David J. Cichelli is Senior Vice President of The Alexander Group Inc., a national sales effectiveness consulting firm. He specializes in designing effective sales compensation plans, and is the author of Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans (McGraw-Hill, 2003). We spoke with him by telephone in October 2005.

SFXP: Tell us what you do exactly.

D.C.: The Alexander Group works with the largest companies with sales forces of 200 or more, primarily internal sales teams. Sales compensation is a very raw subject with a lot of sales organizations and one of the first things they look for outside help with. Ninety-five percent of companies change their compensation plan every year. I help them clean their jobs up – decontaminate them – reduce the number of measures, and make sure the measures are focusing on result measures. That’s the essence of my consulting service.

SFXP: Why should a company change its sales compensation plan?

D.C.: As marketing and sales objectives change to stay competitive, sales management and compensation managers need to keep the sales incentive plans contemporary. The sales organization is a dependent variable between two separate variables – the products and the customers. If one of those changes either sides of the equation, it changes what a sales department does. Any time there is a change in product configuration or business appetite or any change in customer buying preferences, that’s going to change the structure of a sales department…sometimes in a major way and sometimes in a minor way. Consequently, it will change the compensation program.

SFXP: What mistakes do you see repeatedly in the sales compensation area?

D.C.: Tweaking is the most common practice. I tell people if you tweak, you’re not doing it within the context of all of the changes that you’re facing. After awhile, tweaks will produce a crash site and you’ll need help to untangle the mess that all of the tweaking has created.

SFXP: So what’s the answer if a company feels something needs to be fixed?

D.C.: I recommend that they strip it down to its base metal on an annual basis and recreate their compensation program from the ground up. If nothing has changed, the new plan will look just like the old one. One of the most troubling things with my clients is they show up and say they have 20 different types of sales jobs in six different channels… their issues are all spread out. They’ll tweak to pieces, but you have to realize that’s going to impact a bunch of other things. By looking at it top-to-bottom on an annual basis, you can make minor changes correctly rather than tweaks incorrectly.

SFXP: But how will a sales force react to an annual review?

D.C.: A sales force is open to that review if you communicate it correctly. Pay plans can continually migrate whereas the pay opportunity does not. Sales reps are often the ones who say, “This thing doesn’t match what you’re asking me to do.” If sales reps are constantly at odds with management about changes to the compensation program, that’s a failure of communication by sales management.

If I give a sales rep the New Jersey territory tell him “Everything you sell there you get 3 percent,” and then I come back a year later and split New Jersey into major and small accounts, my rep is going to blow a head gasket. I’ll do better if I say at the time I hire him, “When you work for us, your target pay is $100,000, your upside opportunity is $225,000, and you’re focusing on all accounts in New Jersey. Next year, I may be splitting that territory into major, middle and small accounts, and I’ll talk to you then about your job opportunities, but your pay opportunities won’t change.”

SFXP: What else causes sales compensation plans to fail?

D.C.: One of the most common problems occurs in sales job design. Sales organizations continually need to realign their jobs with emerging and changing market conditions, sometimes changes that they aren’t fully aware of. If you’ve ever tried to watch a clock move you can’t see it move even though you know it’s moving. What happens is sales management becomes so focused on being at 1 o’clock they don’t realize that it’s 1:30 or 2 o’clock. They constantly are trying to maintain designs that were true at 1 o’clock, whereas the business now has shifted, new products have emerged, customers buy in a different way, and all of a sudden we’re running an obsolete sales organization – obsolete jobs, obsolete territories, obsolete quotas, obsolete compensation programs.

SFXP: I read an article that you wrote in which you state that your rule of thumb is to use no more than three measures in a sales compensation plan. Can you elaborate?

D.C.: While the limit of measures is arbitrary, it helps provide focus to the incentive plan design efforts. The analogy is trying to listen to a bunch of radio stations. Each measure is a radio station. Using extra measures is a failure of sales leadership. They don’t trust their supervisory capabilities so they start putting extra measures into the compensation program. If you just focus on performance measures related to sales results, three is plenty, maybe even too many.

SFXP: You also have definite ideas on what measures should and shouldn’t be used.

D.C.: Always have a production measure such as sales volume and, if necessary, strategic measures such as profit, product mix or new account sales. Do not include corporate measures that a salesperson can’t influence. And compliance measures – getting paperwork in on time, filling out some sort of CRM program – should be handled with supervision rather than with an incentive program. Don’t use the compensation program as a training tool.

SFXP: You have definite ideas on what percentage of salespeople should achieve target pay. Can you talk about that?

D.C.: This idea that everybody is great and they should be paid over quota means I’m overpaying my sales force compared to labor market practices. You have to distinguish between income producers compared to sales representatives. There is a profoundly dissimilar set of principles that companies either conveniently or consciously confuse. Most companies establish performance scaling that should allow 60 to 70 percent of sales personnel to achieve and exceed their quota, meaning 30 to 40 percent should not. While this ratio causes a slight overpayment of the target compensation levels, the amount is minimal and offset by low performers earning little or no incentive.

SFXP: What are your thoughts on determining the correct mix of base salary and commission?

D.C.: Some salary/commission ratios are correctly set as high as 90:10, others should be as low as 50:50. What is the variable that causes that to shift? The degree of personal persuasion of the salesperson. The more the salesperson can affect the customer to buy, the lower the base salary. A lot of channel guys are basically holding hands with a partner and training them, they’re not actually closing a deal so an 80:20 mix fits. Territory reps going up and down the street knocking on doors are more in the 50:50 range because the sun rises and sets on their energy level.

You can read articles by Cichelli and order his book at www.compensatingthesalesforce.com. He also highly recommends The Sales Compensation Handbook by Stockton B. Colt (American Management Association, 1998) and Compensating New Sales Roles by Jerome A. Colletti and Mary S. Fiss (American Management Association, 2001).

November/December 2005 Table of Contents