We’re in uncharted territory dealing with the personal, social, and business ramifications of COVID-19. Earlier I wrote about how companies can change their sales compensation plans as we neared the end of Q1. Regardless of how your organization handled Q1, you are now faced with a sales team that may be struggling with occupying their time. They are probably not making cold calls. They don’t have any in-person sales meetings. And there are no tradeshows to attend.
How do you keep them busy and engaged, while also making sure you’re moving the business forward for Q2 and H2 sales? Here are some recommendations:
- Invest in Sales Operations Infrastructure – Business is like riding a bicycle – if you are not moving forward, you’ll eventually fall down. With our normal business day operating at the speed of light, we don’t usually have time to fix anything thing that is not broken, howsoever inefficient it may be. Use this slowdown to review and overhaul business processes. Scan your entire process from lead generation to invoice submission. Identify manual steps that can be automated. Everyone has some sort of Excel hell full of manual tasks. Maybe some of these can be automated by writing a simple Excel macro. If nothing, at least get a BSA (business systems analyst) to interview all stakeholders and document the entire process.
- Sales Training – Put your sales staff through extensive training on your products so that they are capable of handling product demos on their own and don’t need a Sales Engineer (SE) to accompany them. If a salesperson can demo the product and handle not just commercial, but also techno-functional questions, imagine how effective your sales organization can be. Your cost of sales could go down by almost half. You can also cross-train some your ISRs (Inside Sales Reps) and SEs to do Sales so that you have a more nimble and scalable sales organization.
- Clean up your CRM database – When was the last time someone found time to remove obsolete contacts from your CRM system? Now is the time to clean it and enhance it. Make it more efficient for when sales ramp back up.
- Stock up on Leads – It’s time to do market research or buy contact lists to stock up on your contacts database.
- Do more for existing customers – If new sales have come to a grinding halt and you have spare delivery capacity on hand, reach out to your existing customers. Offer them additional products and services that they have never bought. With spare capacity on hand you should explore giving deep discounts. Your customer, already dealing with the crisis would appreciate and remember your positive gesture.
Have you come up with other strategies to keep your sales team engaged and encouraged? We’d love to hear about them!
In this time of uncertainty around the health, societal, personal, and business impact of COVID-19, one would think worrying about sales commissions falls very far down on the list. But from a business perspective, the social distancing, shelter-in-place orders and work-from-home mandates could not have come at a worse time for sales – the last two weeks of the quarter. We can assume that almost every salesperson is going to miss the Q1 quota by a mile.
It’s safe to assume that most companies will not go belly up for one bad quarter. But your sales team certainly will not be happy about missing their quotas due to circumstances beyond their control. Now is the time to consider what temporary changes you might want to make.
Several of our customers have reached out to us looking for guidance on how to handle Q1 sales compensation in the light of this unprecedented situation. Here’s what we are telling them.
When the economic impact of this outbreak become clear, business leaders may have to adjust the sales capacity as per the new landscape. But in the short term, broadly speaking, CFOs and Sales Leaders have four options to choose for Q1 Payout:
- Reduce the Quota for the quarter
- Pay Recoverable Draws
- Pay Non-Recoverable Draws / Bonus
- Do Nothing i.e. pay as per actual Q1 attainment
Several factors should be considered in determining what is right for your organization:
This is a shared crisis. Most companies in retail, airlines, and hospitality industry are facing massive shutdowns. As of now, more than 70 retailers have announced they will be closed for the next two weeks. Retail typically does not pay for sick days, yet, according to Business Insider, “most of these companies – which range from mall brands like Urban Outfitters to major athletic retailers like Nike – have confirmed they will pay employees for lost shifts during this period.”
Put it in this context: When the word spreads that the local retailer is making the financial sacrifice to help its employees, but your company is not willing to help its sales staff – how does it impact your brand? Think about it not just from the perspective of current and future sales team, but also how would your customers and prospects perceive your company?
Risks from High Turnover in Sales
You’ve invested in your sales team. What you decide could very well impact their choice to stay with you or leave once we’ve come through the end of this turmoil. According to HR Digest, “the total cost of employee turnover can range from tens of thousands of dollars to 1.5-2x of their annual salary.” Consider that in your decision – or more bluntly – do you want to keep your sales team, or risk losing them.
It all comes down to how quickly you can hire and train new sales personnel. If it requires months of training before the salesperson can be effective, you can’t afford to do nothing as it would risk dissatisfaction and high turnover in your sales team.
We’ve recently been in a very tight hiring market where many companies – especially B2B companies – promote their perks and values. We don’t know what we’re looking at. The New York Times reports that “Layoffs Are Just Starting, and the Forecasts Are Bleak.” It might be hard to take the financial risk to change your sales compensation plan – even temporarily – in a chaotic economy. The decision you make should also reflect the company values you highlight in the hiring process.
What percentage of On Target Earnings is Variable?
If the salesperson relies heavily on the variable sales compensation to make the ends meet, this situation is going to cause them lot of financial pain. Employers should feel the tremendous humanitarian pressure to provide some assistance.
Deals are Lost or Delayed?
It is possible that the economy comes back on track within Q2. The question is – the prospects who were ready to buy from you in Q1, but didn’t buy, will they come back to you in Q2 or are those deals lost forever? Would Q1 situation lead to higher demand for the rest of the year? If so, your sales team still has a shot at meeting the annual quota, and all you need to provide is a recoverable draw in Q1.
The decision your company makes is unique to your situation – both today and what you have forecasted. It’s not an easy decision – but it’s one many of us have to face.
FASB and IASB, the two key global financial regulators have recently updated their guidelines on revenue recognition in financial terms through ASC 606 in the US and IFRS 15 its international equivalent. This has the potential of disrupting the current accounting practices for most sales organizations. It will start with some publicly listed companies and by 2018 all companies will have to comply with it.
So, what’s changing and how does it impact you?
The good part is that the overall sales compensation plans or designs will not be affected by the new regulations. You can still execute your planned vision with regards to your sales compensation strategy, albeit the way your accounting team accrues commission expenses gets changed drastically. The basic premise on which both ASC 606 and IFRS 15 have been formulated is that an organization can recognize revenue and the corresponding expenses from a contract only when the customer is satisfied. What it means is revenue recognition is no longer dependent on the realization of internal events such as successful delivery made to the customer or the passage of a certain amount of time.
Obviously, it makes the simple process of expensing sales compensations a lot more complex, especially for companies that enter into intricate multi-year contracts with their customers. The finance teams of these companies will have amortize commission expense for their sales teams over the entire length of contract. For eg. if a sales person gets into a three-year contract with a customer and gets $ 100,000 as commission, then this amount cannot be expensed in the year the contract was signed. Rather, it will have to be amortized over the three-year term of the contract.
Now, it gets a lot more complicated in cases where the contracts have elements such as variable service deliverables, floating terms and conditions and dynamic pricing in them. Some companies may want to take the easy route and expense all sales commissions immediately for the sake of simplicity. But by doing so they will not be presenting an accurate financial picture of the company to its stakeholders. The larger enterprises and publicly listed companies cannot afford to do that. They will have to find ways to manage the change of accounting standards without burdening their already overworked staff with additional workload.
So, what can you do?
It’s going to get a lot more difficult to manage the sales commissions manually on an excel as it will not only put unnecessary pressure on the finance teams but also lead to several errors. Accountants will have to diligently track all those parameters that affect a sales person’s commission including the quality of work delivered and the nature of the contract. That’s next to impossible.
If configured correctly, your sales compensation software can overcome these challenges and simplify the process of tracking the amount of sales commission that has to be expensed in a year. Here’s how it can help you:
- Distinguish between contracts that are for a duration of one year or less and those greater than a year and maintain separate calculation methodologies for the two.
- Automatically capture all relevant characteristics of a transaction, calculate commission pay-outs and account expenses accordingly.
- Distinguish between direct sales commissions and incentive compensation that supervisors receive for the performance of their teams. While the latter must be expensed immediately, the former has to be amortized for a longer duration and realized as per the rules of the new accounting standards.
- Provide a holistic picture of the commissions expenses over several years to the sales head, so he can plan the sales strategy in a more decisive and accurate manner.
- Manage frequent changes in the contract and facilitate seamless accounting for them.
If you were already thinking of implementing a sales performance management system in your company, now is the right time. The new accounting regulations are just another reason why you should invest in an SPM system, but I think you can see the bigger picture as well. Don’t you?
Sales Performance Management (SPM) projects are complex and most don’t complete on time or within budget. As a specialized SPM services firm, Spectrum has worked on numerous SPM implementations with a variety of technologies. The following our five of the top reasons why SPM implementations run into issues and our take on what can be done to mitigate those risks.
# 1 – Lack of Executive Sponsorship
SPM projects involve participation from multiple business functions like Sales, Finance, HR, Legal et al. There is always a possibility of participants losing momentum on project tasks, as they also need to focus on other regular job. The presence of a senior leader as an Executive Sponsor of the SPM project, who everyone looks up to for directions and guidance, helps in keeping the focus of the team on the project priorities.
Decision making in a multi-dimensional team comprised of mid-level managers is a challenge. The project runs into time pressure frequently. The executive sponsor understands the success factors and constraints too well. With the authority to take quick decisions, he helps aligning the team to his directives and ensures that timelines are met.
# 2 – Poor Project Governance Model
Since multiple functional departments have participants in the project, involving all the stakeholders throughout the life cycle of the project is an absolute necessity. A consistent, proactive and methodical communication platform ensures that the all the stakeholders are well informed of all the elements of the system that are being impacted during the project. It is important to form the steering committee very early in the project that lays down a simple and transparent project governance model, identified the dependencies and risks in the project, establish a versatile project plan involving all stakeholder participation and a sound communication platform that keeps the directives clear.
# 3 – External Dependencies
SPM projects impact multiple functions such as Sales, Finance, Legal, HR, IT etc, and at the same time get impacted by multiple functions. This puts SPM projects at high risk, especially the projects with long project timelines.
Several external factors like – a new executive, launch of a new product line, an M&A announcement, economic downturn or legal lawsuits, can very quickly bring in significant changes to business processes, incentive plans and resource availability. The new VP of Sales walks in with new visionary ideas that put the in-flight project back to design phase! An enhancement applied to ERP system breaks the data interface and so on.
It is important to realize that SPM projects are not happening in silo. There are lots of dependencies! While it is impossible to predict the unforeseen, one has to put in a conscious effort to look beyond the horizon and anticipate the factors that may impact the project. If there are too many changes expected in the near term, you should consider pushing out the project kick off.
# 4 – Poor Resource Planning
Operational and project responsibilities are different, and it makes sense to keep them separate.
Can the driver of the car also be made responsible for engine tune up? Yeah, maybe, but generally you wouldn’t expect one person to take on the dual role. However, in SPM projects, we often see the commission operations team carrying on the added responsibilities for supporting the new project, especially testing. This leads to severe operational conflict with project tasks.
Like any other complex projects, different specialists are needed to be assigned to specific roles. Bigger the project, greater will be the resource needs. If it is so deemed that operational team has to be the one doing testing as well, then one has to plan for the month/quarter ends, when operational team would have no bandwidth for the project. Don’t assume 100% availability.
Planning of vendor resources is also important. I have seen projects where multiple vendor resources are on-boarded on the project kick off, even though the ground work of the project is not yet completed! It’s like getting construction workers on the ground when the floor plan is not even approved. This burns a lot of money over idle vendor resources causing budget crunch for later phases of the project.
# 5 – Testing Approach
Most popular testing approaches are – Parallel Run and Test Case based testing. Most often there is not much thought given to which approach is best suited for the project.
Parallel Run approach requires running the legacy (or current) system in parallel with the new (or enhanced) system, and comparing the results for a quarter or two. This approach does not work, if there are significant changes in the plan design and expected results. I have seen testing resources working arduously to identify and explain the gaps between the two systems. If the new plan design is very different, or the old system has lots of known issues, then why waste time in doing reconciliation! In such a situation, test case based approach is more suitable. However, building numerous test cases, test data, and expected results, is a time and effort intensive approach.
One needs to evaluate the two options, and take a conscious decision on which testing approach is most suited. Very often a hybrid approach works much better. Compare the results with the old system where there are no changes, and build exhaustive test cases for some selected modules.
About this Blog’s Author
Maneesh Gupta is the founder and Managing Partner at Spectrum Technologies. Spectrum is a Silicon Valley firm providing specialized services in the area of Sales Performance Management Systems since 2006. Maneesh can be reached at firstname.lastname@example.org