Ivan Petrovich Pavlov was a Russian physician who won the Nobel prize for Medicine in 1904.  He is credited with first describing a psychological phenomena called Classical conditioning. Why is this relevant to you, the readers of this blog (other than being a completely useless piece of trivia that if brought up on a nice evening with the opposite sex, will definitely end the night for you  at almost any party outside a university town)? Well Pavlov had a dog, and he observed that the dog would begin salivating before food was presented to it. He used various triggers to generate the response from the animal including bells, etc. None of which the animal could directly eat. Thus by ringing a bell he could get the dog to salivate, even though biologically there was no reason to do so as the animal had no access to food. End of history lesson.

Pavlov figured out something that we in the sales world intuitively understand that you can manipulate behaviors by tying a stimulus to a reward. This is fundamentally what a commission plan is intended to do. The challenge is as with Pavlov's dog there are certain fundamental principles that must be maintained in order for the reinforcement to be successful. It is here that many commission systems fall down. If the plan is either too complex, or  not transparent (ie. the sales people don't trust that the reward is coming), or the rewards are inconsistent. You will fail to generate the behavior you want as business managers.

So what are the rules?

1.  You must consistently reward the behavior you are looking for. Changing the plan, inconsistent application, adding new rules,etc will work against the behaviors you are looking to create.  Exceptions, "special circumstances" etc all work against an effective commission plan as they show reps that its not simply about performance its also about successful lobbying. That is not to say never make exceptions but be sure you know why you are making them and communicate clearly to everyone those reasons.

2. Timing- The reward must be given within a close time period with the action. If you delay the reward to far from the behavior you are looking to reinforce, the sales people wont know which behavior you are rewarding. This is a classic mistake with many plans.  In an attempt to protect against downside risk many organizations delay the reward.  It is much more successful to give the reward and then punish negative behavior through claw backs (ie. negative reinforcement).

3. Transparency- Reps must know and understand the rules. Many organizations don't take the time to explain to reps how to max out the comp plan. This actually works against the results you are trying to achieve. If you are able to explain to sales people what are the behaviors that are going to be rewarded you are much more likely to get them in the form you are looking for. As opposed to some bastardized version that they come up with themselves.

In previous posts I have spoken about how to use multiple levers to manipulate results. The key is that in the creation of your plan be sure in the quest to achieve your business goals you don't violate these rules. Its always better to simplify the plan and get consistent results than have a more  complex plan that is generating inconsistent results.  Think like Pavlov and your results will be Nobel prize worthy!

Moment of Zen
"The secret of success behind all men of achievement, lies in the faculty of applying their intellect in all their activities, without being mislead by any surging emotions or feelings. The secret of success in life lies in keeping the head above the storms of the heart."-Swami Chinmayananda

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

There are two camps on this question. Many sales VP's look at the compensation budget for sales people and try to build a model that will keep sales salaries within a range that is competitive with the marketplace but at the same time is not disproportionate with what they expect the job should earn. An opposing philosophy is to track cost of sales but not worry much about management of total dollars. Focus instead on contribution ratio to revenue. This is most easily described as total compensation for a rep should be x% of the total revenue that said rep brings to the organization. Thus if a rep brings one million dollars to the table his cost should be some fixed percentage (ie. base +commissions).

In my mind trying to manage cost of sales as a finite number is self defeating as karmic managers. It is clear that gross margin must be watched and you definitely dont want to pay significantly more than what is competitive in your space but these figures fail to take into account the relative nature of individual success to corporate success. The purpose of the compensation plan is to incent the sales people to exceed the targets placed before them. Managing cost of sales as a fixed figure will create diminishing returns as reps exceed their quotas in a couple of ways.

1. Management is forced to reset quota on a monthly/quarterly basis for reps that over perform. Effectively slapping them for doing exactly what they were asked to-namely exceed their number.

2. Institute compensation caps or windfall clauses where reps are capped at a maximum earning potential in the year. Probably the single most de-motivating thing sales management can do to sales people.

So how do you ensure that sales compensation is not grossly out of whack with what the industry is paying? The key factor is it is managements responsibility to do their homework. Understand the pipeline, what is possible for reps in aggregate to achieve in the period, what is a stretch target, and how is your salesforce segmented. It is sales management's responsibility to build a performance plan tied to compensation that strives to achieve a budgetary figure and is tightly tied to contribution ratio, This way if reps are blowing out your compensation budget you are assured that your revenue targets have correspondingly being blown away, which makes the difficult conversation with your CFO that much easier.

By focusing on the ratio of compensation to revenue as opposed to simply fixed dollars you will stay clear of some of the classic errors made by sales organizations that inevitably result in high turn over and under achievement.

Moment of Zen
All things appear and disappear because of the concurrence of causes and conditions. Nothing ever exists entirely alone; everything is in relation to everything else. -Buddha

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

Previously I have looked at two important variables in designing a compensation plan for your sales reps, specifically the type of organization you are, and the business you are in. This week is about the longer term impacts of your compensation plan. Specifically how do you build a plan that is going to incent your sales reps to build your business while they line their pockets.

Most commission plans are focused in a fixed interval such as a month/quarter/year. The challenge is that momentum is built over multiple years and across multiple sales people. Yet it is difficult to get salespeople to think beyond their next paycheck let alone across multiple years of a business cycle. A common philosophy is: "Well if we are constantly closing sales then we will by nature of winning deals build momentum and let marketing worry about the rest." I disagree. I think that sales management needs to build a consistent and disciplined focus on territory/market building and through that effort will come predictable forecasting, consistent achievement of targets, and higher ASP's, irrespective of the individual sales person working the territory.

How do you do this? Well most simply by understanding what are the metrics that are going to result in long term territory growth. In my experience a couple of interesting examples are:

1. % of penetration in target market by segment
This is the number of customers of the available prospect base that are using your product. This can be defined in many ways. One example might be if you have a territory manager for White plains, NY, and are selling IT services to accounting firms with revenues over $1M annually, what %of available firms are using your services in any capacity. The secret is to set a target rate and a % growth rate. As you can see this is a long term target that is directly in the hands of the salesperson.

2. % repeat business in active customers   
This metric is about strengthening current client relationships. A territory manager might have a target of 5% of current clients need to purchase something. This is about keeping your client base fresh and actively engaged with you.

I am sure there are many more that are tied to specific business models. As you can see these kinds of metrics rewarded with a bonus structure or a % accelerator on commissions incent the sales rep to build the momentum of the business. The key is when using these kinds of concepts is, the compensation plan must accelerate as the sales rep does more and more of what management requires. This will create momentum in the sales force to push harder towards both the quota targets and the territory metrics, resulting in short and long term business success.

Moment of Zen

"Nothing is equivalent to knowledge"-Vedas

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

Previously I discussed how organizational structure impacts the philosophy that drives sales compensation. Another major variable is the type of business you are in. What this really means is the alignment of shareholder/owner goals to the goals of sales people and sales management. Let me use an example to illustrate. If the owners primary goal is revenue growth, the compensation plan should be structured towards top line revenue growth, and this should trump any sub goals such as cost of sales, gross margin, etc. Many business owners believe you can create incentive programs that pull multiple levers. In my experience while this is possible it is extremely difficult. Sales people like water seek the path of least resistance and it is nearly impossible to close every possible loop hole to make sure all your levers are working properly. As an owner or sales manager identify what the primary lever you want to use is and then use it to move the sales organization.

What levers should you consider? Well it depends on what business you are in, and what stage of business you are in (start up, growth, maturity, decline). Organizations in a start up or growth phase should really be focused on revenue growth, and as such the compensation plan should be tied to top line revenue. Some organizations might want to add a secondary lever for gross margin so they can quickly identify good customers from bad as to not bankrupt the business in this fast moving stage. How would this look? The industry standard for software is 6-8% commission for every dollar sold.

>80% of quota    4%
80%-99%          5%
100%-125%        8%
126%+                  10%

A structure like this heavily motivates reps to get to 80%, because if they arent there, they are taking a disproportionate hit on commissions. The accelerators post 100% encourage reps to over achieve. The question of gross margin can be addressed in a couple of ways:

1. You can structure approval levels where reps can only sell deals that achieve X gross margin before pushing it up the flag pole. Or if you don't want to expose the gross margin set dollar or percentage discount points. An example would be  reps have flexibility of up to 20% off of list, managers can move to 35% of list, <35% requires executive approval. This will guarantee that management is making the call on lower margin deals and you wont have reps having a fire sale to hit quota.

2. You can set a commission modifier based on GM (or price point) and tie it to the months revenue. An example might be (again industry specific):
Average sales price of rep
>50% of target ASP    -2% eligible commission rate
51%-75%                     -1%
76%-100%                    no modifier
101%-125%                +2%
126%+                           +4%

The great thing about this structure is that you are going to push reps to sell not only at quota but sell for the highest price possible. As a rep at 126% of quota and selling at 126% of target asp would be looking at 14% commission on a dollar sold. Too rich? Well it comes back to alignment-the organization is making at the top level 9x what the rep makes. As long as your goals are aligned with the compensation plan, giving reps the ability to make big dough will ultimately result in over achieving reps at big gross margin.

Next week input variables-how do you build your compensation plan such that reps build your business long term as opposed to a month at a time.

Moment of Zen

"A dog is not considered a good dog because he is a good barker. A man is not considered a good man because he is a good talker." -Buddha

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

Last post I talked about the variables that need to be considered in the development of a sales compensation plan. The structure of your sales organization was the first of those variables.  Why do you have to consider the structure of your sales organization when developing your comp plan? Well the compensation plan is the primary lever to change behavior. How your organization is structured will determine what behaviors are important to you.

1. Salaried sales people- Many manager scoff at the idea of a sales organization predominately staffed by salaried sales people. Yet for many organizations this is the perfect model. Why would you consider having your compensation mostly in salary?
    a) You have a very long sales cycle (measured in years) where multiple reps might be involved in the selling process.  Good examples of this are defense industries, or selling large ticket items like aircraft. It is tough to measure and reward such sales on a commission  basis as there are many people involved in the sale, the sale may take a long time to complete and ultimately bill and collect on,  and the contract size might be so large that it would blow out the sales compensation budget requiring earning caps etc.

  b) You have a brand new product in a new market that has not been tested. In this case you don't know what you don't know, and sales people's function is reconnaissance. They might be able to take down a few deals in the process of their intelligence gathering but their primary focus is to educate the organization on the market, understand where the land mines are, and build the case for greater investment or expansion.

2.  100% commission sales people- This is the classic you eat what you kill view of the world. On a first glance this seems like the ideal model for sales compensation. But a look under the hood often reveals a lemon. 100% commission sales people are concerned about their paycheck not your company's revenue. This means that they will make decisions that make them money first, often at the expense of your company or your customers. They are also predominately self managed. Try to get them to do anything that doesn't pass the test of making them money and they wont-justifiably. If you aren't interested in investing in them why should they invest in you?  Often sales people will take these positions because they don't have any alternative, and as soon as they find an alternative they will jump ship.  100% commission positions are really best suited for folks who want to run their own business.  If your organization is structured this way you want to ensure that your sales reps are viewing their relationship with you as their own business and you align your goals with theirs.

3. Some sort of hybrid of the above- This is where most sales organizations sit. The ratio's may vary but most sales organizations include some salary and some commission. The million dollar question is what is the right ratio.

The secret of the right ratio is in what percentage of the job function of sales in your organization sits in either of the two above camps.  Are you in a market leader in a mature market with a long sales cycle and high dollar value products? In this case perhaps you want to have a 70/30 split with 70% of compensation tied to salary and MBO(management by objectives). The MBO's should be the key input variables in your business as discussed in an earlier post. 30% might be tied to commissions on deals closed on an annual quota.  For an organization with a new product in an existing market, in a price leadership position the break down might be more 50/50. Where as an organization in a market leadership position with a price leadership position might be 30/70. 

The key in understanding this variable is to  understand what are the behaviors that characterize your market/product, and what do you want your sales people to be compensated for doing. Understanding this will get you started on how you need to build your commission plan. Next week variable two- the structure of your revenue model/business model's impact on your sales compensation plan.

Moment of zen
"The world is indeed a mixture of truth and make believe. Discard the make believe and take the truth"-Shri Ramakrishna Paramahamsa

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

Summer doll-drums, when vacations call with their siren songs, and sales managers/VP's nightmares of commission plan negotiations begin to manifest.  For many it is during the summer that strategic plans begin to form.  Commission plans are a key part of achieving revenue targets. Yet the development and execution on sales compensation plans remains a mysterious art. This post is going to be one of a few discussing compensation.

So as a karmic manager we believe in foreseeable consequence. In the case of comp plans this is best characterized as, " If you pay for it...then it will get done".  I have spoken in previous posts about Key performance indicators, quota achievement is likely one of these. Unfortunately the commission plan is often built as though it were the only indicator. There are many factors you need to consider when building a compensation plan:

1. What is the break down of how you compensate your reps? Is it 50/50 salary/commission, 100% salary, 100% commission, etc. How you break down the total compensation of your reps will greatly determine what kind of commission plan you build.

2. What is the nature of your business. Are you a software company that commissions on the basis of shipped units, or a value added reseller whose business is highly dependent on margin? This factor is yet another to consider before you build your plan.

3. What are the input variables that you know impact your sales process? How are you going to compensate reps for doing the things that you know will make them successful, and discourage territory skimming.

4. What is your acceptable cost of sales. Do you have enough dollars in the pool? What happens at 80% achievement or 160% achievement?

5. How much complexity will your reps accept. Obviously if you are trying to move a bunch of levers at once, your plan is going to be more complex than the simple marching order " Go sell!". Complexity is not a bad thing unless in its execution your reps lose transparency. If your reps cant figure out what they are making in a few quick calculations on their handy dandy calculator your commission plan is probably failing in some capacity. Lack of transparency will result in a distrust of the numbers and ultimately turn over.

6. What is the ROI that you expect for a sales person. This is closely tied to quota calculation and needless to say determination of quota is inseparable from commission plans.

In understanding these factors you will be able to build a couple of commission plan alternatives for refinement. Ideally jointly with the development of the comp plan is the quota negotiation. Next week- Understanding the breakdown of your sales compensation and what it will mean for your commission plan.

Moment of zen
"We are what our thoughts have made us;so take care about what you think. Words are secondary, Thoughts live;they travel far"-Swami Vivekananda

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

So faithful karmic warriors. I have decided to take a well earned two week vacation so dont dispair. I am preparing a discussion on sales compensation for my next post on July 7th, which should spark some discusion I hope. See you in two weeks!

Even the best sales person is going to get shown the door at least once in his or her career. Whether involuntarily due to a reorganization, downsizing, etc or voluntarily because it was time for a change. The question arises-now what? If you are reading this blog its probably because you love sales and as a result are not considering leaving the profession, yet in this economy things are tough. Great companies have the pick of the litter, and sales jobs that you would want are tough to find.

The karmic sales person embraces this reality. The upside is that we understand foreseeable consequence and the fact that the great habits we developed as salespeople are going to put us ahead of the pack in the job search. So where to begin? Start with what you know will work- a plan. Identify who are your best prospects for employment. Pick companies that you want to work for not positions or job titles. Then execute:

1. Get a foot in the door. Tools like linkedin are great for this. You can send an invite or get a contact to refer you.
2. Don't ask for a job. Provide value first. Put together an interesting piece on the firm, competition, etc. Get the contact to read your work first. Ask for a chance to speak by phone or preferably in person to discuss.
3. Gain an understanding of the climate in the firm. Are they in a hiring freeze? Are they able to hire consultants? Be flexible remember your goal is to get into the company of your dreams. Your skills will compel them to offer you the job of your dreams.
4. Try to branch out and get farther in the firm, build your network. Try to get your contacts to identify groups that are struggling under a heavy workload, or whose numbers are down. These are prime sources for you. Remember you haven't asked for a job yet.
5. Once you have identified your highest probability options present a 90 day action plan on what you would do should they have a job available. Express your passion for the firm and that you are ready to go the extra mile.

I bet you will have your pick of offers. Is this hard...yes. It is definitely easier to just fire off resumes to job postings. No one said the karmic path was easy. One thing is for sure even if you don't get an offer, you will leave your prospects with a view of your skill set  and professionalism that will leave them anxious to work with you again.

Moment of Zen
"Each man carries his destiny in his own hands" -Sri Satya Sai Baba

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

In life, I have found that there are things that I struggle to define but I know it when I see it. These concepts are often abstract and subjective and as such difficult to reach a common understanding around. Culture, specifically organizational culture, is a great example of one of these concepts.

Organizational culture is touted by management consultants the world over as one of the primary factors that impact corporate success or failure (as evidenced by organizations such as Google or Enron). Yet how do you define your culture in a way that is meaningful to your employees, is actionable(ie. new recruits can learn), and generates positive impacts. On the negative side how can you adapt your culture to mitigate negatives and accentuate positives.

What is culture? In my mind it is in its broadest sense is cultivated behavior; that is the totality of a person's learned, accumulated experience which is socially transmitted, or more briefly, behavior through social learning. Culture is symbolic communication through a group's skills, knowledge, attitudes, values, and motives. It is a collective programming of the mind that distinguishes the members of one group or category of people from another. Culture consists of what is professed, acted on, and perceived by members of the group. In the corporate context it takes many forms. Recently I was reading an article about Zappos, whose culture is defined by customer service.

This organization takes it far beyond any other that I have seen (check out this article http://www.nurvinteractive.com/?p=58).

As a karmic business person culture represents a powerful opportunity for creating foreseeable consequences in your organization. For example if you were looking to build a culture of Operational effectiveness you might do the following:

1. Instill KPI's around operational effectiveness along with rewards
2. Begin a process of social learning where groups talk about how they achieved operational efficiencies in their organizations and the benefits they got from them.
3. Build organizational structures that empower every employee to make immediate decisions that reinforce the culture of effectiveness and efficiency, at the micro and macro level.
4. Set up leadership positions and career paths around the skills, knowledge, attitude, and values of the culture.

If this sounds familiar-it should. This is exactly what GE did when they implemented six sigma. The karmic manager knows that culture isn't accidental it is the result of a considered process. Leaders need to be purposeful about the building of culture based on corporate direction. The foreseeable consequence of this activity is a culture that sustains the organization and lifts it to new heights.

Moment of Zen
“May we be fearless... from friends and enemies...from known and unknown ... from night and day...May all the directions be our allies.”-Atharva Vedas (hindu scripture)

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!

I am often asked the question by sales people and business owners, how big a pipeline do I need to meet my goals. My response is typically well what are your goals, and is there a way we can extrapolate a reasonable estimate of the pipeline required to get there. I often talk about the karmic method being the synthesis of empirical methods applied to a sales process with accumulated experience. To that end lets apply these principles to this question.

The size of your pipeline is going to depend on a bunch of variables (typically the same variables involved in many other sales calculations):

1.  Total revenue you want to achieve in the period.

2. Average sales price.

3. Close ratio- Ratio of opportunities won to total opportunities in the pipeline. You will need to back out how many raw opportunities you will need to have in the pipeline.

Based on these variables you can calculate your ideal pipeline size:

Revenue target/ASP= # of deals you need

# deals needed/ Close ratio= pipeline size required

So an example calculation for a software product would look like:

Total Annual revenue target= $1,000,000
ASP= $50,000
Close ratio= 15%

There for you would need 50 deals to hit your target.  You would need 334 deals in your pipeline to hit a target of $1,000,000 with an ASP of $50,000 and close ratio of 15% of the raw leads. Needless to say the percentage close rate will be different at various stages of your sales process, so you can further sensitize this calculation by calculating the deals required at each stage based on the close percentage of that stage. The interesting thing about this method is that you can then evaluate the accuracy of your calculation by looking at previous years results (provided you have the data) and using regression analysis(Microsoft excel will do this for you) determine the co-efficient of each of these variables for your business.

You can then adjust your revenue target based on the time you have (ie. 3-6 months) or by the average sales price. For example go for a few large deals or many small deals depending on the market. All of this assumes you have data set to call upon.

If you don't, then begin building one. Take your revenue target and set a multiple for your pipeline that is difficult but achievable. You can then start tracking against your multiple as you gain data. At least this will give you a starting point while you build a dataset.  The key to karmic selling is to apply critical reasoning to seemingly "art like" processes to ensure foreseeable consequences. The determination of pipeline size provides a defendable road map for sales people to follow that will ensure both sales people and the company hit their monetary goals.

Moment of Zen
"Introspect daily, detect diligently, negate ruthlessly"- Swami Chinmayananda 

P.S. If you are interested in leveraging the karmic philosophy to accelerate your career or business please check out my website http://www.karmiccoach.com , and get Karma working for you!