• May 3, 2004
  • By David Myron, Editorial Director, CRM and Speech Technology magazines and SmartCustomerService.com

Is Your Compensation Plan Undermining Your CRM Initiative?

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Incentive compensation plans are designed to motivate sales and service professionals to achieve goals and strive for excellence. But the disturbing truth is that these same compensation plans are often in opposition to the corporate strategy and CRM initiative. The effect is that employees will lose sight of what's important: their customers. "Compensation is the first litmus test for a company's seriousness about the customer," says Lior Arussy, president of call center consultancy Strativity Group. It may seem impossible to design compensation plans that keep sales and service reps motivated and focused on the customer while supporting corporate goals. But companies like DirecTV and Hologic have succeeded in doing so. Here are four strategies that will help your comp plan succeed, too. Pay for the Results You Want In sales, as in life, you get what you pay for. If, for example, your organization needs to increase sales of a new product line, but reps receive incentives that favor existing product lines, the reps won't bother to pursue sales for the new product line. According to Brad Brown, principal at sales compensation consultancy Reward Strategies, companies must make sure they're paying for the most important activities, and that those activities are connected to their business strategy and flow to the bottom line. Compensation should pay sales and service reps to achieve those specific results. Rewarding reps for the wrong results can prove especially deleterious to customer service efforts. A common call center mistake, Arussy warns, is to reward agents based on performance during peak hours. For example, a company may pay bonuses to agents who answer more calls during a peak time. However, this can lead to unscrupulous, yet commonly used, techniques that frustrate customers. In an effort to reach their call volume goals, agents may place customers back in the call queue, pass the caller to another agent, or simply hang up--all in an effort to quickly get to the next caller. This behavior can severely decrease customer satisfaction levels and lead to an increase in customer attrition. A better strategy is to reward agents not simply for volume, but also for meeting customer-focused goals. Arussy suggests that call center managers set up bonus structures based, for example, on the creation and accumulation of new ideas from customers. So instead of having an electronic board on the wall that shows the number of calls waiting, the board can show scores for the number of ideas generated or implemented, or savings and revenue numbers based on ideas generated for the company. Share Ownership
In complex sales environments one customer may require several salespeople at different stages in the customer's life cycle. But each salesperson must have his own reward structure. "The compensation system must be well aligned with the job," says David Cichelli, author of Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans. Hologic, a provider of medical imaging products, found that rewarding salespeople and field engineers for their specific role in the sales cycle not only improved performance, but also boosted incremental sales. Hologic's imaging systems include both hardware and software components that can be quite costly, running in excess of $500,000. The company has a growing service business that represents roughly 25 percent of the company's overall revenue of $204 million. An important component of Hologic's service business is extended product warranties. Hologic sales professionals are compensated for selling the imaging systems themselves. But the company's 120 field engineers, deployed throughout the United States, are in the best position to sell extended contracts as customers approach the end of their original one-year warranty. The field engineers are rewarded separately for customer retention efforts when they sell extended contracts or cross-sell or upsell other products. To support the field engineers, Hologic is using Oracle's Contract Renewal application version 11.5.7, part of Oracle's E-Business Suite. The application notifies field engineers approximately two months prior to a local client's warranty expiration date, giving clients fair warning to avoid any lapse in coverage. Previously, warranty renewals often slipped through the cracks, says David Rudzinsky, chief information officer at Hologic. As a result of the compensation strategy and the software to support it, "we have noticed an uptick in contract renewals and we can renew contracts faster, eliminating any lapse in coverage," Rudzinsky says. Automation: Let Reps Track Their Pay Many organizations still use basic, homegrown systems like spreadsheets to track compensation. But these systems provide little to no visibility for sales and service professionals to determine what is owed to them and when. So they try to figure it out on their own, which causes two major problems: overpayment and frustration. "The system is a black box: There's no information being provided to them, and you have a complete environment of shadow accounting, where sales reps track their own efforts to determine compensation," says Greg Wynne, director of product marketing at Callidus Software, a developer of enterprise incentive-management software. "It's a huge drag on productivity, which takes time away from being in the field and trying to generate business." So inefficient are these manual systems that it may take three or more months after the target date to reward sales and service professionals, which can lead to the costly problem of overpayment. DirecTV, for example, was taking too long to pay its distributors the sales compensation owed to them. As a result, the satellite communications company received many double submissions for compensation credit. "DirecTV wasn't turning around compensations quickly enough," Wynne says. "What's most important to any company is that they don't lose the relationship with that [sales] channel. So they'll err on the side of overpaying [rather] than underpaying." To correct the problem DirecTV implemented the Callidus TrueComp incentive compensation management (ICM) system. DirecTV is now able to provide its payees with up-to-date, Web-based reports of both daily and pay-period results. This has significantly reduced its administrative time lag and provided visibility into its compensation program, which has helped the company reduce compensation overpayment. Unnecessary overpayment on sales compensation plans can be costly. Research firms like Gartner and Forrester Research estimate that, on average, organizations overcompensate their sales professionals between 3 and 10 percent annually. Just as problematic is underpayment. If sales and service professionals don't clearly understand their rewards structure and, as a result, incorrectly calculate their rewards, they will be unpleasantly surprised when they receive less than they had anticipated. This creates frustration and dissatisfaction. One solution is to use an ICM application, which can minimize these problems by providing up-to-date visibility into the rewards accumulated and the status of payments. Keep It Simple and Up-to-Date Business strategies change and compensation plans must change with them. Outdated comp plans become difficult to track, and "suddenly you find yourself micromanaging the sales compensation program," Cichelli says. To help minimize compensation overhauls, he says, managers should keep performance measures down to three metrics or less, and they should be easy for employees to understand. To establish the most appropriate metrics, Cichelli suggests interviewing senior management to determine future sales objectives, headquarters staff to learn what is currently working and what areas need improvement, and field sales management and sales personnel for their understanding of the existing program and suggestions for improvement. After gaining input from the appropriate employees, create new sales metrics that are in line with both corporate goals and sales professionals' desires. The sales metrics should be challenging, achievable goals that at least 50 percent of the sales force should achieve, and an additional 15 percent should surpass, according to Reward Strategies' Brown. Brown also suggests simplifying payment methods. Bonus plans are preferable to commissions, because they're easier to administer and keep cost-of-sales and cost-of-labor in check, he says. Finally, be patient. Cichelli says that it can take large organizations four to five months to fully implement a compensation plan. Organizations with 10 to 50 sales reps should start their redesign efforts at least two months in advance of the implementation date. Sales organizations with fewer than 10 salespeople should allow at least one month for the redesign efforts. And when you think you're done with your compensation plan, think again. Zig Ziglar, author and motivational speaker, says, "People say that motivation doesn't last. Well, neither does bathing. That's why you need to do it every day." Have You Selected the Right Compensation Plan? Getting your compensation plan to align with corporate CRM goals also means implementing the right plan. Here are four types of variable compensation plans from Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans, by David Cichelli.
  • Gainsharing ties payout to corporate results like growth in revenue or profit. The plan targets between 3 and 8 percent of base salary for payout purposes. Gainsharing fails when participants view the program as an entitlement, which yields modest satisfaction for payouts in good years and significant dissatisfaction for no payouts in bad years.
  • Add-on programs reward employees with a specified dollar amount or a percentage of base salary for achieving preestablished goals. Payouts average between 5 and 10 percent of base salaries. While effective, too many duplicate plans, excessive payments, inappropriate goals, and inconsistent eligibility criteria can weaken their value. The base pay represents 100 percent of the company's target cash compensation.
  • Management bonus plans are incentive plans for the director level and above, and can range from 10 to 100 percent of base salary--the higher the position, the higher the bonus percentage. Most plans cap the upside incentive payout.
  • Sales compensation plans tie performance measures to individual or sales teams' efforts. These plans provide a base salary plus an at-risk component that is paid based on the person's ability to reach a predefined goal. Upside earning opportunities are set at three times the at-risk component. While pay caps are generally avoided, fewer than 10 percent of individuals exceed the triple upside earnings level. Incentives: Not Just for Sales Results If your business-focused comp plans need a boost, consider adding incentive strategies as a way to motivate employees and boost morale. Here, call center professionals share some of their secrets for cost-effective reward programs. 1. Don't only reward the best performers. Set up a structure that also rewards performance improvements, says Bob Funiss, president and founder of Call Center Ideas. Rewards could be anything from a cash bonus or merchandise to recognition like a wall plaque. 2. Make sure reps also know why they received a particular incentive, says Kimberly King, president of Interweave, a call center consultancy. If a rep wins a prize, but doesn't know why, that's a clear indicator that your incentive program did not work. 3. Scrap your employee-of-the-month program. The problems with this award are that managers have to figure out whose turn it is to win and the reward is not immediate enough, says Penny Reynolds, cofounder of The Call Center School. 4. Don't reward agents for meeting the standard. Set up attainable goals that go beyond the standard, and base your rewards on successfully completing those tasks, King says. 5. Get creative with old-fashioned or low-cost motivational techniques, Funiss says. Handwrite a thank-you note; give specific, meaningful, and immediate verbal praise; give a token like chocolates, balloons, or flowers. Contact Senior Editor David Myron at dmyron@destinationCRM.com
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