Can your sales comp plan reflect customer value?By: Michael Miller Sales Compensation
When a company uses the term “value selling,” they’re typically referring to the value created for their business, viewing the sales force as a profit center that generates economic value for the company. To achieve this, sales leaders make sure roles and responsibilities are aligned to company strategy and financial goals and sales efforts are focused on profitable products and services. They may also use the sales compensation plan as a means to reward disproportionately for high-margin sales, customer retention, price realization and profit.
But what happens when you shift the “value” point of reference from the company to the customer? Recently we’ve seen “value selling” emphasize the value delivered to the customer. This sounds good, but when it comes to the sales comp plan, how is it best done? Isn’t there an inherent dilemma in compensating a sales rep on the value delivered to customers, rather than on the value to the company?
Sales leaders can reconcile this dilemma with three aspects of plan design: (1) measuring customer value; (2) considering team measures; and, (3) selecting the right performance period.
1. Measure customer value
What are the right metrics to measure and reward for customer value? Measuring concrete customer ROI or economic value delivered to customers can be a challenge. If the solution is business process outsourcing, measuring ROI is a little easier, for example when using performance-based contracts and revenue models. In this case revenue to the company and incentive dollars to the rep are directly tied to customer value. A customer pays the vendor based on a matrix of cost savings and quality improvements. And the vendor sales comp plan pays the seller for the same results. (See Figure 1). In many other cases, however, measuring customer value is not as straightforward. If a certain solution has proven to deliver customer value, then sales of the solution can be used as a proxy. You can reward sales of the proxy solution disproportionately with either a higher commission rate or a quota credit multiplier. (See Figure 2). A third option is to use key sales objectives (KSOs) tied to estimated customer value delivered, problems solved, milestones achieved, or customer satisfaction.
2. Consider team measures
Sales comp should be used to drive individual accountability and performance. But value selling typically requires team selling with marketing, service, and other functions. How do you reconcile the conflict? Measure and pay on both individual and team performance. First, keep individual accountability clear in the plan. If you expect your sellers to work independently to deliver customer value, then keep the individual component and weight it heavily. Then, create a team measure to reward results of a collaborative effort. Configure the team measure based on the deployment model. Some companies deploy overlay specialists focused on delivering customer value. If the overlay is not part of the sales force, use the same metric for both overlay and seller. The target incentive weightings and payout mechanics can be different in the two comp plans. If however the overlay is part of the sales force but is deployed flexibly, also use the same metric for both overlay and seller. And here, be sure to configure the measurement level to clearly reflect line-of-sight (e.g., single territory level for the seller, multiple territory level for the overlay). Keep the team line-of-sight clear to discourage freeloading.
3. Select the right performance period
Delivering customer value takes investment and time. But sales comp is most effective when rewarding short-term company financial results. What’s more, the sales comp program is almost always an annual program, by definition part of the company’s annual budget. If customer value selling results are not immediate, how can you account for value selling in this year’s annual comp budget? Value selling is often a multiyear investment and thus should be treated accordingly. It is not a neat part of the annual budget. For long-term value selling, consider setting multiyear goals with progress payments each quarter. These can be hard financial metric goals or KSOs. If you’re asking sellers to sustain focus on customer value selling even when that doesn’t produce immediate results, then it’s only fair that you pay sellers beyond a single year. So consider paying a modest, declining incentive on future customer value results or proxy performance. This future residual payout may give the CFO heartburn, so be sure to terminate the payouts within 2 years after payments start.
Paying sellers today for future customer value can be challenging. It often requires departing from traditional sales comp metrics. To be clear, customer value selling isn’t appropriate in all cases. It’s not necessary or advisable to turn the entire core sales force into a long-term customer value-oriented resource. Often it’s more appropriate to use specialized overlay resources to focus on customer value. These resources may not need to participate in the sales incentive program. A competitive base salary may be all it takes to reward these specialized resources. But if you believe that some or all of the core sales force must focus increasingly on delivering customer value – alongside delivering short-term results for your company – then you may want to redesign the incentive compensation plan. To get started, sort through your choices for customer value-related metrics, team goals and performance periods. By doing this your investment and tradeoffs will become clearer.
Learn more about Alexander Group’s sales compensation services.