What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line

What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line

by Mark Donnolo

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Overview

What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line by Mark Donnolo

The way a company designs its sales compensation program has a greater impact on behavior and results than any sales training, sales management method, or leadership message. Yet most senior executives fail to see the big picture, leading to fundamental misalignments between sales strategy and organizational goals.

Featuring insightful interviews with Fortune 1000 C-level executives and real lessons from the field, this essential book reveals the tough questions leaders should be asking about how sales incentives drive the business. It provides valuable thought models and a Revenue Roadmap identifying the four major competency areas and 16 related disciplines that must connect for an organization to grow profitably. Last but not least, readers will find an interactive report card they can use to grade their own compensation plans.

Sales compensation powers the performance of the entire business. What Your CEO Needs to Know about Sales Compensation casts a spotlight on how leaders at all levels can leverage the strategic power of incentives to reach the ultimate goals of their organization.

Product Details

ISBN-13: 9780814432273
Publisher: AMACOM
Publication date: 01/09/2013
Pages: 272
Product dimensions: 9.00(w) x 6.20(h) x 1.10(d)
Age Range: 18 Years

About the Author

MARK DONNOLO has worked as a leading sales effectiveness consultant for more than 25 years, helping Fortune 1000 companies including UPS, LexisNexis, Office Depot, AT&T, and KPMG. He is managing partner of SalesGlobe, a leading sales effectiveness consulting firm, and a founder of The Sales Leadership Forum.

Read an Excerpt

CHAPTER 1: Your Revenue Roadmap:

Driving Your Sales Strategy

with Sales Compensation

ON A CHILLY MORNING IN SACRAMENTO, I sat perched on a vinyl bench seat, warily eyeing my rolling workplace for the day: an

18-wheeler, windows fogged from the cold, vibrating slightly as its engine idled. My tour guide, Cliff, was a driver sales rep for a major brewing company. Cliff climbed into the cab and slid over to the driver’s seat, and we pulled away from the distributor’s warehouse toward a 10-hour day of sales calls to convenience stores, supermarkets, bars, and restaurants.

As we drove, we talked about how Cliff sold beer. He had been with the company for a number of years and was very successful a but he explained that his role had changed. “Two years ago, I was selling cases of beer to store owners,” he said. “Now,

I’m trying to make the beer they already have move faster. I check the signs, inspect the coolers, and try to get our beer in the best position.” In addition to being a driver sales rep, Cliff had also become a bit of a marketer, since the company had changed his objectives a short time ago.

In the parking lot of a convenience store in a gritty urban neighborhood, Cliff dragged down a hand truck. I followed him to the back of the store and into a huge cooler that held cases upon cases of light beer, regular beer, and premium beer in 12-

ounce, 16-ounce, and quart containers. Cliff looked through the stacks, pulled the expired boxes, and loaded them into the truck.

He then lugged beer from the truck and packed it into the cooler.

As he did this, he talked to the store owner about what was selling and what was not. Then he detailed the cooler display at the front of the store, making sure the facings of cans and bottles were aligned and that the packaging and tags for the week’s specials were clearly displayed.

The brewery Cliff worked for had recently changed its sales strategy. The old approach was to sell as many cases of beer as possible, as often as possible, to as many retailers and restaurants as possible. Cliff and the other driver sales reps were paid cents per case commission to load more cases into the coolers, rotate the stock, and pull out old beer.

Eventually, the brewing company realized that pushing more bottles and cans into the back room of a retailer wasn’t necessarily selling more beer to the customer. With competition at the point of sale increasing over the years, sales out were less driven by stocking the cooler and more driven by effective marketing.

Strategically, what was important to the brewing company was selling beer to the end consumer. The company learned that the consumption of beer was driven by TV, radio, and social media advertising. Point of sale advertising, the company discovered a was another driving force.

For years, the company had missed the opportunity to mobilize the driver reps and had motivated them toward the wrong goal. It had mistakenly promoted a transactional model of selling into the back room. Finally, it realized what actually sold beer:

product placement, use of signs and displays, and matching price points with competitors. But the question remained: How did that translate to the sales organization? How could this strategy convert to incentives that were meaningful to the driver sales reps? The quest for that answer found me undercover in a convenience store cooler, wearing a starched uniform with “Mark”

neatly scripted above my left shirt pocket.

We worked with the company to determine how to motivate the sales organization with performance indicators that could ultimately steer consumer preference. The company moved its sales compensation plan off a purely volume-based plan and connected it to the metrics and activities that drove beer consumption.

It developed performance measures that were focused on merchandising, such as the number of facings, positioning the product closest to the cooler handle, the placement of signage at the retailer, the location of large displays, and competitive matching.

If its competitor’s malt liquor was in 32-ounce bottles, then the company made sure its 32-ounce bottles of malt liquor were positioned right next to them, hopefully with a larger number of facings.

By understanding what influenced the purchase of beer and connecting it to something that was important to the driver sales rep, the company was able to change the behaviors of the reps and get them to sell more beer. Now, Cliff did not just talk to the store owner about how many cases of beer he wanted and yesterday’s baseball scores. Cliff also talked to him about how the beer was selling and ideas he had about improving the marketing of certain products. Cliff talked about the positioning of the product and displays, and he had statistics on how much that could increase the volume. The store owner listened because he knew Cliff’s advice was in his best interest.

Because Cliff’s compensation changed, his conversations changed. Because his conversations changed, the results changed.

This retailer had struggled with the sale of premium beer brands in this particular market, but the store owner had seen a dramatic improvement in those sales over the past 24 months because of Cliff’s marketing.

The company and Cliff had learned an important lesson about translating the new sales strategy to the front line. The customer had learned an important lesson about how to improve the results for his business, and together the company and the customer saw significant improvement in results, demonstrating the power of sales compensation and its connection to the sales strategy.

Aligning to the Strategy

One of the first things our firm does when we look at sales compensation is understand the sales strategy. We ask: How should the priorities of the business be represented in the sales compensation plan?

One of the ironies of sales compensation is that while it’s a tactical program, it can churn up issues that are actually bigger misalignments of sales effectiveness. For example, Cliff’s original sales compensation plan paid him for generating pure sales volume, an activity that was out of alignment with the company’s strategy of positioning product competitively and playing an adviser role to help the retailer grow its business. A transactional plan like this would ultimately cause a breakdown in the company’s ability to achieve its goals. Sales executives have to be able to distinguish between issues that are related to sales compensation and those that are indicators of bigger strategic challenges. They have to know when they have a sales process issue that needs to be fixed.

Mike Kelly, former CEO and president of The Weather Channel

Companies, began his career years ago at Fortune magazine.

There, Kelly worked directly with the business customer—sometimes the CEO of the company—who would have a personal preference for a business magazine, whether it was Fortune or

Forbes or BusinessWeek. Because the decision maker was at a senior level in the organization, it was important to understand the corporate strategy. When Kelly took over the sales organization of a new magazine, Entertainment Weekly, he took that customer orientation with him.

Traditionally, a magazine would research target companies and try to prove to clients and agencies that their audience was the right audience, as opposed to trying to connect customers and advertisers to the subject matter. But Kelly implemented a customized, consultative approach, connecting advertisers to entertainment marketing. Unfortunately, Kelly explains, “We over-customized it a and the organization had a hard time making money.”

Entertainment Weekly was scheduled to be profitable after two years, but by year five it was still losing money and Kelly was feeling some pressure. “We would always point to our growth.

Our circulation growth was great, our revenue growth was great a and everybody assumed, ‘Okay, at some point or another we’re going to get to profitability.’”

Kelly enrolled in an executive education class at Columbia

University where he met Professor Larry Selden, who talked about an idea called customer segmentation. Selden told his class that the best companies understand not only who their customer is but also what their customer’s needs are. They group their customers based on needs as opposed to what they want to sell them. By segmenting his customers, Kelly could understand the profitability of each customer and each customer segment.

Then he could align his resources against those customer segments that were most profitable.

“It was revolutionary for me,” says Kelly. “No one—and certainly no one in the magazine industry—thought that way. All revenue was good revenue. And we typically thought our biggest customers, our highest volume customers, were the most profitable customers.”

So Kelly took the customer segmentation idea back to Entertainment

Weekly, and his team analyzed the profitability of all of the advertisers and all of their segments. They figured out that cable advertising was starting to explode. Networks wouldn’t let cable channels advertise on television because they thought they would steal viewers. So cable had to buy print advertising; it was the biggest, broadest reach they could get. Entertainment Weekly had a smattering of cable channel advertisers, but it hadn’t been a big focus. Kelly and his team had concentrated on what everybody else was concentrating on: automotive companies and health and beauty companies. They were big advertisers that had a lot of appeal, but they were price sensitive. Kelly, however, realized that the cable television advertisers were actually Entertainment

Weekly’s most profitable advertisers because they paid full price. This was because they were time sensitive—they had to be in certain issues of the magazine because a show was on a certain night—factors that compelled them to pay a premium.

Kelly completely changed how his organization thought about who its customer was, who its most profitable customers were, and how it should go after its customers. He realigned the sales force, putting more people and sales incentives on the most profitable categories with strong growth expectations and fewer resources against the customers for whom it was really just a price buy. Kelly says:

We were supposed to lose money that year. We made money.

And then we went on to have 30 percent CAGR [compound

annual growth rate] for the next five years.

I learned that sales is sales. But there are principles of

finance that if you apply them to sales, including incentive

plans, you can accelerate what you do. I’ve brought that to

every other job I’ve had. We really try to understand who the

customer is and what our value proposition is to that customer.

Then we segment those customers so we understand

who the most profitable ones are and who they aren’t. We put

our resources behind that profit.

If your compensation plan doesn’t align with the strategy

and the segments you want to target, then you’re going to be

working at cross-purposes. It’s hard work to get an organization,

any organization, to start to think differently. And

in most companies, sales is product-focused or platformfocused.

They’re going to go sell their product wherever they

can. When a company becomes more customer-focused, all

of a sudden it starts to define the product mix based on what

the customer needs are.

The sales compensation program can support that customer focus, run counter to that focus, or create confusion. In Kelly’s case, the priorities of the sales strategy were well represented in the sales compensation plan, and it drove the desired behavior.

Table of Contents

CONTENTS

Acknowledgements xi

Introduction 1

Chapter 1

Your Revenue Roadmap: Driving Your Sales

Strategy with Sales Compensation 7

Aligning to the Strategy 10

The Four Layers of the Revenue Roadmap: Connecting

Your Sales Strategy and Compensation 14

Insight 16

Sales Strategy 17

Customer Coverage 18

Enablement 20

Setting Your C-Level Goals 23

The Sales Compensation Diamond: The Facets of Evaluating and Designing a Sales Compensation

Program 30

Determine Target Pay 32

Calibrate Pay Mix 33

Create Upside Potential 34

Establish Performance Thresholds 34

Develop Measures and Priorities 34

Define Levels and Timing 35

Design Mechanics 35

Align the Team 36

Set Objectives and Quotas 37

Institute the Governance Process 38

Operate the Program 39

Evaluate the Program 39

5 Questions You Should Ask Your Team About

Sales Strategy 40

Chapter 2

Lapdogs, Dobermans, and Retrievers:

Motivating the Breed that You Need 41

What Breed Do You Need? Aligning Sales Roles to

Revenue Flows 44

The Three Strategies for Revenue Growth 45

Sales Roles and Their Canine Counterparts 47

The Big Picture on Sales Roles 59

The Six Dimensions of Sales Roles 61

5 Questions You Should Ask Your Team About

Sales Roles 64

Chapter 3

The Reverse Robin Hood Principle: Differentiating

Top Performers 66

The Building Blocks of Sales Compensation 69

Base Salary 70

Target Incentive 71

Pay Mix 75

The Reverse Robin Hood Principle: Upside Potential 81

Factors Determining Upside 84

Thresholds 89

Thresholds Aren’t for Everyone 90

To Cap or Not to Cap 92

5 Questions You Should Ask Your Team About

Pay Mix and Upside Potential 95

Chapter 4

Performance Metrics: Measure Twice, Pay Once 96

Performance Measures3 (Cubed) 103

Measures 104

Level 107

Frequency 109

Performance Measure Pitfalls 114

Using Measures Without Clear Line-of-Sight 114

Measuring at the Wrong Level 115

Measuring What Can’t Be Controlled 115

Measuring on a Sliding Percentage Scale 116

Using Conflicting Measures 118

Selling Incentive Plan Real Estate to Marketing 119

Misaligning Bookings and Billings and

Losing Urgency 121

5 Questions You Should Ask Your Team About

Performance Measures 122

Chapter 5

Big Deals: Aligning and Motivating Strategic

Account Sales 124

Defining Strategic Accounts 126

Sales Potential 128

Strategic Value 129

Understanding How the Customer Makes Decisions 131

Centralized Process 131

Preferred Provider Process 133

Decentralized Process 136

Promoting a Solution Sale 138

Motivating Creative Sales Roles 141

Discern Between Creativity as an End and

Creativity as a Means to a Sales Result 142

Consider Fewer Directive Incentives and More

Incentives with Latitude 143

Understand Motivators for Highly Cognitive

Sales Roles 145

Involve Creative Sellers in Creating Their

Own Goals 146

The Sales Crediting Balance 147

Measuring Mega Deals 151

5 Questions You Should Ask Your Team About

Strategic Accounts 157

Chapter 6

A Quota Quandary: Setting Equitable and

Profitable Sales Goals 158

Some Challenges with Quotas 161

The Forensics: Do You Have a Quota Issue or a

Sales Effectiveness Issue? 165

10 Success Factors for Better Quotas 171

See Beyond a Single Number 171

Remember the People 172

Involve the Right Team 172

Don’t Get Lost in the Legacy 173

Get a View from the Bottom-Up 173

Move Beyond History 174

Balance Market Opportunity with Sales Capacity 175

Fit the Methodology to the Account Type 177

Make Your Approach Scalable 177

Don’t Over-, Over-Allocate 178

From History to Opportunity 179

5 Questions You Should Ask Your Team About

Quota Setting 182

Chapter 7

Managing Sales Management: Understanding

Roles and Rewards 183

Sales Managers Aren’t Just Big Salespeople:

What Does It Take? 185

They Understand How to Lead 187

They Strategize the Growth of Their Organization 188

They Are Creative at Planning and Systematically

Solving Customer Problems 189

They Are Effective at Coaching and

Developing Their Teams 190

They Sell in the Right Places 192

What Motivates Managers? 193

Role and Recognition 196

Career Map 198

Investment 199

Rewards 201

Sales Compensation 202

Long-Term Incentives 203

A Few Sales Compensation Ideas for Sales Managers 205

Establish Pay Mix with a Longer View 205

Do a Simple Roll-Up 205

Look at Team Participation 206

Shift Measures Down the Income Statement 207

Get Objective 207

5 Questions You Should Ask Your Team About

Motivating Managers 208

Chapter 8

Making Change: Communicating and

Implementing the Sales Compensation Plan 209

Change Management Key Steps 213

Start Strong 214

Craft the Change Story 216

See the Organization’s View 220

Get the Change Forecast 222

Leverage the Learning Modes 225

Follow the Process 227

5 Questions You Should Ask Your Team About

Making Change 231

Chapter 9

The Role of the C-Level: Getting Involved in the

Right Way 232

C-Level Involvement in the Sales Compensation Process 235

Providing Strategic Direction 236

Getting Involved in the Process 240

Reviewing, Approving, and Supporting the Program 241

Asking Good Questions 244

5 Questions You Should Ask About Your Executive

Involvement 248

Chapter 10

Your Strategic Sales Compensation Report Card:

Grading Your Plan and Taking Action 250

Grade Your Plan 251

Time for Action 252

Glossary 257

Index 265

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What Your CEO Needs to Know About Sales Compensation: Connecting the Corner Office to the Front Line 5 out of 5 based on 0 ratings. 3 reviews.
JimGauthier More than 1 year ago
I've been in sales operations for over 20 years running sales and service models large in scale and small in scale, models selling legacy, mature products and models selling cutting edge, leading technolgy products and services. Establishing, developing, implementing, tracking, and paying sales teams is both an art form and a science. Mark seems to have figured out that "secret sauce". He blends solid, logical and quantitative standards with those more qualitative and creative in nature. His thought process is sound and when his ideas are put into action, successful and productive sales teams are always the result. This is a must read...whether your teams are successful or not. With the landscape ever changing, the principles in this book are necessary and critical tools.
SHahn1 More than 1 year ago
This weekend I completed "What your CEO needs to know about sales compensation" in record speed. In my experience I have read many compensation books and never before has an author linked theory with actual examples while keeping you entertained. Mark Donnolo kept a sense of humor while he educates. This is a must read for any leader - whether in sales or not.
Anonymous More than 1 year ago
Excellent. This book makes the topic of sales compensation accessible and puts it within context of the broader sales strategy for the executive and manager. Interesting stories and interviews with executives that make the topic relevant rather than academic. I found it engaging rather than technical. Great for corporate leaders, sales leaders, and managers in the organization that need to design incentives or understand how their incentive plan should really work.