Philosophy & Motivation

Does a motivated employee impact business performance and drive results?  The obvious answer is “yes”, yet employers since the dawn of time have struggled with how to motivate its workforce. Consider the following traditional practices used to manage staff:

Reward – bonuses, commissions, spiffs, random paid days off, more independence, promotion

Fear – 90 day plans, write-ups, unpaid additional duties, less autonomy, termination

I took the liberty of categorizing these common practices into two general buckets because, at the most basic psychological level, humans are motivated by either reward or fear. This is absolutely true in a business environment and even more so in a sales culture.  So if these techniques are time tested and drive human behavior, why is it so hard to create an effective and motivated sales culture?

My answer… Philosophy!

A clear philosophy provides a consistent framework for administering incentive plans and evaluating performance. It also forces Management to align compensation strategies with the business model, culture, recruiting practices and the role of the employee. A tool that I use to capture and summarize philosophy is a compensation matrix, as illustrated below:

Chart 1.   

Obviously this is an example and the matrix can be customized based on company specific needs. That being said, the matrix does an amazing job of distilling something that is inherently complex into a very simple and useable grid.  I highly recommend that Management perform this exercise as part of its standard planning process.

Goal Setting – Realistic but challenging

The next biggest error I have seen in my days as a professional consultant and CFO were budgets that were either totally unachievable or way too easy. Both of these situations represent extreme ends of the spectrum and are not good for the business, employee motivation and ultimately, performance. The good news is that this problem can be corrected by involving staff in the budgeting and planning process. In the world of management accounting, there is a strategy that argues the best way to achieve realistic but challenging goals is to employ a “high-low” and “low-high” methodology.

High – Low – is the most traditional budgeting technique.  Upper Management sets the goals for the organization, without receiving input or feedback from staff.  Many organizations do this and it is often driven by CEO or Board expectations. This typically results in goal-setting that is uninformed with unachievable metrics.

Low – High- This technique forces the staff and department heads to set their own goals, typically without receiving input or feedback from Management. This typically results in goal-setting that is more informed; however, there is the tendency for staff to sandbag or not push themselves enough.

By combining these two techniques a floor and ceiling is essentially established which provides the organization with budget boundaries. More important, this budgeting strategy captures input from all key stakeholders allowing for the appropriate balance between realistic and challenging goals.

Common Sizing and Multiples

Once a solid framework is established, the real fun begins as Management (typically the head of Finance and Sales) is ready to construct incentive plans.

Common-sizing is a valuation technique that displays a number as a % of a base figure. The base figure is the employee specific revenue goal (whether team based, individual or a combination of both), which should be developed by multiple parties in the planning process. The value of common-sizing is that it is scalable and links revenue achievement with compensation.

Multiples are also commonly used in valuation and finance applications. They work similar to factors and express revenue goals as a “multiple” of employee compensation. This is extremely useful as it provides a general rule of thumb around productivity expectations as it relates to employee compensation.  I have included two examples below that illustrate the power of common sizing and multiples:

Chart 2.

Chart 3.

These examples highlight several great theoretical observations around compensation strategies that are worthy of commentary:

1.       Options as it relates philosophy: I have presented three “basic” options in my examples to illustrate how philosophy impacts compensation.  I think it is a worthy exercise, at least as a sanity check, to compare how different philosophies will ultimately impact compensation of your sales staff.

2.       Compensation mix: In terms of motivating sales professionals, offering multiple ways to earn money is great strategy. I have included base, commission, bonus and other cash incentives as primary ways to compensate employees. Non-monetary incentives have been excluded, however, this is also a great way to motivate and reward staff for desired results.

3.       Base vs. Incentive comp mix:  Paying too high of a base salary is the single biggest pitfall in constructing sales plans. A high base salary coupled with limited monitoring is a recipe for disaster in terms of motivating your sales force. The base-incentive relationship must reinforce motivation and align with company goals. This is where the common-sizing is so valuable as it allows organizations to develop and continually asses rules of thumb around fixed and variable compensation.

4.       New vs. Renewal performance expectations:  I have often heard people say that it is much harder to recruit new business than to service and upsell existing business. This is absolutely true and certainly manifests itself in the numbers.  In my example, the implied multiple for a new business sales staff was 2.5 vs. 16.4 for a renewal sales staff.   Although this relationship changes in different industries and with different products/services it should be a general expectation that organizations will have a higher multiple assigned to renewing business.

5.       Compensation of new vs. renewing employees– It generally requires different skills & experience to be successful at prospecting new business vs. servicing existing business. The market traditionally places a premium on new business sales employees. The examples above reinforce this by showing a higher total comp for new business sales employees.

Conclusion

Employee compensation is a tough and sensitive issue. Finding the right balance between employee motivation and company performance is not easy.  Establishing a clear philosophy around compensation and having a well- defined and engaging budgeting and planning process are two critical tools that, I would argue, must be employed prior to the actual creation of an incentive plan.

The use of common –sizing and multiples are extremely effective tools for developing compensation plans. These techniques will improve an organization’s understanding of its business and provide good rules of thumb around expectations for sales employees.

These best practices should help companies stay on course and provide a solid chassis for an effective and motivated sales force!