By Chad Albrecht and Russell Schubert
At a recent WorldatWork conference in Chicago on sales compensation, consultants from ZS delivered presentations on various themes. But there was one particular topic — the issue of voluntary turnover — that really seemed to strike a chord with participants.
Several delegates made a point of approaching us afterwards with the message that the cost of replacing each salesperson – whether through hiring and training a replacement or lost revenue while the role is vacant – could now amount to hundreds of thousands of dollars. But our research suggests that forward-thinking companies are adopting bold incentive schemes in an attempt to tackle this disruptive and costly issue.
Adjusting to growth
Evidence from our 2015 Incentives Practices Research study for the medical products industry substantiates the widespread belief that retention is becoming more challenging. In fact, we found that the voluntary turnover rate among salespeople increased from a median of 5 percent in 2013 to 8 percent in 2014.
That in itself is a product of the surrounding commercial environment. After a period of conservatism and caution in the aftermath of the 2007-08 financial crisis, the focus is now very much on growth. Indeed, surveyed companies reported a median revenue increase of around 7.5 percent from the previous year. As a result, more good salespeople are being poached as competition heats up and companies seek to take advantage of available opportunities.
The market for compensation has been responding accordingly. The study suggests that incentives schemes are tailored to fit this emphasis on growth – and to combat the resulting turnover by increasing payouts.
This approach involves the aggressive use of incentives to ensure the commitment of salespeople, and maintain (or even accelerate) the growth trend.
Overall, respondents set more money aside for incentive payments, with total budgets going up by an average of 3 percent since the previous year. To retain excellent performers and spur them on to even greater achievement, companies plan to pay the top 10 percent of salespeople an average multiple of 2.3 times the target incentive this year, an increase from 1.9 in the previous year. A quarter of companies now pay as much as three times the target incentive to these top performers.
There are few limits to what the most successful salespeople can earn from incentives, and a comfortable majority of companies have no cap on sales incentive payouts. They seem to say to their salespeople: You don’t need to leave to fulfil your aspirations. You can earn what you want right here.
Casting the net wide
Moreover, medical products companies recognize that simply retaining top performers isn’t sufficient to realize their growth ambitions. They increasingly reward managers for the average performance of their direct reports, encouraging them to focus on coaching, motivating and mentoring all individuals in the sales team – not just the stars. Companies are taking the necessary measures, and understand that the cost of hiring and inducting any new salespeople is significant.
The move to higher incentives has not, however, been a reckless one. The carrot is dangled very conspicuously, but salespeople must nevertheless strive hard to secure it. A growing number of medical products companies set quotas that exceed national sales objectives, and payouts are triggered at a higher percentage of quota than in the previous year.
Moreover, all companies in our survey now use data on sales potential – the share of a total market that the organization can reasonably expect to capture – for quota setting, whereas a significant minority didn’t last year. They will, therefore, feel more relaxed about handing out generous rewards, knowing that they are based on fair but challenging quotas reached through the use of more sophisticated techniques.
Our survey did, however, throw up one potential flaw in the implementation of this sales compensation strategy. Putting into practice bold and imaginative incentive schemes requires robust and flexible administration. But it appears that, for too many companies, this is goal not easily achieved. Few of them are very satisfied with their administration.
This sense of dissatisfaction in this year’s survey runs relates to the widespread use of spreadsheets and databases rather than software. The majority of companies (60 percent) employ these methods of administration, with only 27 percent using either purchased or custom-built software. Importantly, this year’s sample of companies was more likely than last year’s to resort to spreadsheets and databases and to report a lack of satisfaction with administration.
It is very possible that progress is hampered by such unsophisticated practices. Several companies didn’t have a high degree of confidence in their ability to implement new plan designs with their current systems. It is no coincidence either that this year’s companies allot more full-time equivalent (FTE) employees to what is now more labor-intensive administration, which potentially raises costs.
Adapt or lose ground
Many companies adapt their incentive schemes to an improved economic outlook. They understand the need for aggressive plans, which can stimulate performance and reduce the threat of turnover of valued salespeople (itself a consequence of greater bullishness within the marketplace).
Those companies with a more cautious approach, or whose administration systems hamper the introduction of more enterprising schemes, are in some danger of falling behind the competition. The message is clear: If you don’t get your incentive strategy sorted, good people will walk out the door.
About the Authors
Chad Albrecht is a principal and leader of the B2B Sales Compensation practice at global sales and marketing firm ZS. Chad has helped numerous clients create and implement motivational sales incentive plans and set fair and challenging sales quotas. His clients include companies in the medical device, pharmaceutical, high tech, manufacturing and business services industries.
Russell Schubert, a manager at global sales and marketing firm ZS, has worked with numerous medical device, products and services companies to find solutions for a variety of issues related to incentive compensation, helping to design and implement incentive compensation plans and quota-setting processes.
To read the latest medtech insights from ZS, visit the company’s blog, “The Pacemaker.”
The opinions expressed in this blog post are the author’s only and do not necessarily reflect those of MassDevice.com or its employees.