If you have your ear to the market then you have probably heard rumblings regarding incentive compensation regulation.  Did you know that there is discussion that the government might mandate how someone in the financial industry is incented and paid?  Yep, there is talk.

There is discussion on regulating variable compensation in the mortgage industry, and not allowing compensation to be tied to rates.  In the financial industry, there is talk of tying compensation to the life of the risk or liability.  This means that those that are in the 'high' risk sales will be compensated over a period of time of the risk, and possibly have a portion of the compensation held until the end of the risk period.  This is all new and very controversial.  One of the key questions is whether this will only influence those companies that took bail out money, or if this will be industry-wide.

The way we calculate compensation and what we calculate it on is changing.  I have to believe that those who have been studying the economy and the government bailout have been expecting this.  Evidently, they are considering regulations that would spread compensation out over the period of risk, if there is risk involved.  There are many organizations that currently do this, but the true impact cannot be gauged until the recommendations or mandates are released.  Companies that deal with high risk sales--where there is potential loss or liability associated with a sale (e.g. tied to rates or high risk activities)--will be the most vulnerable to the impact of these changes.

For those who work with compensation, you are well aware that these types of compensation changes tend to snowball and the effect can be felt for years.  Once these changes take root, it will not take long for other industries or organizations to take note and look at how these changes could be used to positively influence their own companies.  Some organizations will use these changes as a negotiating tool to hire top performers from organizations that change compensation, and some will use these changes as an opportunity to strengthen their bottom line growth.

One of the key functions of incentive compensation is to tie compensation to an income producing transaction (e.g., sale of a product or service).  Some companies already tie the compensation to the life of a contract or service, but based on the current economic market, there is the possibility that this will become more of a standard in incentive compensation.  Instead of the sales representatives or executives receiving an immediate compensation value, this may be pushed out to adjust for risk factors.  For example, if there is a window of 90 days for payment, the sales representative or executive may not get paid until payment is received versus when the invoice goes out.    

The winds of change are upon us.  There will be changes made to how companies compensate.  The question is whether you will be affected through mandated regulations or voluntary action.

When you mention Sales Performance Management, it's not unusual for everyone in the room to cringe. Why? Often, no one really owns it--it belongs to Sales, no it belongs to Finance, no it belongs to...

Even though this is one of the most critical areas for an organization, it is one of the least agreed upon. Sales drives revenue and impacts the financial bottom line of the company. While Sales executives focus mainly on the production of revenue, the Finance executives monitor how the revenue affects the financial statements of the organization. Often, the decision making process for these two constituencies are not in sync and that can negatively impact the health of the business. The truth is that key executives in both areas need to collaborate and determine how the decision making process should work for the organization.

Sales Performance Management and its components--incentive compensation, territory and quota management, and product management--are important in ensuring Sales and Finance are on the same page. The ability to make informed decisions not only impacts a company's viability, it helps guide Sales and Finance on where to focus their attention. If executives are monitoring by specific metrics, then they will know where the organization is strongest and where they can refocus resources. For example, if a company discovers that a particular mix of products sold as a package is more appealing to the client base, then they can refocus on selling the package versus the individual items to increase revenues.

Defining and agreeing upon metrics is critical in the decision making process. Metrics could include regions, territories, product groups or lines, sales force personnel, reporting lines, transactional liability and time periods. If you are wondering how to define these metrics, look to one-off or special request reports. Sit down with key decision makers in Finance and Sales individually and create a wish list from these two groups. Then combine that list. Then sit down with the entire group, and sort through and prioritize the list. These key metrics can aid in decision making and in defining your Sales Performance Management goals.

Sales Performance Management is the process by which you manage your sales, incentive compensation, territories, product and or services to drive revenue, and how you manage each of these components affects your bottom line. By aligning Sales and Finance and defining key metrics, you will aid executives in making decisions that will positively impact the financial bottom line of the company.

When a project begins, there are expectations of it going according to plan.  Unfortunately, projects often take on a life of their own.  There are many points where it is best to stop, take a deep breath, determine where you are and where you want to be, and how best to get there.

A project plan, at best, is an estimate and a road map that you desire to follow.  If your mindset is that you cannot veer from it, then you'll likely be disappointed.  In the real world, this map does not take key factors into account that can and will affect your project.  Also keep in mind that scope changes, unexpected organizational changes and testing can influence your plan.

What are some of the key factors you ask?  Let's look at a few of them.

1)      Resources:  When dealing with resources, there are foreseeable and unforeseeable things that can happen.  A foreseeable thing is that your resource has a full time job and now you want them to focus on a project that may require 25% to 80% of their attention, depending on the phase of the project.  Realistically, something will have to give one way or another.  An unforeseeable item is if you have a key resource that you are counting on and they hand in their resignation to you halfway through the project.  In both these cases, you end up with resource constraints that could negatively impact your project plan.  Your budget should always reflect a reserve to add additional resources if needed.

2)      Data:  You find that your data has issues that you knew nothing about because somebody was manually manipulating it to make it work.  Data issues play a primary role in project success or failure, and you can run through your project budget very quickly dealing with them.  Unfortunately, most are not identified until the implementation is under way.  Anticipate their occurrence and work through your data issues as they are identified.

3)      Testing:  The testing phase determines if the system is functioning, and if it functions to the user's requirements.  Many times, the testing process will take longer than anticipated.  It is reasonable to expect user acceptance testing to take four to six weeks, but I have seen it run much longer.  Setting realistic expectations of what is involved in the testing process can aid in success.  Expecting actuals to match 100% to expected results is unrealistic.  Why you ask?  Because there is always some exception that must be processed that was not taken into consideration for your implementation.  It is not realistic to expect all exceptions to be programmable or implemented in the new system.  Be aware of resource constraints and ensure resources can be available to focus on the project or add additional resources to assist with the implementation.

Your project plan is, at best, an estimate of your road map.  Keep in mind that implementations are not set in stone, and as you proceed through your plan, you may find you need to make adjustments.  Don't be afraid to stop, take a breath and revisit what you are doing, where you are, and adjust to get where you want to be.  I believe it better to be proactive and determine that it's necessary to change the plan, than to proceed and have to explain later why it was not achievable.

When an organization makes the decision to change the way they compensate their sales force, incentivize their management team or change other variable compensation plans, they are usually surprised by the headache it becomes.  

Most people become used to something and don't like when it changes. The same can be said about compensation plans.  People get used to a way of doing things, so they may resist a change to the way their compensation is calculated.  Especially if they perceive that they will get paid less or they will have less control over it.

So you should expect push back from the participants to their management team, and from their management team to you.  Unless you are dealing with a legal or compliance issue, you will find yourself compromising on the change to the plans.  It may be best to take a phased approach to changing the plan.  

A key to successful plan changes are transparency of data and calculated results to your participants.  Another key is clearly defining processes for dispute and exception handling.  If exceptions are not defined and agreed to, then any changes to compensation plans will be that much more likely to be challenged.  

If your plan participants do a lot of shadow accounting and challenging of the current plans and system, then expect when you attempt to change plans that there will be greater push back.

Some important tips that can aid you in implementing changes to compensation plans:

1.      Clearly define why the change is being made.

2.      Ensure that the purpose of the plan is clearly articulated and understood.

3.      Communicate how it benefits the company e.g., protect the company viability and assets (people).

4.      Communicate how it benefits the participant e.g., if the company is healthier then the participant has greater job security and potential for continued income.

5.      Ensure that there is a clearly defined process to address personnel concerns regarding the change to their pay.

6.      Communicate a timeline on the transition to the new plan.  Do not announce it on one day to implement on the next day.

7.      Get commitment from the management teams to work with their people to resolve concerns without making concessions that compromise the purpose of the plan or the goal of the plan.  

Many companies are reviewing their compensation plans in light of this volatile economy.  There is a need to review how to react to the changing markets and public reactions.  Preparation of the participants of the changing plans and clear communication of the purpose of the plan and any changes will aid the organization is gaining acceptance of the plan changes.  Stressing the security of the participants in light of the security of the company's viability will aid in lowering resistance to change.

I cannot promise that you will not hit a few bumps in the road through this process or that it will not be a stressful process. I can say that if your participants understand the need and the driving force behind the change they will be less resistant especially if they feel secure in their future and the organization's future.

Many companies are reviewing how they incentivize their sales force.  In an economy strife with decreased expenditures, looming lay offs, and questionable economic stability, companies are asking, 'How do I incent my sales people and what is my basis for incenting them in this economy?'

Have you asked yourself that question?  Have you wondered whether your current incentive compensation plans work?  Do you wonder if there is a better way?  You are not alone.

With decreased sales, many companies are downsizing the sales force, and changing compensation plans to allow for decreased sales.  This may include changing the targets or quotas assigned to the sales force.  The expectation of a smaller sales force managing a larger territory.  The flexibility to model these changes prior to making them, may be the key to making educated decision versus 'knee jerk' reactions to the market.  

Many companies have been moving away from incenting on sales to margin or net sales.  Some even going further to incent on collected versus billed or invoiced amounts.  Organizations are looking harder to not only incentivize their sales force but to also protect and maximize their profit margins. This means reviewing metrics that include net to gross sales, margin to income, and incentive expense to net income. Do you know the impact of your incentive compensation to your bottom line financial statements, and is it what you expect?

If you and your company are in the process of reacting to the market, share your thoughts with me and our fellow readers.  I'd like to hear what you have to say.  Your questions are welcome, too.  We can put our heads together and discuss options, ideas, and strategies.

This is a troublesome time, but it is also a time of incredible opportunity.