ICM Solution Return on Investment – Ask the Expert #4

Many companies often wonder what the Return on Investment (ROI) of incentive compensation system is. Most articles and research on the Internet are either sponsored or written by vendors and it is hard in most cases to truly measure the savings and improved performance as a result of that new system. I asked David Cichelli about his thoughts on the return expectations of a well designed and well implemented compensation system.

David’s Answer:

It’s a mystery. Since no one can conduct a double-blind test to confirm the value of sales compensation, we live in the world of anecdotes and observable behavior changes. My test of program effectiveness is the degree of “alignment” between product divisions and buyer/sales segments. The sales compensation program should ensure alignment of field efforts between these two moving parties.

What I have to say:
I talked about ICM ROI for the first time here, and discussed another story here. I agree with David that it is hard to assess if the new system is responsible for new behaviors. Taking this further, it is hard to assess whether a compensation program improves behaviors period.

However, assuming that a company does see benefits in an incentive program, the question is, will an ICM/SPM solution pay for itself. Presumably, positive behaviors are already encouraged by more labour incentive variable compensation. Real-time information, dashboards, accurate reporting and advanced analytics may help out sales people and management, but other factors are easier to quantify.

These factors are likely to depend a lot from one company to another. As I pointed out in the previous posts, some of the factors to consider are the implementation, licensing and upkeep costs, the quality of the existing system (how accurate it is), and the potential time saving to be realized with a new system (time spent calculating commissions, reviewing data, resolving issues, etc).

Spiffs, Bonuses and Contests – Ask the Expert #3

In this 3rd installment of David Cichelli’s “Ask the Expert” series on this blog, I asked David about his thoughts on spiffs. I asked him if it was possible to use spiffs while avoiding encouraging employees to push a certain product upon a customer at his or her expenses. I also asked David if there was such a thing as too many spiffs. Previous posts of this series are here and here.

Before going into David’s answer, I want to give a bit of background regarding what is a spiff.

SPIF (or SPIFF) may stand for “Sales Performance Incentive Fund”, “Special Performance Incentive Fund” or ” Special Performance Incentives for Field Force”. The exact origin of the term is open for debate. Wikipedia defines a spiff as a small, immediate bonus for a sale. They can be paid by a munufacturer or the employer, to the salesperson who sold a specific product.

I have seen spiffs used in several scenarios such as when a manufacturer wants to gain market adoption with a new product, when a retailer wants to liquidate some of its inventory, to incent sales people to sale certain combinations of widgets, etc. The goal is always to have an immediate impact on sales force behavior. Of course, spiffs are not without their own pros and cons, but they can fit nicely within a compensation strategy.

Here is what David had to say about spiffs:

Julien, you might want to check the spelling of “spiff.” I spell it with one “f.” It means Special Performance Incentive Fund. Check Wikipedia for a nice discussion on the spelling. [Sorry David – I’m sticking to spiff for now, so far I’ve seen it spelled this way more often than “spif”].

First of all, I consider spifs, contests and campaigns an integral part of the sales management’s tool kit. Here are the rules for appropriate use of these programs:

1. Budget of all programs should not exceed the total earnings of the sales force by 3% .
2. Spifs should be used for “doing something new for the first time.”
3. They should not be used to spike performance during a period.
4. They are narcotic in nature: the more you use them the more you need to use them. Moderation of use with healthy hoopla is the best prescription for success.
5. Avoid the use of “chance” to determine winners and payouts–it ‘s unethical to do so: this is an employment relationship, not Las Vegas.

Ask the Expert – Biggest Challenges in Sales Compensation

Here is the second installment in David Cichelli’s “Ask the Expert” series on this blog. The first post and David’s background information are here.

Question: What are in your opinion the biggest challenges in sales compensation. Is there a key to success?

Answer: Well, I could write a book on this subject. Sales compensation is a very noisy device. It is hard to establish, keep current and administer effectively. We find that sales compensation programs tend to fail due to:

1) Obsolescence. Sales compensation plans must be continually updated to help maintain strategic alignment with the company’s goals. Most sales compensation specialists consider an unchanging sales compensation plan as a failure of sales management.

2) Complexity. The sales compensation plans are an easy “mark” when sales management is looking to get the attention of the sales force. However, too many measures—more than 3—doom a sales compensation program as it becomes overly complex.

Ask the Expert – Pros and Cons of Variable Compensation

I recently asked several sales performance related questions to David Cichelli, author of the popular book “Compensating the Sales Force“, a national expert in sales compensation and the sales compensation practice manager at The Alexander Group. He was kind enough to share his expertise with me, and to allow me to share his insight on this blog. Thanks again David for your time.

Question: Several readers end up on my blog by trying to find an answer to the pros and cons of variable compensation. You begin your book with an affirmation that ‘sales compensation works’. What are your thoughts on the pros and cons – the rewards and benefits versus the risks. If it is a fact that pay for performance works, why are not all companies adopting such a system.

Answer: Companies use a wide variety of incentive compensation programs for a diverse array of jobs. Incentive compensation continues to be a mainstay of contemporary management practices. Sales compensation holds an almost legendary status as an expected part of the employment equation. However, sales compensation is a management choice. It’s neither a birthright nor a requirement. In fact, in my view, sales compensation programs are cross elastic with supervisory practices. Frankly, a well-supervised work force does not need an incentive program to be effective, and that observation is true of sales compensation. But, its use is widespread and prevalent. Almost 85% of all companies with sales personnel provide a reward program tied to sales results. A famous—if somewhat inelegant—argument was made against incentives by the author Alfie Kohn in his book “Punishment By Rewards.” But, generally, most sales management teams believe that incentives help bring focus to the efforts of a dispersed workforce…the sellers of the company.

The Most Important Aspect of a Compensation Plan

When I got staffed on my first incentive compensation management system integration project, I knew virtually nothing about that industry. As any good consultant would do, I started to read as much as I could on the topic. One thing I realized is that there are so many books out there talking about how to design plans, formulas, frameworks, etc… But most of these books spend so little time actually discussing how the plan will look like.

That’s probably one of the main reason I come across so many plans that are not completely defined. When I say not “completely define”, I mean that some of its elements are left to interpretation… As a result, the implementers go with that plan, ask countless questions wasting everybody’s time during long meetings, trying to find out who the subject matter expert with a certain piece of knowledge is, only to find out that he or she is on vacation, etc. Alternatively, the consultants could “think” they understand the plan, implement it and later during testing, realize that the results are not those expected by the client… oops! And that often happens around the go-live date and, what-do-you-know, the deadlines are pushed back, the project goes over budget, people are unhappy.

Fortunately, there is one small book called Compensating the Sales Force – A Practical Guide to Designing Winning Sales Compensation Plans by David Cichelli. There is a lot of good info in this book – I will talk about some of it in the future – but in my opinion the best part is only found at the end in Appendix A: Illustrative Sales Compensation Plan. If only all comp plans could look like this!

But that’s not all… The best part of Appendix A is its last few pages; Sales Compensation Plan and Calculation Examples. And THAT’s what I call the most important aspect of a compensation plan (from an implementer’s perspective).

Having a few DETAILED examples in the plan will ensure the implementers knows exactly what the plan does. It will remove any ambiguities, it will save time and be a quick “at a glance” reference. It will also help out in the planning of unit and system tests to cover all scenarios.

A good example will include all the assumptions, sample data/rates/periods/etc and result. If a plan has any exceptions or special calculations, examples for those should be included as well.

That’s it! Please include examples for us 🙂