My apologies to my loyal reader and my philosophy of compensation fan out there for the long silence - things got hectic, vacation-y, and then hectic again.  But I’m back in the saddle and ready to pontificate happily on the care and feeding of incentive compensation systems.

But first a disclaimer.  Part of the hectic-ness (hecticity?) of the last few weeks has revolved around my taking a contract with Merced Systems, Inc. - makers of employee Performance Management systems and of the Merced Incentive Compensation Management system (formerly Practique out of the UK).  I will be working on strategic services, sales, and marketing projects for them for the next couple of months.  I’ll attempt to maintain my usual degree of hard-hitting level-headed objectivity, but in the event of an apparent conflict of interest, you now know which side my bread is buttered on.

Now on to a comp issue.  We incentive compensation junkies have been all aglow in recent weeks about HP’s problems with their Omega comp system.  And really, who can blame us?  When’s the last time sales commissions hit the national news?  This is our moment in the sun and we’re all basking in it.

Julien Dionne made an excellent point in his LeapComp blog.  To paraphrase (with apologies if I mis-state it):  with all the compensation systems available today, if your requirements can’t be met by one or more of them, your requirements are probably unnecessarily complex.  His point - ditch the 10 year old home grown system and buy something a little more modern and purpose built.  And I’m certainly not arguing against that idea.  I generally agree, as you’d expect from someone whose compensation is dependent on companies doing exactly that.

But I do have one nagging doubt, having seen the compensation problems at a lot of large customers including HP.  There are three sides to every story, and in some cases, it’s not the compensation system that’s completely responsible for bad compensation calculations and payments.  Sometimes the problem is a half-dozen upstream systems that send data that’s not accurate, timely and reliable to the comp system.  Or it may be good data, but it’s not in synch with the compensation plans.  Case in point:  if you want to pay on margin but your systems don’t capture cost, how can you make that calculation in a defensible way?

I don’t know what the root cause of HP’s compensation problem is.  It might very well be the Omega system, but it might also be that there are contributing factors beyond Omega as well.  I’m not there and any diagnosis I’d be tempted to give would necessarily be suspect.  But when I read the Wall Street Journal article, my first coherent thought after the wince and the chortle was, “and your point???”

Yes, please, ditch the 10 year old inflexible out of date system.  But maybe before you do, you might also ask yourself the larger question about whether the legacy system is the problem, or are the comp requirements or the upstream data problems too?

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

The recent topic that seems to have generated the most offline comments and conversation was my reasoned, succinct analysis of the state and future of the Sale Performance Management market.  Surprisingly, there are people who disagree with my assessment that the market is confused but overall, probably growing.  Naturally I have had to squash these naysayers like bugs, but I probably ought to clarify my position.

The market is hurting now for a variety of reasons.  The economy is an important factor, of course, but there are other reasons why sales are soft as well.  Probably the most critical one is the fact that so often, the actual implementation of SPM systems has been a horrible experience that has led to lost careers, bloodshed and the collapse of civilization as we know it.  It is hard to get references from existing customers to take to prospects when the memory of the pain is still fresh.

Who can we blame for this?  There has to be someone, right?  Well, sure, we can start with the SPM vendors.  They promise a lot, and in fairness, can often deliver a lot.  But sometimes what they are asked to deliver just isn’t very sensible from a business or systems perspective, and for this we have to blame the domain of incentive compensation itself.  Paying on ambiguous calculations against bad data, and then going back and changing the past and recalculating every period over and over again, isn’t something any system will do well.  If the vendor succeeds in making that happen, and I can attest that a lot of magic has been performed on a lot of projects to do so, then you have systematized something that is flawed by its very nature - you have perpetuated the chaos.  So, to some extent, we also have to blame the victims of the bad projects: the customers.

But does the horror of implementation mean that the market is in trouble?  I don’t think so.  I think it just means the market is still immature.  Remember, no one likes dieting and exercising either.  But eventually, as awful as it is, your doctor will suggest strongly that you consider doing it if you’d like to be healthy in the coming weeks, months, or years.  And equally, like it or not, you will eventually also have your arm twisted to implement a new, rational SPM system in order to make sense of one of the most mission critical and expensive parts of your business.  It’s just a matter of when.

You as a customer need to be clear and focused on what you want, what you need, and whether it is achievable given your available resources.  And the vendors need to show some toughness about what they agree to implement.  Duplicating a broken system in good software results in a differently broken system.

I believe that someone - whether an existing vendor in the SPM space or someone we haven’t run across yet - will put together a reasonably complete and integrated package, but more importantly, will start insisting on best practices in the comp plans and processes they model in their system.  And then things should take off.

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

I was having dinner the other evening with some friends and the subject of airline travel came up, as it so often does.  These friends had recently experienced trying to book flights using frequent flyer miles.  Evidently (and I think we can all relate to this) the process was fairly lengthy and complex and involved being on the phone with the mileage program support desk for quite a while as various dates, routes, and other options were proposed and debated.  Eventually a suitable set of flights were booked in exchange for the miles in the account, and everyone was, if not happy, then at least, reasonably satisfied.

At that point, the operator said something along the lines of, “Gee, you’ve been so nice and so patient, let me see if I can get authorization…  Great - yes, I can!  Would you like a $150 voucher for use on the airline at a future date?”

Of course the answer was, yes please.  Then the operator followed up with, “And would you be willing to take a customer satisfaction survey about your experience on this call this afternoon?”  Er, yes, sure.  Only a churl or a scoundrel would have taken the voucher and run without repaying the debt, and that call-center operator bought his 5-star rating fair and square.

The story is interesting because there’s a lot of pay-for-performance going on here.  First of all, the mileage program itself is all about rewarding behaviors, and as anyone who travels extensively will tell you, it works.  I whine like a 6-year-old when I have to fly any but my two favorite airlines (i.e., the ones on which I have a lot of miles banked), and I get irrationally annoyed when my airlines don’t have flights that go where I need them to.   And when you fall below quota?  I lost status on one of the airlines in February and I feel like a second-class citizen.  Now I have to board in Group 6, whereas the month before the flight attendants would come up and thank me for my continued loyalty to the airline.

But of course the more interesting pay-for-performance is the call center operator’s plan.  Because you know the voucher wasn’t offered from the goodness of his heart - he must be paid on customer satisfaction survey scores.  And I’d be willing to bet that the operator’s supervisor is paid on the survey scores of the operators s/he manages, too.  A voucher - one that doesn’t come out of your own pocket - is a small price to pay to stack the deck.

My real question about this interaction is whether the giveaway of vouchers is an unintended consequence of the program, or indeed, something the airline encourages?  After all, there aren’t a whole lot of flights that cost less than $150, so when my friends use their voucher they will have to pony up some cash of their own, and the airline will have a couple more passengers at a time when maybe travel is down.  Either way, I’ve enjoyed pondering it since dinner the other night.

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

Joe Galvin, a VP at SiriusDecisions, threw out a point as an illustration to his discussion on how to make sales organizations operate more efficiently in a recent Sales Optimization webinar.  To paraphrase (with apologies if I’m misquoting him), he said that, as a rep, he would want a fair and equitable territory and a quota in line with his peers, plus a clear comp plan to let him know the rules of the game.  With those pieces, you could let him go and he’d make sales happen.

So of course, I got to wondering what a fair and equitable territory is?  I suppose, ideally, it’s one that can support the rep’s quota, first and foremost.  A rep with a million dollar annual quota in a territory that can only reasonably be mined for  $750k in annual revenue is sure to be frustrating and demotivating to the rep while not allowing the company to make its numbers.

On the other hand, a rep with a million dollar quota in a territory that can provide $3M in annual revenue is sure to be ecstatic.  But this isn’t good for the company - if there is $2M in unserviced business in that territory, the company is losing money.  Not to mention how helpful this situation would be for the company’s competitors’ reps make their quotas.  Generous, certainly, but not good business.

In an ideal world, a company can and should try to make the quota, essentially, equal the territory.  In the real world that’s tough.  TerrAlign has a tool for that, but it’s still a fairly new field in terms of applying technology to the problem.  Like anything else in the SPM field, the quality of your data will have a direct impact on your ability to perform meaningful analysis and alignment of accounts or geography to sales reps’ territories and quotas.

So that’s the ideal version of territories and quotas.  What about the more common reality reps and companies face?  How do you determine what’s fair?  For example, what if a rep spends a year or so prospecting a territory, building up recognition and respect in the accounts, and then is poised to reap the rewards of this over the next couple of years?  A rep who is highly successful one year will often be “penalized” - that is, given a much higher quota, and often a smaller territory to make it in, for the following year, while other reps are dealt pieces of the now highly-productive territory.  Is that fair to the first rep?  There’s certainly business in the territory that needs to be gathered, maybe more than the rep can handle by her- or himself.  But maybe that business wouldn’t exist without the rep building up the pipeline in the first place.

It’s a truism in the sales world that the territory belongs to the company, not the rep.  But try telling the rep that when he or she has spent a year fattening one up.

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

With apologies for the late notice, but some of you might recall a blog entry on TerrAlign and their treatment of territories as a strategic business driver.  Ken Kramer from TerrAlign, along with Joe Galvin of SiriusDecisions, will be presenting a webinar tomorrow at 1:00 p.m. EDT / 10:00 a.m. PDT, entitled “Sales Optimization 2009 - Maximizing Sales Resources to Drive Revenue“.  Registration is required, which you can do here.

Sorry once again for the short notice - I hope you’ll try to make the presentation as it should prove to be quite interesting.

I was recently asked to give a presentation to a company with my considered opinion on the State of the SPM Market.  I think an acceptable conclusion - even the preferred one for some members of the audience - might have been, “We’re doomed!  Abandon ship!!  Save the women and children!!!”

And hey - it is a conclusion reasonable people might draw.  First of all, there is this pesky problem of the economy, which some of you might have noticed is, um, lousy.  But I have to feel that it won’t always be, although I have no insider information that might make anyone else believe this.

A more interesting reason to despair is that we can’t even completely agree on what SPM is - or even what to call it.  Or where it lives - finance lives in Finance, but SPM (or EIM or ICM or BPS or you name it) lives in Sales Ops, Finance, even HR.  Or someplace else.

What functionality should be included in a complete off the shelf SPM application?  Ask a dozen finance people what functions a G/L system should have and you won’t get much disagreement.  But ask a dozen comp people (or vendors) what they expect to see and they will spec out 13 different sets of features and functions.  And it’s hard to get everyone to agree on where the boundaries of SPM are.  Sales order entry?  Might be in, might be out, depending on who you ask.  Crediting transactions to payees?  Seems like it ought to be in, but isn’t invariably.  What about actual payment - writing the checks or managing the EFT?  Most of the SPM system vendors are quick to exclude that, but many customers regard it as part of the SPM system and feelings sometimes get hurt when the discussion of which system should own that takes place.  Eventually, natural selection in the marketplace will channel the various products into looking and acting more and more like each other, with similar sets of functionality that model similar kinds of best compensation practices, but it hasn’t happened yet.

So there are many reasons to despair.  But there are also reasons to be optimistic.  Not least is the fact that any part of a business that funnels as much as 20% of a company’s revenue (depending on the industry and sales model) through its systems had better have solid systems to run it through.  Excel, or an unsupported legacy system covered in duct tape and riddled with hacks, is not likely to suffice.  Words like “compliance” and “SOX” raise their ugly heads.  From my perspective, bulletproof, supportable, maintainable software is a must, and I think most medium-to-large companies will find it cheaper to buy it than to build it.

If you grant the logic of that kind of thinking, the market is practically untapped, even after a decade in the lives of the latest set of packaged applications.  The number of companies that have implemented off-the-shelf comp systems is barely a blip.  More and more of them will, because more and more of them will realize that they have it to do, and that the benefits outweigh the costs.  Which means the state of the market is hopeful.

I think…

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

We have changed the infrastructure of Compensation Architect a bit.  If you enjoy the blog and would like to continue reading it, please update your links to the blog to point to http://www.CompensationArchitect.com/blog1, and resubscribe to your various feeds?

Sorry for the inconvenience, and I hope you’ll continue to read and comment on the blog in the future.  Thanks very much -

- David

Compensation consultants are a cosmic bunch - we have to be, given the nature of the work we do, its criticality, and the underlying implications of it all.  Let others worry about software; we ponder the meaning of meaning and the history of history.  So it was no surprise when a conversation with a young lad in the SPM consulting space (thanks Jan!) turned to quantum physics and its impact on sales performance measurement, management and compensation.

You can’t work in SPM for very long before seeing a Finance Director of the company poring over a stack of comp plans, popping antacids and mumbling to herself, “We’re paying these guys to do WHAT??? Is that even LEGAL???“  You wish you could provide comfort and the reassurance that, yes, it’s all just a horrible dream, but sadly, you can’t.  And really, it’s no one’s fault - it’s a law of the universe.

It’s called the “Observer Effect”, and it states that the act of measuring something changes the thing being measured.  It’s a thorny problem in physics, and is often brought up in the same breath as Heisenberg’s Uncertainty Principle.  Anything you try to measure will be affected by the way you measure it.  To give a simple example, put a room temperature thermometer into a glass of ice water - the thermometer will add heat to the water, changing its temperature in the act of measuring it.

Okay, in fairness, compensation is really all about changing the behaviors of the sales force for the better in some way.  You are hoping that the comp plan’s focus on, and reward for, certain metrics will in fact change the things being measured in a good direction.  So in fact, the Observer Effect isn’t a bad thing.  The trouble is, the things being observed - the sales folks - have minds of their own and the incentive to warp the measurement process as much as they possibly can.  So whatever you’re measuring, whether revenue, profitability, new customers?  If there’s a way to make the measurement look more favorable, those subatomic particles known as Account Execs will find it and exploit it.

Holding orders to make the numbers fit a loop hole in the plan?  They’re on it.  Finding a way to make an existing customer look like a new one, maybe by making a different department name part of the customer ID?  Sounds like a plan.

The thing to remember is that these sales people are not bad, exactly.  They’re just being operated on by the laws of quantum physics, against which we are all powerless.

[tags]Incentive Compensation, Incentive Compensation Management[/tags]

Sorry folks - we’re moving Compensation Architect to a new server and things, um, burped. BURP is a technical term - Binary Uninterrupted Redirect Protocol. Hope to have the site up by Monday afternoon and start posting more pearls of wisdom shortly thereafter.

My apologies for any inconvenience!

- David

One new trick I’ve seen these crazy young compensation kids doing over the last few years is the stretch goal.  There are a few different approaches or wrinkles to it, but the idea is that the reps have quotas and commission rates that will result in hitting target earnings at 100% of quota.  Nothing new there.

The twist is that the reps can sign up for stretch goals or quotas at the start of the year - quotas that might be, say, 10% higher than the regular quota.  If they hit the stretch goal, then the overattainment commission rate is set much higher than the overattainment rate for the regular quota.  There might also be a bonus involved to bring the rep to parity for where they would have been, commission-wise, if they hadn’t signed up for the stretch but had made the same revenue over quota.

The downside, though, is that their base rates are necessarily lower for revenue up to the stretch quota, so if the reps don’t hit the higher quota, the commissions will be less than they would be if the reps had only signed up to the regular, non-stretched quota.  The upside is better, but the downside is worse - it’s a bigger, juicier carrot, but it’s farther out of the donkey’s reach.  It’s so fiendish and diabolical that I wish I’d invented the idea myself.

Just think of the balance of psychological forces that come into play when there are stretch quotas.  If the rep believes the stretch quota is out of the realm of possibility, the rep will naturally play it safe and go for the regular quota.  But if the stretch quota  feels doable, then the rep has to sweat through a tough decision about whether to give up a sure thing in order to get a potentially better thing if they work harder and get a few breaks in the sales cycle.  So this is probably a good barometer for your quota setting methods, too.  If the reps snort at the idea of making stretch quota, your quotas might be set too high.  If they claw and scramble for a pen to sign up to the stretch quota, the quotas are probably too low.  But if you see beads of sweat on their foreheads, the whites of their eyes showing all around as they first reach for the standard, then the stretch, then back and back again, you’ve probably nailed the perfect number.

I’ve been playing with some sample numbers and scenarios for how you might use the stretch quota and it really is fun to find the numbers that break even or that might be too high or too low.  It’s definitely a mind-game and there is probably no science to it yet - it’s the art of making your reps sweat.  And what can be cooler than that?

[tags]Incentive Compensation, Incentive Compensation Management[/tags]