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GartnerforSales
3KeystoChangingSales
CompensationPlansDuring
CoronavirusDisruptionand
EconomicUncertainty
SteveHerz,SeniorDirectorAnalyst
4June2020
Gartner
3KeystoChangingSalesCompensationPlansDuringCoronavirusDisruptionandEconomicUncertainty
Published4June2020-IDG00723868-11minread
ByAnalysts
SteveHerz
Initiatives:
SalesStrategyandOperations
and1more
Salescompensationplansbreakdownquicklyunderextremedisruptionsuchasthe
coronaviruspandemic.Salesoperationsleadersmustrefreshtheirguidingprinciples,plandistinctphasesforshort-andlong-termincentiveplanchange,andconsiderquotareliefandotheroptionstocontainrisk.
Overview
Impacts
■Salesoperationsleaderswillfacedifficulttrade-offsbetweenprotectingsellers’incentivesearningsandmeetingcompanycash-flowneeds.
■Promptlyupdatinganincentiveplanimprovessellermorale,butmovingtooquicklyinchangingconditionsmaynecessitatemorechangeslateron.
■Afterthemostacutephaseofsellingdisruptionends,availablerevenueforecastswillstillbehighlyuncertain.
Recommendations
Tobalancetheirsalescompensationplans’motivationalimpact,stabilityandfiscalresponsibilityduringtimesofdisruptionanduncertainty,salesoperationsleadersshould:
■Reaffirmthecoreprinciplesthatgoverncompensationplandesignbyconveningthecompany’sexecutiveleadershiptoupdatesalescompensationguidelinesinresponsetocurrentchallenges.
■Changeincentiveplansintwophasesbyseparatingoptionswithimmediateimpactandfeasibilityfromthosethatrequireawait-and-seeapproachbeforefinalizing.
■Identifythemosteffectiveshort-andlong-termincentiveplanadjustmentsbythoroughlyconsideringbothfamiliarandlessconventionalredesignoptions.
Analysis
Oneofthemostpressing—andvexing—challengesthatsalesoperationsleadersfaceduringtimesofseveresalesdisruptionandextendedglobaleconomicdownturnisdeterminingwhat
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changes,ifany,theyshouldmaketosalescompensationplans.
Evenseasonedsalesoperationsleadersmayfindthatlittleintheirprofessionalexperience
preparesthemadequatelyforaglobalpandemic.Leadersservinginseniorsalesrolestodayhaveneverhadtodesignsalesincentivesinconditionsliketoday’scompletesellingdisruptionandlong-termeconomicuncertainty.
Compensationdesignchallengescausedbyextremeuncertaintyarecompoundedbythedifficulttrade-offssalesoperationsleadersface.Someofthesetrade-offsareamplifiedversionsofthe
tensionsinherentinanysalescompensationdesignprocess,butothersconfrontsalesoperationsleaderswithunfamiliar,emotionallycomplexdecisionssuchas:
■Howtobalancethedesireto“keepsellerswhole”(i.e.,paytheaveragesellerattargetregardlessofcompanyperformance)withtheresponsibilitytooptimizecompanycashflow
■Howtoprovidesellerswithdependableinformationabouttheirincentiveswhenpredictionsaboutcustomeraccessanddemandareunstable
■Howtopreservesellingcapacitytorespondquicklytoeconomicupturnjustascustomerorderdelaysandcancellationsareputtingshort-termpressuresoncompanycashflow
Inthisnote,weprovidethreerecommendationstohelpsalesoperationsleadersnavigate
disruptionanduncertaintyintheirsalescompensationplans(seeFigure1).Mostsales
operationsleadersshouldbeginwiththefirsttworecommendationstorealizeamoreeffectivedecision-makingprocessandimprovedsellermorale.Salesoperationsleaderswhoarereadytobeginimplementingchangesnowcanbeginwiththethirdrecommendation,whichincludesacomprehensivelistofincentiveplanelementstoconsideradjusting,alongwithcorrespondingdecision-makingguidance.
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Figure1.ImpactsandTopRecommendationsforSalesOperationsLeaders
ImpactsandRecommendations
LeadersWillFaceTrade-OffsBetweenSellers’EarningsandCompanyCashFlowBecausecommercialleadersaregenerallyoptimisticaboutrevenueandprotectiveofsellers’
earnings,theymaynotbeadequatelypreparedtomakedifficulttrade-offdecisionsundertime
pressure.Salesoperationsleaders,therefore,shouldpreparecompanyleaderstotakeinformed,decisiveactionbyinitiatingareview(orcreation)ofthecoreguidingprinciplesforsales
compensationdesign.
Becausetheseguidingprinciplesreflectbroadcompanyvalues,theheadofsalesoperationsshouldconvenetherightsetofsenior,cross-functionalcompanyleaderslongbeforedifficultdecisionsareneeded.Asidefromsales,thisprocesstypicallyincludesfinance,HR,legalandcompliance,andIT.Theheadofsalesoperationsmayincludeotherfunctionalleadersas
appropriateforcompanyculturebutshouldbearinmindtheneedtoreachconsensusquickly.
Alistofdiscussionquestions,customizedtocompanycircumstances,canfacilitatethis
leadershipmeeting(seeTable1).Themeetingoutput—astatementoftheexecutiveleadership’scompensationdesignprinciplesupdatedforcurrentchallenges—willserveasareferencepointforallsubsequentdecisionsaboutcompensationplanchanges.
Table1:DiscussionQuestionsforDevelopingandUpdatingSalesCompensationGuidingPrinciples
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PrioritizingValues
SpreadingtheImpact
Category
Questions
■Whatcorevaluesandculturaltraditionsalreadyinplacemustweconsiderwhenmakingsalescompensationdecisions?
■Howimportantisthecontinuityandstabilityofsellers’incentiveplanscomparedtoagilityinsalescompensationandresponsivenesstochangingmarketconditions?
■Whatstepsmustwetaketoavoidunintentionallyincentivizingsellerstorisktheirownhealthorthecommunity’swell-being?
■Doweprefertospreadtheimpactofdisruptionandreduceddemandequallyamongallsellersorallocateitunevenlybasedonothercriteria(e.g.,arole’sabilityto
generateshort-termcash,arole’slong-termstrategicimportance,aseller’sactualperformancerelativetopeers)
■Dowewantsalescompensationchangestofavorhigher-performingsellersoverothers?
■Shouldourapproachtochangingsellerincentivecompensationbeconsistentwithourapproachtononsalespositionsinthecompany?
■Shouldhigh-risk/high-rewardrolesbearmoreoftheimpactfromcoronavirusdisruption?
Defining
■
Isthereapointatwhichweprefertoreducesalesforcesizeratherthanchangesales
Decision
compensationplans?Ifso,howshouldwedefinethatpoint?
ThresholdsorTriggerPoints
■
Howmuchmarginreductionorpressureoncashflowcanwetoleratebeforewemustdirectlyreducespendingonvariablesalesincentives?
Source:Gartner
Recommendations:
■Identifynonsalesleaderswhoseinputsalesoperationsleadersneedtoupdateguidingprinciples,suchasfinance,HR,legalandcompliance,andIT.
■Reachconsensusamongtopsalesandnonsalesleadersontheguidingprinciplesthatwillshapesalescompensationchanges.
■Includeasummaryoftherelevantguidingprincipleswhencommunicatingchangestosellers.
PromptIncentivePlanUpdatesImproveMorale,ButMovingTooQuicklyMayNecessitateMoreChangesLater
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Salesoperationsleadersmustbalancetheboostsellermoralereceivesfromquickdecisionsaboutincentiveplanswiththeriskoflaunchingchangessosoonthattheywon’tstandthetestoftime.
Thesoonersellersgetdetailsaboutplanchanges,thefastertheycanadjusttheiractivitiesto
maximizetheirearnings.Butifcompaniesrushcompensationplanchangesintoproduction,theyaremorelikelytoneedadditionaladjustmentsasthesellingoutlookcomesintosharperfocus.
Multipleroundsofcompensationplanadjustmentscreatelegal,technologicalandoperationalrisk.
Evenworse,theymaycausechangesintendedtoincreasetransparencyandreducesellerdistractiontoultimatelyunderminemoraleandsellers’trustinleadership.
Salesoperationsleadersshouldmanagethisinherenttensionbetweendecision-makingspeedandplanstabilitybydividingcompensationactionplanchangesintotwophases:
■Phase1—Short-termsalescompensationadjustmentsbasedonwhatlittleisknownnow(ifanything)
■Phase2—Long-termadjustmentsthatwillbedevelopedonlywhenenoughinformationisavailabletocreatereasonablystableplans
Communicationaboutshort-termcompensationplanchanges(Phase1)shouldemphasizethecompany’scommitmenttohelpingsellersstayfinanciallysolventduringtheinitial,highly
uncertaindisruption.Whencommunicatingshort-termchanges,salesoperationsleadersshouldexplaintherisksofcommittingtoapermanentchangewhenmarketuncertaintyremainshigh.Atthetimeshort-termplansareannounced,salesoperationsleadersshouldalsoannouncethe
expectedtimingforrollingoutlong-termcompensationplanchanges.
Recommendations:
■Assessshort-andlong-termoutlooksseparately.Distinguishbetweentheimmediatedisruptiontosellingduetotravelandmeetingrestrictionsandtheadjustmentsneededinresponseto
reduceddemandoveralongertimehorizon.
■Assoonaspossible,communicatetosellersthatshort-andlong-termchangestosales
compensationplanswillbebasedonorganizationalvalues,guidingdesignprinciplesandmarketconditions.
■Communicatethedateswhenshort-termchangeswillbeannouncedandlong-termchangesareexpected.
AftertheMostAcutePhaseofSellingDisruptionEnds,AvailableRevenueForecastsWillRemainHighlyUncertain
Oncelocallimitationsonsellingactivitiesareliftedandmarketoutlookscomeintobetterfocus,revenueprojections’accuracywillbegintoimprove.However,theseforecastswillstillbefarlessreliablethantheprojectionsnormallyusedinsalescompensationplanning.Insteadof
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incorporatingthelessreliableprojectionsdirectlyintosalesincentiveadjustments,salesoperationsleadersshouldunderstandandaccountforelevateduncertaintyinredesigningcompensationplans.
Somesalesstakeholdersmaynotappreciatetherisksoftakingnewforecastsatfacevalueandusingthemforcompensationplanredesign,andtheymaythereforefavorquotaadjustments
linkedtonewprojections.However,whilequotarelieforrestatementsmaybeappropriate
(especiallywithmechanismsaddedtocontainuncertainty),companiesmayachievethedesiredresultsmoreeffectivelyandwithlessriskbychangingotherplanelementsbesidesquotas
themselves.
Guidedbytheirreconfirmedcompensationdesignprinciples,salesoperationsleadersshould
understandandconsiderthefullrangeofoptionsattheirdisposal(seeTable2).Notethatquotaadjustmentscomeindifferentvariations,eachwithprosandconsdependingoncircumstances.Equallyimportantistoconsideradjustmentstoplanelementsbesidesquotas—eitherasstand-alonechangesorincombinationwithotheradjustments.
Table2:OptionsandDecisionGuidanceforAdjustingSalesCompensationPlan
CommentsandConsiderations
Optionsfor
AdjustingSales
Compensation
■Evenwhenconductedwithhighanalyticalrigor,retroactivequotachangescanseemunfairtosellers.
■Proactivequotachangesdonotbringthestabilitythatsalesoperationsleadersdesirebecauseupdatedforecastsarelikelytobeinaccurate.
Additionalroundsofquotareliefmayberequired.
■Quotaindexinghastheadvantageoffiscalcertaintyforbothcompanyandsellerbecause,bydefinition,teamperformancewillcenteraround100%
attainment.However,thiscancreatesignificantpressureonmargins(andcashflow)whenrevenuecomesinfarlowerthanwhatisjustifiable.Ifevery55%attainerispaidat100%oftheirtargetbecausethat’stheteam
average,thecoststructureoftheplanwillbreak.
Quotaadjustments
■Reducequotasforaffectedterritoriesonlyduring
disruption.
■Proactivelyreducequotasforall
sellersbasedonupdatedrevenueforecasts.
■Announcea
retroactivequotareduction,thesizeofwhichwillbe
determinedafterthefullimpactofdisruptionis
known.
■Indexquotas(i.e.,
“gradeona
curve”)sothe
averageseller
earns100%(ora
lesseramount).
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Draws,guarantees
■
Thedecisionofwhethertotrueupsellers’payoutswhentheywerepaidat
andother
targetdependsonwhatleadersbelieveaboutthecompany’srecovery.
adjustmentsto
targetpay
■Payallsellers“at
■
Truingupandrecoveringoverpaymentsisappropriateifleaderssee
disruptionasapauseinsellingactivitiesthatwillbecorrectedaftersellingresumes.
target”(orafixedpercentageof
target)during
■
Analternativetoanannouncedtrueupisforsalesleaderstocommunicatethatiflostrevenueisnotmadeup,someoverpaymentsmaybeforgiven.
disruption.
■
Reducingtargetsbyafixedpercentagecanbecombinedwithquota
■Paysellersat
attainmentindexingtocontrolthedistributionofrewardsandtheoverall
targetduring
disruptionand
trueuppayouts
afterthecrisishaspassed.
■Paysellersat
targetduring
disruption,butdonottrueup
payoutsafterthecrisishaspassed.
■Reducetargetpaybyafixed
percentageforallrolesasacost-
cuttingmeasure.
spendingrisk.
Activities
■
Undernormalcircumstances,companiesoftenavoidusingactivitymetrics
■Paysellersbased
forcompensationplansbecauseactivityplansareperceivedas
onactivitiesor
inconsistentwithapayforperformancesalesculture.
MBOsduring
disruption.
■
■
Compensationplanswithactivitymetricsdonotdifferentiatevolumefromquality.
However,duringperiodswhensellingactivitiesarenotpossible,payingsellerstemporarilyonactivitiesthatareknowntodrivecommercial
outcomesisconsideredaneffectiveoption.
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Payoutcurve
■
Adjustingthedesignofpayoutcurvesisapowerfultechniqueforoffsetting
changes
theimpactofforecastvolatilityoruncertainty.
■Eliminateorlowerthresholds.
■
Removingpayoutthresholdscanincreasesellermotivationbyrewardingsuccessesevenwhentheoriginalsalesforecastusedtocreatequotasis
■Reducetheslope
miscalibratedforcurrentdemand.
ofpayoutsto
dampentheeffectofuncertainty.
■
Decreasingtheslopeofpayoutcurvesalsodampenstheeffectof
unachievablesalesforecastsbecauselowerattainmentscorrespondtohigherpayoutsthantheywouldreceivewithoutthedecrease.Conversely,
■Implement
higherattainmentsearnlowerpayouts,whichcanbedemotivatingfor
rankingplans.
■
sellerswhodeliverexceptionaloutcomesdespitereducedopportunity.
Rankingplanshavetheadvantageoffixed,predeterminedpayouttotals.However,manysalesleadersavoidthembecausetheypitsellersagainstoneanotherastheycompeteforhigherpositionsontheleaderboard.
Contestsandspiffs
■
Contestsareunpopularamongmanysalesoperationsleadersbecause
■Payakickeror
theycanbedifficulttogovernandtocoordinatewithsellers’main
bonusfor
compensationplans.
identified
activitiesthat
positionthesales
forcefor
increased
competitivenesswhenthecrisis
■
However,thenatureofdownturnsandsellingdisruptionscanincreasecontests’impactasamotivatorforsellers.Aslongaspartsofthesellinglandscaperemaindisrupted,companiesmayasksellerstoachieve
nonstandardobjectives.
■Forexample,renegotiatingacustomercontracttodriveadeeperand
longer-termcustomercommitmentisdifficulttopredictbutgenerates
measurablevalue.Acontestthatpaysaone-offbonusforachievingthis
passes.
objectivecanmotivatesellerstowardtheseoutcomes.
Source:Gartner
Recommendations:
■Determinewhichelementsofthesalescompensationplanscanchangenowandwhichrequireawait-and-seeapproachbeforefinalizing.
■Useestablishedguidingprinciplestoshapethedetailsofallchanges.
■Considerallelementsofthecompensationplansbeforefinalizingadecision.
■Emphasizecontinuityandstabilityforsellersbylimitingchangestoonlywhatisnecessarytoaddressdisruption.
RecommendedbytheAuthor
GartnerGuidetoSalesCostOptimization
Gartner,Inc.|723868Page9/10
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©2020Gartner,Inc.and/oritsaffiliates.Allrightsreserved.GartnerisaregisteredtrademarkofGartner,Inc.anditsaffiliates.ThispublicationmaynotbereproducedordistributedinanyformwithoutGartner'sprior
writtenpermission.ItconsistsoftheopinionsofGartner'sresearchorganization,whichshouldnotbe
construedasstatementsoffact.Whiletheinformationcontainedinthispublicationhasbeenobtai
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