Andrew Horvath Dec 16, 2014

Compensating Sales for Improved Performance

How should banks compensate sellers? Sales vice presidents want simple and motivational plans with upside potential to attract and retain the best talent and to grow the top line. Finance and Risk Management, however, often want to add controls to sales plans to curtail risky behavior and manage cost.

Sales leaders can use one of two methods to reward sales efforts: Balanced Scorecard (BSC)-based compensation or sales compensation. We believe that sales compensation is the optimal choice for compensating commercial bankers. Banks that pay sellers based on a Balanced Scorecard may want to consider moving towards sales compensation.

Strategic Planning Tool

BSC is a strategic planning and management system popularized by Robert Kaplan and David Norton in the mid-1990s as a way for companies to translate corporate strategy into individual performance measures and to create a feedback loop that informs further strategic planning. The goal of this framework is to enhance long-term organizational success by breaking down strategic initiatives into an activities checklist for employees across all functions.

BSC includes objective and subjective measures, input activities and results and short- and long-term indicators from four major areas: financial, customer, internal business process and learning and growth. A typical BSC for a banker might include 10 to 20 metrics.

BSC came into vogue during the mid-1990s when the proliferation of data generated by customer relationship management (CRM) systems, unified account databases, the Internet and other technologies enabled executives to measure their organizations in areas that were not possible before. Current management systems failed to turn all of the available data into a cohesive evaluation methodology; BSC filled that role.

The natural extension from managing via BSC was paying via BSC. As Kaplan and Norton noted, “Ultimately, for the scorecard to create the cultural change, incentive compensation must be connected to achievement of scorecard objectives.” Linking a bonus to BSC performance is a highly effective way to drive adoption of measures, provided the BSC aligns with the job responsibilities.

For non-sales resources such as Human Resources professionals, the BSC-based bonus compensation system has merit. The add-on bonus is typically based partly on how the individual does and partially on how the group or overall organization performs. If the individual’s measures align with the organization’s strategies, the BSC can fairly reward non-sales resources with bonus compensation.

Sales compensation, on the other hand, is a remuneration philosophy that supports understandable, motivational and aligned compensation plans. Well-designed sales compensation plans link performance measures to job responsibilities and sales strategy, provide attractive earning opportunities for high performers and are readily understood by sellers. Three factors explain why we believe sales compensation is preferred over BSC-based compensation for bankers: measurement focus, immediacy of earnings and upside and earnings differentiation.

Measurement focus. Linking compensation to BSC requires sellers to focus on a long list of measures to maximize incentive payout. Unfortunately, a list of 10 plus performance metrics is likely to blur the focus of even the most skilled sellers and create incentive “shopping” behavior, where the salesperson works on the easiest measures that provide the best return for effort. This shopping behavior might detract from key sales performance goals. If enough reps shop the plan, the link between sales strategy and field behavior will be weak, at best.

For that reason, sales compensation plans limit the number of incentive measures to no more than three in order to focus the seller on what is truly driving the organization’s sales strategy. These measures reward outputs, not activities. Weightings indicate to sellers the most important part of their job. Finally, the measures are not weighted below 15%; any lower than that and measure fails to have a significant impact on earnings and on the attention of the seller.

Immediacy of earnings. Consider a BSC example where a seller has 10 measures and is paid annually. Throughout the course of the year, a seller with the above compensation plan has no idea how a single deal will affect his or her paycheck. When payment not only occurs close to the sales event and is obscured by a perplexing earnings equation, there is little motivational link in the seller’s mind to the payout at the end of the year. 

Sales compensation plans enable sellers to calculate how much money is earned on a sale by using a plan calculator or some other tool. The payouts occur close to the sales event to link the effort and the reward in the seller’s mind. Establishing a systematic link between a sale and reward/recognition is more likely to build a positive feedback loop in sellers who are hitting their numbers and institute a sense of urgency in reps who are consistently missing monthly targets. 

Upside and earnings differentiation. The most significant difference between a BSC-based compensation plan and a true sales compensation plan is the ability for high performers to earn significantly more incentive pay than low performers. Balanced scorecards inherently contain caps when they include metrics that are binary (such as attendance at weekly status calls) or subjective (“acting in the interest of the bank”).

Consider a BSC-based compensation plan that includes a binary “Customer Relationship Management (CRM) Entry” measure. The seller earns 100% of the incentive if they make the CRM data entry, zero if they do not. It becomes impossible for the seller to earn above-goal pay on this measure. Binary measures are not a fatal flaw if their weightings are low or used sparingly. However, overuse of binary measures can significantly inhibit a top performer’s ability to earn beyond the plan’s target incentive, which means that the entire plan becomes limited.

 BSCs, by definition, look for balance, which is not a good fit when an organization wants to encourage “reach for the stars” behavior. Plans typically contain caps for all metrics, most likely in an effort to maintain the “balance” of the Balanced Scorecard. The bank may fear that if it uncaps one metric, all the sellers might gravitate to that measure at the expense of all the other measures. 

Best-in-class companies that want to encourage a culture of accountability and performance build incentive plans that differentiate high and low performers. Such companies eschew caps because they suppress seller motivation; plans with caps certainly discourage exceptional performance. Banks that pay for home runs typically use other parts of the accountability model to make up for the balance that is relinquished by using sales compensation instead of BSC-based pay. If a seller is earning a large amount of at-risk pay through one measure and ignoring other duties, the rep’s manager may sit down with the rep to provide targeted coaching or training. Banks may make performance across multiple measures mandatory for promotions. 

In summary, moving away from BSC-based compensation to sales compensation can help banks in the following areas:

  • Drive management focus by identifying the two to three strategic goals for each role;
  • Attract and retain top performers with the promise of uncapped opportunity;
  • Motivate sellers to overachieve quota, and in turn drive the bank to overachieve its sales goals;
  • Assist in weeding out low sales performers;
  • Increase coaching and training accountability for sales managers by preventing managers from riding a few strong sellers and letting others fall by the wayside; managers are now required to coach and mentor all of their sales resources. 

Mr. Horvath is a manager for The Alexander Group Inc. based in Chicago.  He can be reached at ahorvath@alexandergroup.com.

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