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.
Steve, GREAT Blog article and you are right on the money…
I think you are on to something Steve. There has always been an internal or “inside the company” finger pointing in looking at outside sales. This could eliminate some of that. Not only should sales managers and above have gross margin responsibility, but individual constributors as well. I believe that it better for business and it will also separate the good salespeople from the ordinary.
Steve,
Thanks for the blog and for sharing you experiences. Our experiences are a large portion of who we are and I thank you for sharing. Regarding this entry I find it interesting that more companies do not take different approaches to sales compensation. It seems in my limited experience the compenstation plans are designed to create conflict between Sales and the business unit (one is revenue based and the other is earnings and/or margin based). On paper I suppose this seems to have a balance, but in reality the stronger personality will win the debates, therefore the balance is only as even as the individual personalities involved.
Steve,
Great blog! I agree with Dennis. Keep up the good work, I look forward to more articles.
From a slightly different perspective, the Army’s industrial base has been in a 4-year transition period where we’ve studied and ultimately adopted a host of business practices that our counterparts in civilian industry have had in place for decades. While we quickly adapted to ‘faster, better, cheaper’ practices, the one area in which we struggled was how we went about measuring (grading) ourselves.
The first cut of metrics looked very much like industry’s – revenue, expenses, productive labor hours, eaches (the number of things produced), performance of products, and the quality of services (based on customer feedback). We spent a lot of time patting ourselves on the back because we were quickly green (on target, on goal) across the board. Were we really that good? No. We just didn’t aim very high.
Since that first set, we’ve learned to critically analyze (to include using outside eyes) what we were measuring and how we were measuring it. It forced us, as an organization, to adopt the ‘continuous improvement’ mentality when it came to our corporate business processes. Where we were quite adept at employing continuous improvement and change on our production lines, we failed to embrace that same thought process in our administrative and business management processes. With some help from industry and others, we’ve set in place a regular (annual) review of our corporate metrics. This precedes our annual business planning (budget) cycle. Each new fiscal year launches w/ new goals, more stringent objectives.
We focus on cost, schedule, and performance (just like you), but our discussion and analyses do not address margin. In that the law prescribes we cannot make a profit, we instead focus on fiscal metrics that provide increasingly detailed views of our ability to account for the spending of the taxpayers’ dollars. The ‘return’, if you will, is combat power (vice profit).
The dilemma for us (and I’m guessing every business goes thru a similar growth and learning process) was a desire to look good more than understanding how we were truly doing. We’ve now evolved to where the latter dominates our metrics. And where we make gains or improvements, we assess how we can push the envelope even further.
Just as an FYI, the Army industrial apparatus and its associated partners constitute an $81B enterprise. With that much money at stake, you can [hopefully] appreciate why it was important for us to learn what you have known for years. You can teach an old dog a new trick.
Steve-
Terrific blog! From a sales & marketing point of view, it can be frustrating to compete with products that are turned into commodities versus solutions due to dynamic price points in the market, while having compensation issues.
As you alluded to, strong leadership, mind full of The Customers’ needs, in it’s mission must look at all aspects of the business metrics to sure up the value proposition in order for the team to consistently hit and exceed performance & growth targets. Your style is like Covey, you “Begin With the End In Mind.”