Revamping Sales Compensation to Drive Profitability
Elevate Seller Performance with Realistic Sales Comp Plan Design and Incentive Targets
A global food client is changing its go-to-market (GTM) model, bringing together three sales and merchandising teams that historically were aligned by product lines. The company intends to redeploy these teams around customer segments, including grocery stores, drug stores, healthcare facilities and distributors.
In addition, the client also desires to change their strategic focus from volume growth to profitability and create sales incentives that support this shift. The company chose Alexander Group for our thought leadership, long-standing relationship and expertise in international sales compensation practices.
Approach: Bringing Together Three Different Worlds
Early in the project, Alexander Group conducted interviews with all sales and merchandising leaders for the new segments and included them in the core project design team. They were all recently appointed and still assembling their teams. However, their views were still aligned with their previous business units (BUs). Throughout the project, Alexander Group helped establish a unified company philosophy around sales compensation and the nascent new sales roles deployed against the different segments.
Key insights: Misaligned Incentives Reduce Seller Motivation
The company required a consistent approach that addressed and coordinated all aspects around three key issues:
- Inconsistent plan design. There was no harmonization or consistency in the sales compensation plan designs across its three BUs. The account manager (AM) and merchandising roles in each BU had different pay mixes, metrics and weights. In addition, pay mixes differed within each role based on job level, a common practice in corporate bonus structures but not in sales compensation plans.
- Misalignment between target and actual performance. Across BUs, pay curves were severely misaligned with actual performance distributions. Our assessment findings revealed that only 30-40% of sellers performed on the pay curve strike zone across multiple metrics and plans, with the remainder performing below the threshold or above the cap. This approach significantly reduces program motivation at both ends of the performance spectrum, as most sellers either earned no incentives or had their pay capped. Based on Alexander Group’s research and client work, firms should expect at least 80% of sellers to perform in the pay curve strike zone.
- Flawed budgeting. The company also followed a flawed compensation budgeting process based on the prior year spend rather than on the sum of the target incentives for SIP-eligible incumbents, thereby hiding the long-term issue of sellers being unable to achieve the target incentive. Due to stretched and unclear performance targets and poorly designed pay curves, one BU typically paid only 60% of the target incentive even though its performance was consistently hovering around 100% goal attainment. Our findings revealed that 60% of the target was their de facto expected average earnings amount, limiting seller motivation.
Results and Recommendations: Realistic Metrics and Targets Increase Motivation and Profits
Harmonizing roles and pay mix. Recommendations included harmonized pay mixes within roles to align with the job role mandate. Previously, some roles had too much pay at-risk “on paper” but could never actually earn at these levels. Alexander Group analyzed historical payouts to define their de facto pay at-risk levels and developed transition plans to minimize disruption.
Metrics to drive sales accountability. Alexander Group designed consistent metrics and weights for similar roles and included complementary metrics between AMs and merchandising roles to drive collaboration and accountability. AM roles’ primary metrics were sales-related (~80% weight), and their secondary metric aligned with the merchandising team’s point of sale (POS) execution (~20% weight). Similarly, the merchandising team’s compensation now includes 80% POS execution and 20% sales metrics. This approach ensures that these teams work collaboratively with appropriate incentives.
Focus on profitability. Two separate sales metrics now drive focus on strategic and more profitable product lines without losing focus on the core high-volume brands.
Expanded pay curves. Previously, narrow pay curves resulted in disincentives for both low and high performers. Alexander Group widened the pay curves to align them more closely with actual performance distribution and ensure that more sellers perform in the pay curve strike zone.
These recommendations supported our client’s goal of achieving:
- Sales compensation plans that align with new roles, help support the new GTM model and focus on profitability over volume.
- Motivational sales compensation plans that allow sellers to clearly understand their path to consistently earning variable incentives every month.
As a result of our recommendations, our client successfully deployed the new sales compensation program and delivered its profitability target in Year 1 of the new program. The client also reported that the Alexander Group project brought a new way of assessing the performance of their sales organization and evaluating the adherence of sales compensation plans to their different segments’ strategic objectives.