) differs by country. The surprising winner in the teaming category is the United States with companies setting aside, on the average, 18 percent of the target incentive for team rewards. Table II presents the survey responses of degree of teaming for 10 countries. For the account manager, the United States (82/18) has the highest degree of teaming and India (90/10) has the lowest portion of teaming.
Clearly, there are numerous local legal regulations including sanctioned works councils, which affect sales compensation design at the country level. When designing incentive plans for a specific country application, investigate these often different practices:
- Base Pay: restrictions affecting total compensation and base pay reductions
- Clawbacks: precluded in some countries
- Signed Acknowledgement: employee and employer must sign plan
- Minimum Wage: base pay minimum wage required
- Mandated Pay Increase: must provide government-mandated pay increases
- Pay Mix: government practices define relationship between base and incentive
- Termination: in-process commissions must be paid at termination
Global Versus Local Sales Compensation Practices
As globalization of the economy continues, management will adopt corporate-wide sales compensation practices. Differences will still occur such as target pay levels and regulatory practices. However, differences driven by cultural norms may be in retreat as evident of only a modest difference in the degree of “risk” and “teaming” seen in pay plans from country to country.
About the 2016 Multi-Country Sales Compensation Practices Survey
More than 110 companies participated in the survey, which was conducted in June and July of 2016 and published in August 2016.
Low wage inflation continues into 2016 for sales personnel. The trend over the last five years is to budget for a 3 percent (median survey results) increase in total compensation, base pay and incentive payments for sales personnel. This continues for 2016, according to the results from our 2016 Sales Compensation Trends Survey. However, sales compensation budgeting is one thing; actual payments are another reality. Our multiyear survey results, on a forward and backward look, reveal that total sales compensation costs tend to be higher than the budget amount, sometimes as much as 4 percent as it occurred in 2014. In 2015, the over-budget payment amount was 2 percent, i.e., the actual compensation costs increased 5 percent even though the planned increase was 3 percent.
About the 2016 Numbers
The annual Sales Compensation Trends Survey gathers information about important sales compensation and sales employment statistics. Revenue growth expectations jumped to 9 percent for 2016 as compared to the projected and actual revenue growth of 7.5 percent for 2015. For those granting base pay increases (62.9 percent), they expect to provide a median increase of 3 percent in base pay. Overall, sales compensation costs also are slated to grow at 3 percent.
2011 to 2015 Sales Compensation Plan Effectiveness
56.5 percent of the reporting companies rated their 2015 sales compensation plans as effective. Correspondingly, 14.9 percent rated their sales compensation plans less than effective. Except for 7.7 percent population in 2013, a consistent 15 percent of the reporting companies have trouble with their sales compensation program on an annual basis. This consistent finding indicates that sales compensation plans need continual oversight. Sales compensation plans can easily become misaligned as buyers, products and strategic focus changes. Sales leaders must commit to an annual assessment and review of the sales compensation plans to ensure alignment and effectiveness.
What about Windfalls/Bluebirds Orders?
Most sales compensation plans “pay for persuasion,” the act of securing revenue commitment from a customer. A windfall/bluebird falls into a gray area where the sales representative unexpectedly captures a mega order without obvious seller influence. Almost 95 percent of all companies experience windfalls and bluebirds. Some companies treat such orders as regular revenue and allow the seller to earn exceptional payouts. Others (20.1 percent) have a published and enforced policy to address such orders, often providing a good payout but less than the conventional sold revenue.
Windfalls/Bluebirds – Published Policy: Do you have a published policy for large, unexpected windfall or bluebird orders?
Additional Survey Highlights
49.3 percent of the surveyed companies plan to increase headcount in 2016.
62.9 percent of the reporting companies plan to give base pay increases in 2016.
85.4 percent reported sales revenue as the key performance measure for the primary sales job.
40.9 percent of the survey participants do not have a published windfall/bluebird policy.
72.5 percent of all companies report having access to adequate or better market survey data to price sales jobs.
About the 2016 Sales Compensation Trends Survey
More than 150 companies participated in this year’s annual Sales Compensation Trends Survey. The survey was conducted in December 2015 and published the first week in January 2016.
Most sales organizations assign sales goals to their sellers. Sales quotas are an integral part of the sales accountability system. They align field sales performance with corporate objectives. They are a yardstick for performance coaching. They provide measurement for incentive compensation purposes. When functioning correctly, sales quotas provide a shared understanding of revenue objectives between sales management and the sellers. However, sales quotas are the outcome of a complex process. Here is the needed charter: Sales leadership needs to get sales quotas right by striving to achieve standards of sales quota excellence supported by constant monitoring.
During one of the many impressive economic booms in the Gulf States, I vividly recall one of my first teaching assignments in the region. Attending the session were sales and marketing executives of locally headquartered companies. The VP of commercial lending for one of the region’s largest banks began, “David, I grew my revenue 30 percent last year, my boss wants 40 percent growth this year.” He continued, “This is unreasonable, yes?” Of course, the answer to the question begins with more questions: “How was this number calculated? Is it a reasonable number for the bank? Is it a reasonable number for the head of commercial lending? Is it a reasonable number to allocate to all of the commercial lending officers within the department?”
The Alexander Group recently conducted the 2015 Sales Quotas Practices Survey. More than 170 leading companies shared their perspective on the status and health of their sales quota systems. The findings provide a profile of how companies continually invest to improve their sales quota system.
The survey’s key findings suggest that most companies have a suitable level of sales quota effectiveness.
Survey Question: How do you rate your current quota allocation process?
Overall, 75 percent of the companies judge their quota program to be acceptable (neutral) to better than acceptable. Most companies have crafted successful sales quota programs. Meanwhile, a quarter of the companies need to improve their sales quota program.
However, the survey’s outcomes are a bit more problematic. For example, more than 60 percent of the companies want at least 60 percent of their sales personnel to reach and exceed quota. However, the actual results suggest otherwise.
Survey Question: What percent of sales personnel in the primary sales job met or exceeded quota in 2014?
Less than 50 percent (48.5 percent) of sales personnel reach and exceed their quota. In practical terms, this reflects an almost equal balance between “winners” and “losers.” This number is less than the preferred 66 percent of salespeople reaching or exceeding goal most companies prefer as an outcome.
Other key findings include:
- 59.1 percent report that quota allocation administration resides in the sales operations function.
- 64.6 percent notify the sales personnel after the start of the fiscal year.
- 40.1 percent report that quota accuracy is acceptable.
- 34.3 percent report that they make mid-year quota adjustments affecting 1 percent to 5 percent of the sellers.
- 100 percent is the median compensable revenue as compared to the actual revenue, making the two numbers virtually equal.
- 49.7 percent say their quota policy and practices are formally documented.
What about the seminar student—the Middle East commercial bank lending VP? Determining whether a 40 percent increase in goal is reasonable or not cannot be answered without investigating “how” the number was determined. My advice to the VP? “I suggest you develop your own fact-based number and meet with your boss. If the variance is significant, ask for explanation and reconsideration or, at a minimum, a review of the goal mid-year.”
SALES QUOTA HEALTH CHECKLIST
Sales quota programs are “blind systems,” meaning we do not know their effectiveness until the end of the performance period. As a blind system, management needs to make numerous investments to increase the likelihood of program success.
Use this checklist to improve the effectiveness of your sales quota program. These standards of excellence reflect the survey findings, and our judgment of the preferred characteristics of an effective sales quota program.
Setting the Annual Corporate Number
- Engage the executive team, including sales management, to establish the new fiscal year corporate objective.
- Constrain the amount of quota over-assignment to the sales department and sellers to less than 5 percent of the corporate fiscal objective.
Ensuring Quota Program Governance and Accountability
- Confirm that sales leadership selects and deploys the most appropriate quota allocation methodology.
- Assign quota allocation and quota management to sales operations.
Assigning the Number Through Quota Allocation
- Have sales personnel participate in the quota allocation process when they have moderate to high account knowledge.
- Begin and complete the quota allocation process prior to the start of the fiscal year.
- Assign quotas at the individual territory level.
- Allow at least two months to allocate quotas.
- Assign annual quotas, unless performance horizons are short.
- Notify sales personnel of their new quotas after the start of the fiscal year.
Assessing Quota Program Effectiveness
- Strive to have at least 60 percent of sales personnel reaching or exceeding goal.
- Raise quota achievement so the median quota performance exceeds 100 percent of goal.
- Establish standards for quota program success.
- Analyze quota attainment and quota distribution on a regular basis.
- Continue to invest in increased quota accuracy.
- Use both robust internal performance data and external market data to improve quota allocation accuracy.
Making Mid-Performance Period Quota Changes
- Keep mid-year quota changes to a minimum, not to exceed more than 5 percent of the sellers.
- Require senior sales leadership approval for any quota adjustments.
- Define and limit the reasons for mid-year quota changes.
Crediting Sales Results
- Avoid double sales crediting. Keep double sales crediting within 105 percent of actual revenue.
- Give full sales credit when sales personnel are no longer responsible for the order.
Documenting and Communicating the Sales Quota Program
- Document fully the sales quota program.
- Use multiple and varied methods to communicate quota program policies and practices.
- Engage the first-line sales manager in the quota management and communication efforts.
Sales departments plan to increase pay by 3 percent in 2015. However, sales departments have a long history of overspending their compensation budgets. Last year was no exception. It was a blowout, according to the recent results from our 2015 Sales Compensation Trends Survey.
Payouts exceeded the 3 percent estimate by 4 percent for a total increase of 7 percent in 2014. Projected wage inflation increases for sales personnel have remained modest since 2010. From 2011 through 2014, sales departments have projected their next year compensation payout costs to increase at a median 3 percent. Only in 2012 did the payouts match the projections. For 2011 and 2013, the payouts exceeded the estimate by 2 percent. For 2010, the payouts exceeded the estimate by 3 percent.
For 2015, we are again seeing sales departments estimate their compensation payouts to increase 3 percent. This is consistent with pay treatment for other corporate functions.
Much like the rest of the economy, most sales departments are expecting moderate sales revenue growth in 2015. Survey participants project a 7.5 percent median increase in sales for 2015.
The Survey results indicate that sales personnel hiring will be improving in 2015. Almost 65 percent of the reporting companies plan to increase headcount in 2015, the highest portion of reporting companies since 2010.
What else we can we expect to see in 2015? As the economy improves further, the demand for qualified sellers should expand. Hiring will become more difficult. If voluntary turnover increases as sellers seek improved compensation, we may begin to see an uptick in compensation inflation. The 2014 blowout might be a precursor signaling further and more generous wage increases for sales personnel in 2015.
Last month, we launched a survey focused on the pay practices for the Big Four sales jobs. Do you ever wonder how other sales leaders pay their primary selling roles? You are not alone. In fact, 185 companies from a wide range of industries completed the survey. The survey reveals the hard-to-know-information regarding how companies configure their sales compensation plans. For example: How many measures? Are plans capped? What about thresholds? In addition to plan design, participants answered questions on base pay administration, quota management and sales crediting practices. Some of the results were expected, but some were surprising.
What are the Big Four? The Big Four sales roles, as the term implies, are the chief roles in the sales organization. These roles represent approximately 60 percent of all sales personnel. They are:
- Strategic account manager
- Key account manager
- Territory representative
- Channel/partner manager
Most surprising – uniformity of design. Frankly, we were expecting noticeable plan design differences among the four jobs. This was not the case. Almost all design choices feature the same preferred practice and, interestingly, almost the same prevalence of practice score. We consider design features selected by 50 percent or more of all respondents as prevalent practice. Several primary design features met this criteria, across all four of the sales jobs:
- sales revenue as the primary measure
- no use of MBOs
- no caps
- the use of clawbacks for lost business
Thus, the survey findings indicate these design features are not only common, but also highly prevalent across industries for these roles.
Somewhat surprising: thresholds. The use (or non-use) of thresholds also rose to the level of prevalent practice (more than 50 percent of respondents), but the answer was split between role types:
- the use of thresholds for key and strategic account managers
- no use of thresholds for territory and channel/partner manager roles
The use of thresholds for key and strategic account managers is actually not that surprising. These roles are responsible for existing accounts with run-rate business. Designed correctly, thresholds focus incentive dollars on incremental growth in existing accounts. Thresholds are not appropriate for hunting roles or roles with higher churn, which is more frequently the case with territory representatives. The most surprising? Low use of thresholds for channel/partner manager roles. These roles frequently manage run-rate business sold primarily by channel partners.
Other common practices. The participants also identified several designs as common practices across all four of the Big Four sales jobs, in other words, these designs represent the top most popular answer, but chosen by less than 50 percent of the participants.
- Two performance measures in the plan, except for the channel/partner manager, which uses only one measure
- The preferred calculation method is bonus formula
- The pay mix is 60/40 except for the channel/partner manager, which is 70/30
- The companies pay all four jobs monthly against an annual plan
How do the incentive plans for your primary sales roles compare? Perhaps more importantly, are they working? Are they effectively supporting the business and sales objectives of the company?
In the Alexander Group’s recently published 2014 Sales Compensation Trends Survey, most companies plan a 3 percent (median response) increase Read Full Post
The 2013 Sales Compensation Practices Survey will provide a contemporary snapshot of how companies manage and improve their sales rewards program.
This year’s survey probes the following key topics:
- Governance and Accountability-Who is in charge?
- Mid-Year Changes-How stable is your 2013 program?
- Risk Assessment and Plan Effectiveness-How do you assess risk and effectiveness?
- Automation and Administration-How many dedicated FTEs?
- Contests/Spifs, Referrals, Long-Term Incentives-How much are they worth?
- Program Communications-How do you communicate plan changes?
- Sales Costs and Sales Confidence-What is the cost of sales?
Early findings from more than 70 major sales entities describe some interesting practices:
- Governance and Accountability. More than 45 percent of the companies indicate that sales management/sales operations are responsible for the annual sales compensation program re-design effort. 25 percent report that a multi-function task force oversees the annual design process. 22 percent report that HR/compensation spearheads this effort. As our previous surveys have confirmed, there is no definitive owner of the annual re-design process; however, our experience suggests that a task force of sales, marketing, finance and HR stakeholders often produces a better, more effective and balanced outcome.
- Mid-Year Changes. One method to test the “health” of a sales compensation program is to examine the extent of mid-year changes in plan designs. For 2013, 55 percent of the initial responders to the survey have made no changes to their sales compensation plan designs. We consider that result typical. Sales compensation plans (and quotas and territories) often need to “breathe” as market conditions change.
- Risk Assessment and Plan Effectiveness. Less than one-half of the reporting companies (47 percent) have a formal risk assessment process and report for their sales compensation program. We advise our clients to invest in a comprehensive annual risk assessment to ensure legal compliance, accurate crediting and program guideline adherence. Sales compensation programs are expensive, have many opportunities for policy misapplication and harbor unforeseen legal land mines.
- Automation and Administration. 45 percent of the reporting companies continue to use desktop applications, such as Excel and Access, to administer their sales compensation programs. We recommend that sales compensation programs be administered using commercial-grade applications from either ERP vendors or dedicated solution providers. Sales management can track, adjust, model and audit sales compensation programs with such dedicated software solutions.
- Contests/Spifs. 51 percent of the survey participants provide one to five contests/spifs per year. One-third offer no contests or spifs. We believe that the moderate use of contests (one to five per year) provides sales management with extra tools to help focus sales efforts, particularly outside the normal sales compensation program. They are ideally suited to launch new products or drive special, unanticipated campaigns.
- Program Communications. More than 83 percent of the companies require a signed acknowledgement (hard copy or electronic) of the sales compensation program. Signed acknowledgements, as part of the program communication, ensure sales personnel are fully informed of their program design and features. Both California and New York require signed acknowledgements of the sales compensation program.
- Sales Costs and Sales Confidence. Two-thirds of the survey respondents will increase overall sales expenses by less than 5 percent in 2014. This is a conservative number reflecting the lingering uncertainty of the economic recovery. While cost cutting is down, additional investments are modest.