After many years of being involved in the implementation and design of compansation schemes and programs, I’ve discovered valuable secrets leading to both successful and disastrous outcomes for companies and their sales teams.
A few years ago, while working in an IT company, the whole salesforce was reshuffled after the management discovered that their motivation scheme was actually demotivating the sales people so much that their team left the company in search of better opportunities.
Time after time, when you examine the high turnover ratio in companies, you’ll find the root cause is centred around poorly constructed motivation schemes.
Is this something that you want to see in your own company, in your own sales team? In the next few minuutes we’ll examine the very simple CQT design formula for successful compensation programs.
But first, let’a have a look at how we define failure.
When a motivation program fails, it comes with unpleasant consequences that sometimes are not noticed for many months, or even years, by which time the results are very obvious, and the damage has already been done.
And who wants to go through that painful process when you can use the CQT design formula for successful compensation programs?
Five of the most common problems a company faces when the motivation program is not working are:
- high turnover of sales people,
- slow and underperformance,
- slow revenue generation,
- company focusing in non-strategic areas of development,
- high costs.
When you look closely at the common denominator, you will often discover these problems have been triggered by a poorly designed sales motivation scheme.
As you analyse each one of those five areas in your business, and understand that the poorly designed sales motivation scheme is the main reason, you can safely say that the system has failed.
And this definition of failure of the system is the one that is linked to negative consequences, some of which are more dramatic than others. However, it doesn’t need to be so negative to still define the system as a failure, such as in the following example:
The management team of a bank decided to start the new year by launching a campaign to attract new current account and the deposit gathering.
Since this newly launched program become a priority, they had a system designed to follow this objective and incentivise sales people to bring more deposits.
However, after the first six months, they disocovered that deposit gathering was falling well short of the expected targets. This caused business and operational problems for the bank, with the management concluding that the motivation system had failed to be aligned with the sales objectives.
In this circumstance failure might not be that evident but it is still a failure.
What is a motivation scheme?
Most people understand a sales incentives (motivation) scheme to mean a flat commission given to sales people for any revenue they bring. For example, they may receive 5% of any new revenues added to the company. And this is just one of the many different techniques and areas that I analyse in other articles in this blog.
The sales motivation scheme is a reward program paying sales people (mostly with money) as a reward for certain performances. It can also include people outside the sales team, such as those in product support and service teams.
Through its design (including terms and conditions), the system can drive sales people to focus on specific sales areas and have a sales mentality or mindset that fits the strategy of the company.
A sales motivation scheme is a program used in the majority of sales organizations today in their sales departments.
- It is found in organizations selling low ticket items, or call centers selling insurance packages and retail FMCG products to industrial and more complex IT solutions.
- It mostly applies where sales people are physically present.
- It includes terms and conditions, and various mechanics that synthesize a program aligned with the objectives and the annual targets of the company.
What are the objectives of the motivation scheme?
For any company, there are two main objectives of a motivation scheme, that need to be achieved in total harmany for a successful outcome:
- Keeping sales people motivated to perform this role
- Bringing either qualitative or quantitative results for the company
The CQT design formula for success
A sales motivation program consists of not just one, but three main areas to be successful, known as the CQT formula.
For example, many people believe that by just giving an amazing commission (say 15%) to a sales person for any deal he brings, then this shall suffice and make the sales person happy.
But what if the designated sales territory allocated to the sales person is very mature with no space for a new competitor?
And what if they are selling high ticket items, requiring many months of negotiations, and a small chance of closing, but offer a very large commission? Without any regular income to support them, there is little incentive for sales people in those instances to hang around.
Well, if you design a motivation scheme you need to start looking beyond the system only.
The three main areas that altogether synthesize the CQT formula.
- C – the commission plan
- Q – the quota and
- T – the territory allocation.
Each area can be seen to be an individual component, but the success only follows when they are working in harmony.
Next time you think you have a problem with the commission system look at the CQT formula, and you’ll soon discover the way to fix it is by revising your quota or territory allocation, because your people are leaving not on account of the commission scheme, but the target that was given to the sales person.
A harmony that is needed.
As stated above the three CQT constituents of a sales motivation program (compensation/motivation scheme, quota and target assignment) must be in harmony and work well altogether. A failure in one of them might be the reason that the whole program fails, where this harmonization will help solve problems in one of the three key CQT areas.
Here’s a common example in sales organizations:
Territories are often not equal, upsetting the balance of the CQT design, taking away
equal opportunities for sales people where there may be added incentives for being the top sales achiever in the team.
An anomaly in the territory analysis can be easily resolved in the quota or even within the motivation scheme. Such instances may create a program where sales people can be credited for sales and get paid not by the actual revenue they brought but according to their performance against their target.
This is a way to make both quotas and territories equal and manage to equalize the efforts. By looking only at the CQT components individually, could result in an unfair system for some members of the sales team.
Using the CQT Formula For Successful Compansation Programs
By now we know that:
- A poorly designed compensation or motivation scheme can lead to devasting outcomes for both individivuals and the company
- There are three components in the program, Commission, Quota and Territory ( CQT)
- All three CQT components must be in harmony and well connected and not be regarded as being independent of each other
Now let’s examine what actions you can take today to proactively monitor the business, and ensure that CQT are in harmony, and what to do when you discover a problem that needs be fixed.
To avoid or minimize the risk of facing issues start with the following:
- Establish a monitoring procedure within the sales, finance and HR team to regularly monitor some key indicators and perform analytics. This process requires a team to look for indicators or warnings that something is wrong with the motivation plan such as:
- Sales turnover.
- Is it happening in certain sales teams that cover certain products or is it to certain individuals?
- Is the company losing the best performers or the worst?
- Sales turnover.
- Non alignment with objectives
- Is the sales team’s objectives not aligned with those of the company?
- Is the sales team missing key objectives?
- Analysis of sales and revenues in key objectives versus other non prioritized objectives.
- Poor performance to certain teams, certain product teams or specific sales people.
- Have a performance analysis and examine whether the problem is constantly in certain teams, certain geographic areas, certain vertical industries, etc.
- High customer turnover.
- Are customers of certain products or in certain geographic area leaving you for a competitor?
- Poor market profile.
- Are you losing market share in certain industries, geographic areas?
When one of the above is evident it may mean (not necessarily in the first phase) that there is a problem with the motivation scheme which may lead to more dissatisfaction and disappointment of the sales people.
- Develop appropriate principles in the motivation scheme to include a consideration of CQT in the design.
- Have a log documenting the following information
- Are regular exceptions to be included in the sales motivation area?
- Are there usual conflicts in sales crediting?
- Are there complaints by sales people about sales commissions that are not paid to them?
- Does the management need to send frequent communication to sales people with explanations and examples of how the system works?
- Establish frequent communications with key people to get feedback of the current scheme
- Talk to the design and the analysis team to give you
- their view of the system,
- what they hear from the field,
- how often they need to change the system,
- how often there are problems.
- Talk to the design and the analysis team to give you
- Establish a routine with sales people and ask about the current version of the scheme –What they like and don’t like about it.
- Talk to the sales managers that manage teams and get also their feedback.
The above will proactively give you alerts and messages that something is wrong in the motivation system. Some of them will point at the specific CQT problem.
As soon as you are faced with a CQT problem, you need to act quickly and resolve it, by following the below steps:
- Establish a committee beforehand to take decisions and act quickly when is needed.
- Have policy documents outlining how to deal with every situation when faced. For example, if quotas need to be re-assigned, the document will state who gives permission and what is the generic guidelines.
- If a CQT problem is too complex to fix in one area, then try to make a change in any of the other CQT areas to find reslution. For example if a territory is “poor” and makes people disappointed, give them more reasonable targets.
Conclusion
A sales motivation scheme or compensation program is so much more than a document showing how much a sales person would get paid for certain performance.
An effective and successful sales motivation scheme is built around the CQT formula, interrelated to the quotas assigned and the territory a sales person is managing. Without the CQT formula, you may struggle to solve your performance or high sales turnover problems by monitoring only one area, increasing the chances of the problem remaining.
Hidden secrets to successful compansation programs can be summarised very simply. Always examine the CQT components together, ensure they are working in harmony, and you’ll have a successful and effective sales commission plan.
What are your thoughts?
Any feedback or questions about the CQT Formula, both positive and negative, is always welcome. I will do my best to get back to you promptly.
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