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Compensating the Sales Force: A Practical Guide to Designing Winning Sales Reward Programs, Second Edition

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The classic guide to raising your bottom line with the perfect

compensation strategy—fully revised...

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Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans: A Practical Guide to Designing Winning Sales Compensation Plans

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Overview

The classic guide to raising your bottom line with the perfect

compensation strategy—fully revised and updated!

Sales compensation WORKS!

Nothing motivates a sales force better than a

powerful compensation program. And when

your salespeople are motivated, revenue soars. But

how do you design a program ideally suited for your

business strategy and organizational needs? It’s

a delicate balance that makes all the difference

between profit and loss.

More and more sales leaders have turned to Compensating

the Sales Force to help them discover

problems in their present system and create a compensation

program that works best for their needs.

Now, in the second edition of this authoritative,

jargon-free handbook, sales compensation guru

David J. Cichelli brings you completely up to date on

setting target pay, selecting the right performance

measures, and establishing quotas. He supplies

clear guidelines for building the right compensation

plan for any type of firm, of any size, in any

industry, and he offers step-by-step procedures for

implementing each approach.

In Compensating the Sales Force, second edition,

Cichelli has substantially expanded the book’s

popular formula section, and he provides brandnew

examples of:

  • Income producer plans
  • Sales rep commission plans
  • Bonus plans
  • Incentive plans
  • Base Salary management plans

The book also includes all-new chapters for global,

complex sales organizations and hard-to-compensate

sales jobs.

Using the lessons in Compensating the Sales Force,

you’ll construct and calculate accurate formulas for

payout purposes and establish highly efficient support

programs, such as sales crediting and account

assignment.

Complete with dozens of real-world examples that

illustrate important points and demonstrate specific

techniques and procedures, Compensating

the Sales Force provides all the tools you need to

design and implement a sales compensation plan

that maximizes profits—and keeps them climbing.

With brand-new chapters on GLOBAL SALES TEAMS amd COMPLEX SALES ORGANIZATIONS!

Praise for the first edition of Compensating the Sales Force:

“If your company is refocusing its efforts on sales revenue

enhancement, you must read this book. If you want motivated

salespeople and superior sales results, act on its content.”

Noel Capon, R. C. Kopf Professor of International Marketing,

Chair of Marketing Division, Graduate School of Business, Columbia University

“This book provides great guidance for any business leader who wants to capitalize on sales

compensation as a tool for driving business results.”

Rick Justice, Executive Vice President, Worldwide Operations and

Business Development, Cisco Systems

“Dave Cichelli is the premiere sales compensation educator today. You will immediately find

this work informative, helpful, [and] thought-provoking.”

Mark Englizian, former Director of Global Compensation, Microsoft Corporation

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Product Details

  • ISBN-13: 9780071739023
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 6/17/2010
  • Edition number: 2
  • Pages: 272
  • Sales rank: 487,418
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.20 (d)

Meet the Author

David J. Cichelli is Senior Vice President of The

Alexander Group. He has been an instructor at

several academic institutions, including Columbia

University. He is a frequent speaker at national

association meetings and serves clients from a

variety of industries, including financial services,

high-tech, software, telecom, and health care.

Cichelli authored WorldatWork’s one-day class on

sales compensation.

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Read an Excerpt

Compensating the Sales Force

A Practical Guide to Designing Winning Sales Reward Programs
By David J. Cichelli

McGraw-Hill

Copyright © 2010 David J. Cichelli
All right reserved.

ISBN: 978-0-07-174234-4


Chapter One

Why Sales Compensation?

THE ROLE OF THE SALES FORCE

The role of the sales force is clear. Sell the company's products and services to new and existing customers.

Of course, most of us can easily visualize the "classic" salesperson. Our able and determined salesperson has a geographic territory, travels from one account to another visiting customers and potential buyers, demonstrating the latest gizmo easily drawn from a sample kit or well presented in a glossy brochure. However, this typical image is not fully consistent with today's modern complex sales force. While our fabled territory sales rep is not gone, he or she has been joined by a cadre of sellers. Many companies now sell through multiple sales channels. Our territory rep is now part of a complex customer coverage model that includes telesales, major account sales, product overlay specialists, and partner management. To compound matters, the definition of products now varies widely from physical products to services to solutions. To add additional variables, the definition of sales revenue has expanded beyond the initial purchase dollars to include rental, lease, product usage revenue, and maintenance revenue. Further, today's sales organizations are often fully integrated with other formerly disconnected customer contact units such as Customer Service, Contracts, Customer Finance, and Collections. In other words, while the classic sales job still exists for many companies, the territory salesperson traveling from one account to another is just one more member of a much more varied and complex sales coverage system.

For conventional purposes, we will continue to refer to today's sales coverage system as the "sales force," fully recognizing the expanded characteristics of today's sales departments.

Regardless of the complexity of the sales organization, the sales force continues to serve its primary charter of identifying, securing, and servicing customers. The sales department has at the apex of its objectives what no other department has: the responsibility to manage the profitable revenue growth from the company's customers.

WHY SALES COMPENSATION WORKS

Some non-salespeople assume sales representatives are solely money motivated. They believe the best (and only way) to manage the sales force is with an overly lucrative sales compensation program. Of course, this is not true. This monetary-centric view of sales representatives promotes a cursory view and inaccurate assumption about sales representatives. It can lead to some false and unfortunate conclusions about the importance of the sales compensation program.

The source of effective management has many competing theories. While the names and themes of these theories might vary, they all subscribe to at least two critical elements: leadership communication and performance measurement. Great sales compensation plans optimize both of these elements: communication ("this is what's important") and performance measurement ("your incentive payment for last month's performance"). However, clear communication messages and measurement systems don't always fit tidily into a sales compensation plan. There are other and more powerful ways to manage salespeople. For example, day-to-day, hands-on committed sales supervision is considered the best "system" for optimizing sales performance.

A typical conversation between the first-line supervisor and his or her sales charges would sound something like this: "Now, ladies and gentlemen, we are on the line here to achieve this month's sales objectives. I have a commitment from each of you to reach your monthly quota. It's important to me, and it should be important to you. At our next sales meeting, we will put the numbers up on the board to see who we cheer and who we sneer! If you are having any trouble closing a deal, I can help you. Call me, and we will schedule joint sales calls. Remember, your success is my success!"

This pitch by the first-line supervisor shows the importance of leadership communication ("... it's important to me, and it should be important to you ...") and performance measurement ("... at our next sales meeting, we will put the numbers up on the board to see who we cheer and who we sneer ..."). Notice, no mention of money was made, but a heavy dosage of personal accountability and peer pressure is evident.

Interestingly, this vignette illustrates how sales compensation is considered "cross-elastic" with effective sales management. In other words, the better the sales supervision the less the need for aggressive incentive plans to manage sales performance. Further, sales compensation is not a birthright of salespeople. We estimate that 20 percent of all sales personnel are paid with a salary-only program without any variable pay plan.

Regardless of the pay plan, high-performing sales organizations feature ongoing leadership communication and robust performance measurement systems, whether these functions are found in the sales compensation plan or projected through effective sales management, or are a combination of both.

Yes, we agree, the economic transactional value of the incentive compensation dollars does provide motivation for increased performance. However, we consider it complementary to other factors such as pride of performance, supervision, affiliation, and goal accomplishment.

Well-run sales departments treat sales compensation as one of several levers of effective management. Along with other management tools, sales compensation can play a contributing role to successful sales production. However, it cannot be the only factor because alone it cannot provide leadership, commitment, and purpose of endeavor that effective sales management can so ideally provide.

THE POWER OF SALES COMPENSATION

A well-designed sales job and sales compensation program can provide dramatic improvement to a company's sales results. When products, customers, sales leadership, jobs, measures, and rewards are in alignment, sales results can be more than remarkable. Sales compensation can provide the right focus on revenue growth, profit improvement, product focus, account penetration, and solution selling.

If sales compensation programs are so powerful, why do they seem to be so "noisy"? In a league of their own, like no other compensation program that the company has, sales compensation programs seem to produce a disproportionate amount of challenges and conflicts. Why is that? There are several reasons. Some issues are to be expected, but others are a result of poor design and poor alignment. Here are examples of some challenges and conflicts:

1. The chief executive officer (CEO) and the chief financial officer (CFO) are unhappy that the sales compensation program is too costly while the company is performing below objective. This is not an uncommon situation. Before concluding that the sales compensation plan is overpaying, you might want to look at the cost of sales. A high cost of sales might be a result of overstaffing and not overpayment to individuals. If actual payouts are too high, then examine the quota system first. Perhaps quotas are too easy.

2. Product management wants greater product focus from the sales force. Product managers want to put extra incentives in the sales compensation plan to promote specific products. Product focus is a legitimate measure for sales compensation purposes; however, prior to making changes, product managers have to make good on their own responsibilities, including rationalizing the product offering, segmenting customers, and providing sales messages for unique buyer populations.

3. Salespeople complain sales quotas are too difficult. Sales quotas should be difficult. That's their purpose—to stretch performance. Sales compensation is not an appeasement program.

4. Salespeople seem to ignore components of the sales compensation program. This is often the result of a poor sales compensation design, not a motivation issue. A poor design is frequently a reflection of strategy and alignment confusion by senior management. Too many measures, inappropriate measures, or unrealistic objectives will cause sales personnel to ignore one or more components of an incentive plan. Solution: new job definition and a new sales compensation design.

5. The company spends too much money administering the pay program. Using low-power tools such as desktop software will cause an increase in headcount for program administration. This may not be the fault of the incentive program, but may be a problem of failing to provide proper information technology (IT) administrative support to the program.

Sales compensation is noisy. Sometimes the design is at fault, and sometimes it's an issue of alignment. It can even be just a by-product of an effective program. As a sales compensation designer, this book will help you sort out what problems are real and what are not, where the solution resides, and how to make the right changes.

JOB CONTENT—THE SOURCE OF SALES COMPENSATION DESIGN

When asked about the origin of a sales compensation program within a company, the response might include the following: "It's always been that way" or "It's the industry practice. We follow what others do."

These reasons may sound compelling, but they do not provide a strong rationale for designing effective sales compensation programs. Historical practices, sometimes known as legacy solutions, are often no longer contemporary with market realities or support a sales model that no longer exists.

What about industry practice? Follow industry practice only if your company is identical to your competitors and if they have found the ideal sales compensation solution. However, the likelihood that your products, customers, and customer coverage strategy are identical to your competitors is, at best, remote. So, following what others do in your industry is usually not an effective strategy. As we will learn later, the design of the sales compensation plan is unique to every company.

Effective sales compensation begins with the proper strategy alignment and ends with effective job design. There are several points where sales management must achieve alignment before reaching the sales compensation program. The right products must be aligned with the right customers. The right sales jobs must be aligned with the right buyers. The sales jobs must have clarity of purpose—alignment to the sales task—and the performance measures must have alignment with the job content.

Once sales management provides proper alignment among customers, products, and sales jobs, then sales management can craft a sales compensation plan to support the aligned sales strategy. As we will learn in Chapter 4, sales compensation design is driven by job content. Get the job right and the sales compensation design is easy. Conversely, create a confusing, misaligned sales job and no sales compensation plan can be successful.

SALES JOBS AND SALES PROCESS

The art and science of crafting effective sales compensation programs rest with a commanding competency in sales job design—assessment, evaluation, and construction. Job design errors are the No. 1 culprit in sales compensation plan failure.

Sales management configures sales jobs to serve a preferred target buyer population. All sales processes comprise five key components. Depending on the products, market, and customers, sales management will define the sales job within the context of these five components:

• Demand creation: Stimulating the market.

• Buyer identification: Finding the decision makers.

• Purchase commitment: Securing the order.

• Order fulfillment: Delivering the product or solution.

• Customer support: Providing ongoing support after the initial purchase.

Each step of the selling process contributes to securing and keeping customers. The sales job is often involved in each step of the sales process; however, the level of involvement varies significantly from one company to another and from one sales job to another. The following are descriptions of how sales personnel may be involved in each step.

• Component 1: Demand Creation: Typically, the marketing department has responsibility for demand creation. Through advertising, public relations, trade shows, and direct promotion, the marketing department creates demand for the company's products or services. However, in many cases, the sales department will help create demand for the product. This is usually true for companies selling new high-end products in the business-to-business market. This is known as "new market" selling. In these instances, the most practical method to create demand for the product is to hire a seasoned sales force to promote the product to target buyers. In some instances, some sales organizations, such as pharmaceutical sales, only do the first two steps of the sales process—demand creation and buyer identification—with no other sales process responsibility. In these instances, sales personnel promote products but never actually write the order.

• Component 2: Buyer Identification: It is normally the responsibility of sales personnel to identify buyers who can make a purchase decision. When selling complex products and services, identifying the buyer(s) can be extremely challenging. Many sales training programs and sales improvement programs spend considerable time educating sales personnel on how to work with the customers' numerous individuals and teams to correctly identify the right decision makers. However, in other companies, marketing, not sales personnel, assumes responsibility for both demand creation and buyer identification by having customers identify themselves through direct response either by mail, telephone, or Web site visits. Finally, in other companies, the marketing department is responsible for identifying potential buyers through research conducted by telemarketing reps. Marketing then assigns these potential buyers (hot leads) to the sales force for sales efforts.

• Component 3: Purchase Commitment: The primary value of a sales representative is to secure a purchase commitment from a customer. This step is typically known as "closing" the sale. We all share a common image of a sales rep opening up the order book and writing down the customer's order. (This is how the now seemingly quaint expression "book the order" came into the sales world vernacular.) While a high-tech version of booking the order still exists today, securing a purchase commitment can be an involved and complex process of contracts, fulfillment obligations, performance-pricing, and delivery commitments. For most companies, a booked order now arrives via an electronic medium. Still, some sales departments require their sales personnel to remain involved in every part of the transaction, ensuring that all elements of the purchase process have been successfully completed. At the other end of the spectrum, we find customers so well acquainted with products that they do not need or want a salesperson involved in the purchase process. These customers prefer to order by telephone, fax, or from an e-commerce Web site.

• Component 4: Order Fulfillment: The actual delivery of a product or service to a customer is collectively called "order fulfillment." In some cases, the salesperson provides order fulfillment, but frequently this responsibility rests with others. But there are many selling models where sales organizations require sales personnel to oversee the successful delivery of the product to the customer. Customers will typically call the salesperson to check on the status of the order as they await delivery or ask for assistance if there is an order fulfillment problem.

• Component 5: Customer Service: Most sales organizations work collaboratively with customer service departments to provide after-the-sale support. Even so, sales representatives will occasionally find themselves involved in customer service issues if a customer is not satisfied with a product or service. In some companies, this is a mandated part of the sales job, and sales personnel will work with internal resources to ensure customer satisfaction.

Each of these activities—demand creation, buyer identification, purchase commitment, order fulfillment, and customer service—contribute to a successful sales process. The role of the salesperson will vary depending on products, customers, and the company's sales coverage model. The mix and configuration of these sales process roles determine the content of the sales job, and sales job content drives sales compensation design.

SALES COMPENSATION—PAYING FOR THE POINT OF PERSUASION

The highest value provided by sales personnel is to help customers make choices when there is uncertainty and risk. This event is known as the "point of persuasion." The purpose of sales compensation is to reward seller success at the point of persuasion.

(Continues...)



Excerpted from Compensating the Sales Force by David J. Cichelli Copyright © 2010 by David J. Cichelli. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Acknowledgments xiii

Preface xv

Introduction xvii

1 Why Sales Compensation? 1

The Role of the Sales Force 1

Why Sales Compensation Works 2

The Power of Sales Compensation 4

Job Content-The Source of Sales Compensation Design 6

Sales Jobs and Sales Process 7

Sales Compensation-Paying for the Point of Persuasion 10

Sales Force Obsolescence and Sales Compensation 11

The Impact of Customer Relationship Management 13

Summary 14

2 Sales Compensation Fundamentals 15

Variable Compensation Models 15

Income Producers versus Sales Representatives 20

About Sales Compensation Concepts 23

Sales Compensation Design Elements for Sales Representatives 23

Eligibility 24

Target Total Cash Compensation 25

Pay Mix and Leverage 27

Performance Measures and Weights 30

Quota Distribution 32

Performance Range 34

Performance and Payment Periods 36

Summary 38

3 Who Own Sales Compensation? 39

Sales Compensation Program Ownership 40

Program Accountabilities 41

Assignment of Program Accountabilities-Large Sales Organizations 43

Using Committees 45

Sales Compensation-The Process Manager 46

Summary 47

4 Why Job Content Drives Sales Compensation Design 48

Job Content Drives Sales Compensation Design 48

Sales Job Components 50

Sales Job Type Inventory 53

Job Levels 61

Job Design Errors 62

Sales Compensation Practices by Job Types 64

Summary 65

5 Formula Types 66

Types of Plans 66

Illustrating Formula Payouts with Sales Compensation Formula Graphs 66

Unit Rate Plans 68

Target Pay Incentive Plans: Commission versus Bonus 75

Target Incentive Plans: Commission Formula 78

About Link Designs 90

Bonus Formula: Providing Equal Earning Opportunities When Territories Are Dissimilar in Size 98

Target Bonus Plans 98

Bonus-Calculation Basis 108

Special Designs 109

Base Salaries 116

Summary 121

6 Formula Construction 122

Fundamentals of Sales Compensation Formulas 122

The Economics of Income Producers 125

Advanced Thinking about Income Producer Commission Rates 127

Constructing Sales Representative Formula 131

Formula Construction Worksheets 136

Summary 146

7 Support Programs: Territories, Quotas, and Crediting 147

Territory Configuration 148

Quota Management 154

Sales Crediting 162

Summary 168

8 Difficult to Compensate Sales Jobs 169

Channel Sales Representative 170

Long Sales Cycle, Mega-Order Sellers 171

Business Development-Specification Sellers 172

Strategic Account Manager 173

Pursuit Teams 174

New Account Sellers 175

Account Manager 176

Overlay Specialist 177

New Hires 178

Branch Manager 179

House Account Manager 180

Sell and Deliver Service Providers 181

Merchandisers 181

Summary 182

9 Compensating the Complex Sales Organization 183

Examples of Complex Sales Organizations 185

Challenges for Sales Compensation 191

Preferred Sales Compensation Outcomes 192

Sales Compensation Rules for Complex Sales Entities 193

Summary 195

10 Global Sales Compensation 196

The Philosophy of Internationalism versus Globalism 196

Sales Compensation-A Local Solution 198

Global Trigger Conditions 202

Global Sales Compensation Solutions 204

Trends in Global Sales Compensation Practices 206

Summary 207

11 Administration 208

Administration Components 209

How to Avoid Unnecessary Administrative Burdens 217

Summary 218

12 Implementation and Communication 219

Implementation 219

Communication 223

Summary 230

13 Program Assessment 231

Strategic Alignment 232

Employee Motivation 234

Best-Practice Variance 235

Return on Investment 237

Program Management 237

Summary 239

14 Sales Compensation Design 240

The Sales Compensation Design Process 241

Ten Steps to Sales Compensation Design 242

Summary 247

Closing Notes 248

Appendix A Illustrative Sales Compensation Plan 250

Appendix B Sales Compensation Surveys 263

Appendix C Software Vendors-Sales Compensation Administration Software 264

Index 265

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  • Anonymous

    Posted September 14, 2013

    David Cichelli is energetic, knowledgeable, and concise. This i

    David Cichelli is energetic, knowledgeable, and concise. This is a "must have" reference. I recommend his books and seminars to everyone!

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