SPOTLIGHT INSPIRE YOUR SALES FORCE

Companies fiddle with their sales compplans continually, but the underlying logic hasn’t changed in years. Until now.Managers—and researchers—have access to so much new data that best practicesare, at long last, shifting.

SALES

How to Really Motivate Salespeople

Doug J. Chung | page 50

Much of what we believe about the bestways to compensate and motivate the sales force is based on theory and labexperiments. But in the past decade, researchers have been moving out of thelab and into the field, analyzing companies’ sales and pay data, and conductingexperiments involving actual salespeople. The findings from this new wave ofresearch support some current compensation practices but call others intoquestion.

For example, studies clearly show that capson commissions hurt sales. If managers must retain a cap, they should set it ashigh as possible to avoid reducing reps’ incentives. Although overlycomplicated compensation systems have their downsides, research has found thata system needs to include enough elements (such as quarterly performance andoverachievement bonuses) to keep high performers, low performers, and averageperformers engaged throughout the year.

Managers should be careful in setting andadjusting quotas. For instance, studies show that ratcheting (raising asalesperson’s annual quota if he or she exceeded it the previous year) dampensmotivation. The research also suggests that it’s important to pay attention tothe timing of bonuses: A reward given at the end of a period is more motivatingthan one given at the beginning.

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COMPENSATION

Who’s Your Most Valuable Salesperson?

V. Kumar, Sarang Sunder, and Robert P.Leone | page 58

U.S. businesses spend $800 billionannually on sales force compensation and another $15 billion on sales training.Yet the backward looking metrics they rely on (such as revenue generated) togauge the impact of this spending provide limited insight into how asalesperson will do going forward and what types of training and incentiveswill be most effective.

As a result, many companies misallocatesales force investments. The authors worked with data

from a Fortune 500 B2B software, hardware,and services firm to develop a method for measuring reps’ future profitability.The metric, salesperson future value (SFV), is the net present value of futurecash flows from a salesperson’s existing and prospective customers minus thecosts of developing, motivating, and retaining the rep. The SFV analysisrevealed that the fi rm had been overvaluing poor performersand undervaluingstars.

Using the SFV calculations and data oneach rep’s prior training and incentives, the authors segmented reps accordingto whether they were motivated more by training or by various incentives. Thefi rm then increased training for some reps and increased incentives forothers, thus achieving an 8% increase in SFV across the sales force. The fi rmalso increased its investments in high- SFV reps and reduced investments inlow-SFV reps—a reallocation of resources that increased the fi rm’srevenue by4%.

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ENTREPRENEURSHIP

The Right Way to Use Compensation

Mark Roberge | page 66

When Mark Roberge joined HubSpot as itsfourth employee, he had no sales experience but still was charged with buildingthe sales team. His background proved to be an advantage, however: With hisengineering training, Robergebrought an analytic rigor to the task. And hequickly realized that the sales compensation plan could motivate salespeoplenot only to sell more but also to behave in ways that advanced the start-up’sevolving strategy. Each time the firm entered a new stage of growth, Robergerevised the comp plan to support its changing priorities:

Customer acquisition. Early on, HubSpotneeded to bring in lots of customers and see how well its offer was working. Soit rewarded salespeople for customers who stayed at least four months, andsoongrew to 1,000 customers.

Customer success and retention. In thesecond phase, HubSpot focused on ensuring that its product fi t the market.Realizing that many customers were jumping ship because they’d been given thewrong expectations, Roberge began tying commission rates to the rate ofcustomer retention.

Sustainable growth. After it fixedretention, HubSpot saw that its service worked best for customers who made acommitment to it. So the firm’s third plan rewarded salespeople for customerswho signed up for a full year at a time. The continual adaptation paid off : Inseven years HubSpot hit $100 million in sales.

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      The Big Idea

HUMAN RESOURCES

Reinventing Performance Management

Marcus Buckingham and Ashley Goodall| page 40

Like many other companies, Deloitterealized that its system for evaluating the work of employees—and then trainingthem, promoting them, and paying them accordingly—was increasingly out of stepwith its objectives.It searched for something nimbler, real-time,andmoreindividualized—something squarely focused on fueling performance in thefuture rather than assessing it in the past. The new system will have nocascading objectives, no once-a-year reviews, and no 360-degreefeedback tools.Its hallmarks are speed, agility, one-size-fi ts-one, and constant learning,all underpinned by a new way of collecting reliable performance data.

To arrive at this design, Deloitte drewon three pieces of evidence: a simple counting of hours, a review of researchin the scienceof ratings, and a carefully controlled study of its ownorganization. It discovered that the organization was spending close to 2million hours a year on performance management, and that “idiosyncratic ratereffects” led to ratings that revealed more about team leaders than about thepeople they were rating. From an empirical study of its own high performingteams, the company learned that three items correlated best with highperformance for a team: “My coworkers are committed to doing quality work,” “Themission of our company inspires me,” and “I have the chance to use my strengthsevery day.” Of these, the third was the most powerful across the organization.

With all this evidence in hand, thecompany set about designing a radical new performance management system, whichthe authors describe in this article.

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How We Did It

LEADERSHIP

SC Johnson’s CEO on Doing the Right Thing,Even When It Hurts Business

Fisk Johnson | page 128

Mindful of his company’s long history ofsensitivity to the environmental or health effects of the chemicals in itsproducts, the author decided to risk losing sales by reformulating Saran Wrap.SC Johnson had acquired it from Dow in 1998, and the product’s superiormicrowavability and impenetrable barrier to odor made it the market leader fordecades. Polyvinylidene chloride (PVDC) was responsible for both those uniquedifferentiators. When the U.S. Food and Drug Administration, environmentalgroups, and consumers began to express concern over the use of polyvinylchloride (PVC), the difference between PVC and PVDC got lost in the discussion.

Nevertheless, the company was concernedas well, because it used PVCs in some of its external packaging. It launched aprocess called Greenlist to help it reevaluate their inclusion. Since thenGreenlist has been rigorously updated to sort ingredients according to categoryand rank them for impact on human and environmental health. The company hasremoved potentially hazardous products many times—and taken whatever hitaccompanied each instance.

It could have simply eliminated PVCs fromthe product packaging and left Saran Wrap as it was. Instead it pledged to stopselling wraps that contained chlorine of any kind, including PVDCs, by 2004. Adedicated research, development, and engineering team was assigned to try tore-create Saran Wrap without PVDCs within a year. But preserving its uniquecharacteristics proved impossible, and this once iconic productbecame analso-ran.

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Managing Yourself

CEOs Need Mentors Too

Suzanne de Janasz and Maury Peiperl | page140

The authors have conducted a two-year studyof how new CEOs in large organizations gain access to seasoned counsel andfeedback. Although these leaders have usually experienced mentoring earlier intheir careers, arrival at the top suddenly narrows the available andappropriate options. To keep raising their game—and having their thinkingusefully challenged—CEOs need wise mentoring. They’re finding it, the authorslearned, by turning to high-profile veteran leaders from outside theircompanies.

But these arrangements have some trickyaspects: Special considerations must go into matching mentor and mentee,structuring their sessions to deliver the intended benefits, and prioritizingthe process so that it isn’t crowded out by other demands. Totalconfidentiality is an absolute necessity—as are regular meetings—andstorytelling is the mode of knowledge sharing both parties usually prefer.“Most interesting to us,” the authors write, “was the psychological boost thatmentors’ war stories seemed to give new CEOs.”

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