Radford Perspectives

Sales Compensation

Discover the biggest sales compensation trends, issues and challenges facing technology and life sciences companies today.

In a high-growth sales environment there is less time for important systems maintenance, which can hurt sales compensation and workforce planning.

Sales jobs are evolving, and job architecture and pay systems need to adapt as well. However, as technology and life sciences companies grow at often exponential rates, we observe a consistent lack of “mining the store” among sales departments. In this chapter of the Radford Perspectives Report, we discuss how sales teams are changing and what sales and HR leaders can do to ensure they are set up to succeed in this new environment.

Lack of "Mining the Store"

The tendency to cast aside important workforce infrastructure items— from updating your sales talent profiles, job architecture and career framework to redesigning sales incentive plans— is understandable. When sales teams are meeting their quota numbers, sales leaders are usually kept happy. The problem is this: most salespeople are not hitting quota. Data from the Radford Global Sales Survey shows more than 60% of sales reps are failing to meet their individual quotas. What’s more, the human resources department typically has limited access to sales data and expertise on sales roles.

Failure to keep workforce infrastructure updated is a big miss because sales jobs are evolving fast. Customers are increasingly adopting subscription-based consumption models, making the historically-coveted “hunter” role less important relative to those jobs responsible for driving longer-term, customer lifetime value. Meanwhile, highly-skilled technical sellers are scarcer than ever.

There are incremental steps sales and HR leaders can do to improve the situation. The first step begins with updating your sales job architecture. This can reap significant benefits, such as mitigating the risk of sales employee turnover and avoiding gender pay inequity— two hot-button issues for which the sales organization is by no means immune. In fact, these issues are more likely to persist in the sales organization because of a heavy reliance on quota achievement for determining employee mobility and pay, and the black-box nature of quota management in most organizations.

With job architecture and career framework, we recommend organizations revisit their structures annually or when there is a major event at the company (e.g., a merger or acquisition, incorporating the results of an equal pay audit or a shift in selling strategy). Figure A shows the process of evaluating job architecture.


 

Figure A
The Building Blocks of Career Framework

Job Structure
Create a detailed job map
to better manage jobs and effectively leverage systems and reporting capabilities

Career Ladders
Specify job leveling criteria
for consistent individual and job analysis across the organization

Job Family Matrices
Flesh out job families
to provide job level requirements and serve as roadmaps for career development discussions

Let's talk briefly about the other side of sales force effectiveness: the sales incentive plan design. With so much of a salesperson’s compensation delivered through variable performance-based pay, sales leaders need to continually monitor pay-for-performance mechanisms to ensure they are working at their fullest and fairest potential. We recommend companies evaluate both quantitative measures as well as qualitative ones (the latter requiring heavy input from stakeholders).

On the data side, we use a three-step process with our clients to gather information in determining whether the sales incentive plan needs fixing, or if the issues prohibiting productivity gains lie elsewhere:

Three Steps to Determine if Your Sales Incentive Plan Needs Fixing

Examine overall performance trends
Ask yourself: Are revenue and profit levels growing at expected rates? What are the skills and behaviors needed to grow profitable revenue in the evolving, go-to-market model? Is there clarity in role accountability between new business development and client-success roles? The answers will help determine the metrics needed, and whether the overall performance of the sales team meets expectations.

Conduct a team-wide analysis
Evaluate how the total cost of sales incentive compensation compares to budget and performance. There are different ways to go about this evaluation, including calculating the compensation cost of sales by job function and unit, looking at the incentive pay dispersion and/or analyzing quota achievement levels to determine whether there is a motivating and cost-effective range of performance.

Perform an incumbent-level analysis
Start with segmenting individual sales team incumbents by role and/or position; then sort incentive payout results from high to low. Do individual payouts align with respective levels of individual contribution? You should also look at these results over prior years, and evaluate statistical regressions, to get a full picture.

Evolution of Sales Roles

As we mentioned above, there are a number of changes occurring to the structure of sales roles across organizations within the technology and life sciences sectors. Many sales professionals are tasked with doing more than playing rounds of golf or taking clients to dinner— they are also expected to answer complex and technical questions about what they are selling. Sales people with this level of expertise are harder to find and, not surprisingly, more expensive to hire.

As consumption-based pricing models become more common within the technology sector, sales organizations are rethinking the job role responsible for continuing to drive usage once the first point of sale is complete. Traditionally, many companies used lower-paying customer service roles or put the responsibility under an account manager while maintaining a strong emphasis on new client contracts.

Over the past few years we are seeing more companies create a separate sales function under the heading of customer success for the purpose of driving an existing clients’ consumption of the technical platform. In many cases increased consumption requires new applications designed to address a client’s specific needs. After the customer has agreed to use the platform, the sales function requires both business and deep technical expertise.

For companies contemplating changing their sales structure to focus on customer usage, there are many questions to consider

  • Is this one role or two?
  • Can the individual serving in the role to drive customer usage effectively grow incremental revenue without eroding the customer's trust?
  • Is a separate hunter role needed?

Finance controllers are increasingly concerned by the increase in the cost of sales, a result of added headcount, when recurring revenue growth does not keep pace with the growing compensation expense. The tradeoff is this is typically a more expensive sales structure. See Figure B for how the typical compensation of a customer support representative differs from that of other sales roles at software companies. However, for many firms that rely on usage-based pricing, a cost-benefit analysis may find the return is well worth the investment in the new role.
 

Figure B
Median Pay at US Software Product and Services Companies

 
  Median Total Target
Base vs. Variable
Pay Mix

Account Manager

$170,475

55/45

Customer Success Manager

$106,598

80/20

Account Services Manager

$99,000

90/10

Customer Support Rep.

$64,387

95/5

 

Source: Radford Global Sales Survey, January 2018 compensation totals.
 

The growing emphasis on technical expertise goes beyond the software industry. Medical device companies typically have on-call shifts to answer questions and advise on the effectiveness of a certain product. In many cases, technical experts engage with the customer in an operating room environment as the customer (in this case, a surgeon) is putting to use a new and highly-specialized product. These technical experts are conduits to the company’s marketing organization, and their operating room experience a critical part of the pre-sale function.

Companies providing solutions that include hardware, software and professional services for large-enterprise customers must keep their sales costs under control as the number of people paid on single deal mushrooms, while individual accountability can get murky. For high-growth companies, we recommend a rate of compensation-to-revenue of 20% as a threshold; anything above this should require management to assess its coverage and compensation approach for sustainability. While technical specialization can drive incremental productivity, it most certainly increases cost in the interim. The burden on HR to ensure role clarity, maintain competitive levels of compensation, and help assess candidate and incumbent proficiency in each role is bigger than ever.

Turnover Remains a Challenge

No conversation about sales compensation and workforce trends would be complete without discussing the unending challenge around sales force turnover. Voluntary and overall turnover among key industries in the technology and life sciences sectors had been at sustained high levels for the past couple of years (tracking above 10%) as the economy and job market remains strong.

While turnover dipped in Q2, it picked back up for Q3 in both the life sciences and technology sectors. Turnover among the technology market still remains higher than life sciences.

When we take an industry-specific snapshot in Figure D, it’s clear that high turnover is being driven by the software market.

Figure C
Median Employee Turnover in the US Life Sciences and Technology Sectors

 

  •   Overall
  •   Voluntary

Source: Radford US Supplemental Workforce Trends Reports.

Figure D
Industry Snapshot of Median Employee Turnover at US-Based Companies: Q3 2018

 

Source: Radford US Supplemental Workforce Trends Reports

 

 

HR, in collaboration with sales leadership, needs to take proactive measures to keep their sales professionals engaged. This includes making sure sales leaders are properly focused on career development (which requires a current or updated career framework). Sales reps often feel there isn’t a clear path toward career growth. When employees aren't challenged or motivated to move to the next level, higher turnover is inevitable. With so many reps performing below quota, HR needs to consider other measures of success, in addition to the company's quota-setting and adjustment approach. This is a talent management issue that’s contributing to high turnover and lengthy recruiting cycles. And sales leadership can’t address the issue without HR's help.

To maintain engagement and provide career flexibility and continued development to high-potentials, we observe more companies promoting employee mobility across functional areas. The concept makes sense on many levels. For one, not all employees want to climb the career ladder or manage people in their designated function. Secondly, some employees benefit in their current function by gaining skills in a related function. Finally, engaged workers almost universally seek new challenges and skills. But traditional rewards systems aren't always flexible in enabling effective employee mobility programs (for example, should the high-performing salesperson take a cut in pay when moving to a role with less incentive upside?). We view internal mobility as an area where more companies will spend time trying to get it right.

Aside from investing in new-hire training programs and ongoing developmental training, companies can manage turnover by conducting comprehensive exit interviews to uncover aspects of the sales job that may be causing a disconnect with employees and evaluating the company's hiring practices to see if it is attracting high performers that fit within the company's culture.

Once the source(s) of the turnover problem are identified, HR, in close partnership with sales leadership, finance and compensation managers, can work on solutions. However, management should not be surprised by an uptick in sales turnover and compensation spend given the current economic landscape and pace of technical innovation.

 
 
 

Meet Our Authors

Scott Barton
Associate Partner, Sales Compensation Practice Co-Leader

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Mark Davis
Associate Partner, Sales Compensation Practice Co-Leader

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