Sales leaders must focus on both growth and profitability in today’s macroeconomic environment. Both “the street” and private equity firms are focusing on specific goals that include maximizing seller productivity and managing sales compensation costs. However, many technology companies have deficient seller performance distributions that inhibit productivity and drive higher sales compensation costs.
Many technology companies have deficient seller performance distributions. Depending on the cohort, only 37% – 41% of technology sellers are achieving their quota. In addition, many technology companies have more expensive bi-modal or flat performance distributions as opposed to a healthy bell curve distribution. Bi-model and flat performance distribution curves are more expensive because some sellers are blowing out their sales compensation costs whereas other sellers aren’t covering their base salaries. Why do companies have bi-model or flat performance distributions? The root causes vary, however typical suspects include poor or inadequate territory design practices, quota setting practices, sales compensation plans, performance management practices and/or talent profiles.
A key metric to evaluate healthy sales management practices is to assess each manager’s seller performance distribution. In other words, measure the manager on how many of their sellers are achieving quota or “balanced seller performance.” Driving balanced performance is particularly important for first-line sales managers whose job is to hire, train, develop, manage, promote and exit a team of sellers.
Done effectively, balanced seller performance measure should drive managers to accomplish the following goals:
There are two typical methods to measure balanced seller performance:
When setting up a balanced performance measure, companies must define two different types of goals:
Mechanic options can vary from a step bonus table, a bonus amount per territory/seller or even as a hurdle that drives different accelerator rates.
Within Alexander Group’s technology sales compensation database, 5-10% of companies use balanced performance in their manager’s sales compensation plan. However, many clients have expressed concerns with this measure. Companies that use percent of sellers/FTEs achieving quota must outline how to accommodate new hires, ramping reps, terminations, promotions and leave of absence in their denominator. To simplify the calculation, many of them only use tenured employees and assess the metric on a quarterly basis, though that may inadvertently encourage managers to engage in aberrant behaviors. For example, a manager may inappropriately promote, transfer or fire a seller to hit their goal.
Some companies use percent of territories achieving quota to reduce all the denominator complexities and, more importantly, to focus managers on ongoing talent recruiting so they can quickly fill open positions when needed. However, this metric requires companies to set static territories at the beginning of the year or fiscal period.
Using balanced seller performance metrics in the field organization is difficult as it can lead to inequities when there are span of control variations. For example, if a company sets a goal that 50% of sellers must achieve their quota, a manager with five sellers and a manager with six sellers both need three sellers to achieve their quotas (which represents 60% of their sales team for the manager with five sellers and 50% of their sales team for the manager with six sellers). To reduce any inequities, some companies only use balanced seller performance in their inside sales organization where there is a higher span of control of 10-12 sellers per manager.
Given all the complications with balanced performance measure, most companies use it as part of their performance management program, and not in their sales compensation plan. In other words, they set a goal, track it, share it on a leader board and manage to it.
If you or your team are interested in learning more about how to set up and implement a balanced performance metric in your organization, contact one of our technology practice leaders.