Category Archives: Compensation

It’s Not a Tip

It’s that time of year again. Spring is in the air. Birds are beginning to sing. Bees are beginning to buzz. It’s that time of the year when everyone’s thoughts turn to their favorite topic. It is the topic that they have actually been thinking about all winter. Yes, you are correct. It is time for the annual bonuses to be calculated.

People who are not fortunate enough to be sales people and on a direct sales commission plan, are usually on some sort of an annual management bonus plan. This plan can be complex or simple. It can have multiple factors associated with it, or possibly just a few. It is in essence a methodology for those that are not associated with direct sales to be able to either positively or negatively participate in the performance of the business or organization.

I have seen many different sales commission plans and many different performance incentive plans. One of the conclusions that all of this performance based compensation experience has led me to is this:

The simpler the compensation plan the better, for all involved.

It doesn’t matter if it is a commission plan based on orders for a direct sales person, or a management performance bonus based on the attainment of specific goals. The simpler the better. We need to remember that simple does not mean “easy”. Simple means that there are specific defined objectives and directly correlated rewards associated with obtaining those objectives. It has been my experience that selecting the appropriate goals and objectives that drive the desired behaviors and performance is not an easy task.

Sales commission plans are in general a little bit easier to figure out than are management incentive plans. There are usually some very specific and well defined numbers associated with the desired goals. These can include items such as orders, revenues and margins. The numbers achieved are divided by the goals and the performance percentage is hard to argue with and is well understood.

Management performance goals are a little bit trickier. The further into the organization away from senior management that you go, the smaller that individual’s ability to affect corporate performance. Based on this fact you would think that actual corporate performance should not have a great deal of affect on the majority of management incentive receivers. On the other hand everyone is contributing to the organizations performance. If the overall organization does not achieve its objectives and goals, it is difficult if not problematic to provide a management bonus to the individual team members.

However, it should also be noted that most sales people do in fact receive some portion of their commission structure rewards at performance levels that are less than one hundred percent achievement of their targets. It would not be difficult to accept the need to provide some sort of similar type management reward for partial goal attainment that works along those same lines.

The point behind all this stage setting is pretty simple. Notice how everything I have discussed up to now is based on the measured attainment of specific defined objectives. When you attain them you get paid and when you don’t attain them you don’t get paid. It should be a well understood arrangement for all involved.

As an example I will hearken back to a simpler time. A time when we were in school. A time when we did our school work and we got grades. We should all remember that time. Depending on where you went to school, a passing grade could either be a “D” or a “C”. I will note as an aside that neither of these letters were acceptable when it came time for my parents to review my report card. There were no acceptable excuses. It’s funny, but I sometimes hear the same words when speaking to my children regarding their scholastic performance. I wonder where they are coming from.

In any event, a certain numeric percentage of the available one hundred percent were assigned to these grades. That meant that regardless of how hard you may have worked, if you didn’t achieve the sixty or seventy percent threshold, you failed to achieve your objective and received no credit for the course. This was a given.

It is not unreasonable to expect any commission or bonus plan to also employ certain threshold before any compensation occurs.

Just to be clear, if commissions and bonuses are based on the achieving of specific goals, it should be expected that a certain threshold will need to be attained before any commission or bonus is paid. Below the threshold, regardless of how hard the individual works, nothing will be paid.

Many organizations follow this policy. There are also those that do not. It is best to be aware of the policy when either setting or participating in a compensation structure.

I have been in several organizations in the past where individuals have commented that they worked incredibly hard in the previous year, and that they were hoping for a good compensation check.

I couldn’t help but look at these people with awe.

I would always ask if they were aware of the specifics regarding the commission plan or the management bonus plan. They would say “yes”. I would ask if there was anything so qualitative (as opposed to quantitative) about their percentage attainment of their goals that would make it difficult for them to measure how they performed against their goals. They would say “no”. I would then ask how they could expect anything but the correctly calculated amount. They would then again reiterate how hard they worked.

I would then inform them that what they were expecting was not a calculated performance bonus, but a “tip” similar to that which is provided to someone who provides a personal service. Much like the wait-person that brings the food, but must suffer due to the poor performance of the kitchen, or the cab driver that must deal with unexpected traffic when the ride is in a hurry. They performed their work as well as could be hoped for, and even though the objectives of a hot and timely meal, or arriving in time to catch a flight were not achieved, quite possibly to factors outside of their control, they would still expect a tip for the service they rendered, especially if they worked hard.

I would then inform these people that to my knowledge most organizations do not participate in the practice of “tipping”. They pay for achievement. People need to know that going in. I think that for all of us hard work is a given and is expected. A bonus is just that. Something extra that is predicated on the measurable performance and achievement against defined goals and objectives.

It may take hard work to achieve the goals and earn a bonus. But in business if you don’t achieve your objectives you usually won’t get a “tip” just because you worked hard.

Bad Deals

I started off my business career in sales. I admit it. It’s not something I am particularly proud of…come to think of it, it is something that I am particularly proud of. I can honestly say that I spent time in one of the most difficult professional disciplines around, the professional discipline of trying to get someone to give you their money. I learned a lot in sales about dealing with customers. I also learned a lot about dealing with the internal mechanisms of the company that I worked for as well. I thought that any customer that I could make a deal with and get an order from was a good customer. As I have progressed through my career I have learned that not all deals and customers are good.

For the average salesperson an order is an order. The more of them you get, the more commissions you get. The more commissions you get the more money and personal esteem you acquire. Along with this comes better houses, cars, big screen TVs and along with the laws of natural selection an increased opportunity to pass your sales DNA along to future generations of sales people. In case you missed it, sales is a jungle.

The ideal sales deal is that you provide your customer with something they need, a product or a service, and they provide you with something you need, primarily money. As long as everyone keeps this sort of exchange arrangement in mind things normally go well, and for the most part they usually do.

Occasionally however there have been recorded instances where things didn’t go well. Many of these sorts of instances are attributable to honest mistakes or misunderstandings and the preponderance of them can be cleared up by honest and diligent work by both parties associated with the deal.

Then there are the outliers. Those deals that you have entered into that despite the fact that you’re doing everything right, either one or both of the parties to the deal are unhappy. Either the customer is not getting what they wanted, or you are not getting paid. Sometimes both. What do you do?

The first step is to find the nearest Home Depot store. Go there and go into their Bathroom / Plumbing section and find a really nice mirror. Buy that mirror, take it to your office, hang it on your wall and spend some time looking at and questioning the person in that mirror to make absolutely sure that you are in fact living up to your end of the deal. Try to look at the person in that mirror from the customer’s point of view. Have you told the customer everything the need to know? Have you done everything you need to do? Start with you.

If you have completed step one and are reasonably confident that you and your team are providing all the entitled goods and services to both the letter and the spirit of the contract then the issue may in fact lie on the other side of the deal, with the customer. This is usually a pretty rare, but not an unheard of event. You may have a customer that through either the normal or abnormal conduct of their business is difficult to deal with.

I have not had to deal with this sort of situation very often thank goodness, but when I have it has normally fallen into one of two categories: it is either a very small customer that for whatever reason has been forced into a position where they cannot adhere to the deal they made, or a very large customer who feels that they are either such a desirable customer or so dominant in their market that they do not feel that they have to adhere to the deal they have made.

Of the two scenarios, I prefer the first one. A company that can’t honor the deal for the most part will be willing to work with you. There may be a solution out there where the deliverables of the deal can be altered to where both parties can be addressed. A small customer company by its nature can be a fragile enterprise. There are risks associated with dealing with them. They will however usually try to work with you.

On the other side of the spectrum is the large company. These are companies that understand the role and position in the market and use it as leverage against all of their suppliers. If you want their business then they feel that you will have to play their game. Most customers want their partners to make a reasonable profit. This usually assures them of a continued available supply of the good or service that they want or need. Some however just want the deal now and will not care if you are around for the next one or not. They know there will be someone else there if you are not.

The usual response to this tactic is for the organization to agree to the terms because the organization decides that it wants the business bad enough, and the size of the business is large enough to warrant an agreement. There will usually be pressure from the sales team trying to convince everyone of the strategic nature of both the business and the customer in question, and how the profit will be made up on the next deal.

It never happens that way, and there is nothing strategic about unprofitable business. I have addressed this topic specifically in the past. You can talk yourself into just about any kind of business, but you cannot talk yourself into profitability.

Once you are into one of these types of deals where the customer is obviously leveraging you there are only a limited number of things you can do: You can look for a legal way out, or look for a way to minimize the damage and exposure while you meet your end of the agreement. After all, you signed it.

Exiting a deal because you don’t like the terms of a contract you signed is usually only an option of last resort. Unless you have been demonstrably misled by the customer, this really isn’t an option. But it is also a financial decision as well. If the fines and penalties for leaving the contract are less that than the losses expected from continuing, it needs to be reviewed.

That usually leaves buckling down, trying to reduce all costs associated with the deal in question, and then getting out at the earliest legal time. Issue the exit / cancelation notification and don’t take any argument from the sales team or customer. These are the teams that were responsible for the deal in the first place. Don’t allow them to prolong the inevitable.

Be polite. Be firm. Be gone.

Sometimes bad contracts are expensive opportunities to learn lessons. Other times they can just be plain expensive. They can be lessons about markets. They can be lessons about sales teams and their compensation incentives. They can be lessons about specific customers. The important point is that they need to be lessons that are learned.

If you have only a contract or two that fall into this category then they could be an anomaly. If you have multiple bad deals in a specific market or with a specific customer, you need to learn how to de-risk those types of deals, or avoid those specific markets or customers.

If you have multiple bad deals across multiple markets and customers, then you have a sales force issue, where their objectives and incentives are not aligned with the profitability objectives and requirements of the company. This is a key point. If you have a number of bad deals you have an issue with your sales team and their compensation plan. You probably need to make sure that the sales team has some sort of margin or profitability goal associated with their compensation in order to avoid this situation.

Regardless, the only person responsible for a bad deal is the one that agreed to it. Don’t sign a bad deal hoping you can make it better. Don’t specifically blame the customer, but if they are unwilling to create an agreement that is at least fair to both parties you need to remember and learn from it. Learn from it and put the processes in place to make sure it doesn’t happen again.

Bad deals happen only because you agree to them.

No Corporate Goals

With the beginning of the year comes the phrase that
while maybe not striking fear in the heart of a leader, will definitely elicit
a wince, or two. It’s time for annual reviews for the previous year, and the
setting of individual objectives for the New Year. This event normally ranks
right up there with root canal on the fun scale for a leader.

Despite my poking a little fun at how the process mat
be perceived, it is a very important process for the successful business. Set
the goals too low and you bog the business down because goals are achieved to
easily or to early. Set the goals too high and you run the risk of the team not
giving a full effort for a goal that is seen as impossible to achieve.

Another aspect of goal setting that is often
overlooked is that of materiality. We have all been recipients of the dreaded
“corporate” objective. That is the overall corporate Revenue, or Profitability
goal. While this may be a suitable goal for a division or business leader, at some
point in the hierarchy it does become meaningless.

Goals are only useful if the individual that the goal
is set for as the ability to achieve or affect the achievement of that goal.
Many will argue that everyone in the corporation has the ability to affect the
achievement of the corporate goal. This is where the idea of materiality comes
in. The entry level specialists may be able to contribute to the corporate goal
achievement, but their “rating” on this objective will be largely dependent on
the work and decisions of those managers and leaders above them.

“Corporate” goals bring down the performance of your
highest performers and mask and bring up the performance of those on the lower
end of the scale. An example would be if the performance of the leader (and
team) of a higher performing smaller division, would fail to get a bonus or an
appropriate review based on not achieving a corporate “objective” because a
larger, poorer performing division brought the overall corporate performance

It seems to have long been held that if the entire
corporation did not achieve their goals then no one in the corporation could be
said to have full achieved their goals. In reality in this situation there are
always those that have achieved or exceeded their goals. It is just that their
performance has been masked by another group that has not. In this case the
higher performers have been lumped in with the lower performers, with little
opportunity for financial differentiation between them.

So, as the Novocain from the
root canal wears off, and the inevitability of having to set the individual
goals for the members of the team looms large, remember; Try not to set the
goals too low or too high, and make sure that the individual can in fact
achieve, or affect the achievement of the goal. In many instances this will
mean No Corporate Goals.

Align the Goals

When we run businesses we all walk in assuming that everyone in the business is on the same page and that everyone is pursuing the same goals – namely the success of the business. My experience has shown me that this is not usually the case.

Here is a quick test to prove my point: Does everyone in the business have the same compensation and incentive structures? Most likely not. Therefore it pays to review each disciplines (Sales, Marketing, Operations, etc.) incentive structure and make sure their goals are aligned.

A case in point: The sales team is normally provided incentives (commissions) based on revenue attainment. This is good. You need to have someone responsible for attaining the business’s the top line. However, this may not be enough. In a volume only incentive plan, price becomes the sales team’s primary differentiator. The sales team will now create friction within the business trying to drive the selling price down to make it easier for them to sell. If you have a sales team that is pressing that prices are too high, you might want to look at their compensation plan as one of the possible causes for this friction. (On the other hand you also need to make sure that you are not overpriced verses the rest of the market, and if you are how you quantify the incremental product value you claim to have. I’ll look at this in later blogs.)

A solution can be to make sure that the sales team has both revenue and gross margin target goals (sales cannot affect other costs of the business as directly as price and hence should have gross margin, not earnings targets) as their objectives. Provide compensation accelerators for business above target margins (this is business that is good for everyone and should be encouraged) and compensation decelerators for business below target margins (just because it is lower margin business doesn’t mean you don’t want it, it just means it is not as valuable to the business – and hence not as valuable to the salesperson, as higher margin business).

Targeting and attaining higher margin business will help exceed earnings targets for a target revenue amount. This is a very good situation and the sales team needs to be rewarded for their part in it. Taking lower margin business means you will need more revenue to meet your earnings dollar commitments. Your sales team needs to participate in this with you as well.