Compensating for the Recession

The economy is in a state we haven’t seen for a very long time. Every segment is affected; every number is down. Imports, exports, manufacturing, retail, finance, and housing are all feeling the pain. This probably isn’t the greatest time to be a sales person on a commission plan. People and businesses just aren’t buying. So, of course, this got us thinking about compensation plans. This downturn really started to get everyone’s attention the last half of 2008, so it’s reasonable to assume that managers have had enough time to adjust their expectations for 2009. We’re seeing that as well; the forecasts are bleak, but sales and compensating for those sales must go on.

So what happens to compensation plans when expectations are lowered? What should happen? Should you invest more in sales to boost production? Should companies expect to spend more per sale in this climate? Or should sales take a hit like everyone else and work for less?

We can’t answer all these questions so we decided to ask around. Here are some interesting comments made by people in the field faced with these decisions on a regular basis.

“We’re not modifying our plan in any way relative to the economy.”
– Cable Business Services.

This business unit works on long cycle sales, so the expectation is to rarely make changes. Some might say this company believes variable plans should in fact be variable. Sales people know what they’re getting into when they pursue this line of work. They reap the rewards during the good times and share the pain during the not so good times.

“The plans are not changing; we’re handling it through operations.”
– Cable Residential Services.

This unit sells primarily through a call center, i.e. with a very short cycle. They are seeing a decrease in calls and consequently a decrease in sales. Sales management can simply reduce the headcount whenever they need to boost individual performance. So they’ve decided to handle the situation that way. Usually this is done by moving reps to part time or letting attrition take place. The management here can feel confident about doing this knowing that it will be easy to increase headcount when things turn around; the sales positions don’t require extensive amounts of training. On the other hand, if the positions required years of experience, they might not have gone this way.

“We’re letting a few people go who we wanted to let go anyway. For the remaining reps we want to keep them happy and loyal, so we’re lowering quotas based on the new forecasts. Also, we’re raising the commission rates so they should end up making close to what they were making.”
– Financial Management Company.

Obviously this industry has been hammered and this company has decided to keep most of the sales organization “whole” while the rest of the financial industry crumbles around them. Obviously it requires considerably more training and experience to sell financial products to investors and pension fund managers than to sell residential cable TV service. We have to think this was a factor behind making quota adjustments here rather than for example letting attrition take place.

We also received some feedback from a major automotive retailer. That industry has also been hit hard and it has never had a reputation for being especially compassionate toward front line sales staff. Not surprisingly, the response here has been to leave compensation plans mostly intact allowing the plans to pare the lower performing sales personnel via attrition. No quota relief is being given to the remaining reps albeit the deals that are, despite the economy, still closing are divvied among the fewer survivors. This is very similar to the residential cable sales example.

In addition to clients, we posed the question to a colleague with considerable experience consulting on issues like this. We wanted to get his thoughts and also to confirm the relationship we noticed between sales person skill set requirements and company reactions to a downturn.

Here’s a quote from Shawn Rossi, VP of Sales Force Effectiveness at Sibson Consulting:

I have seen a wide range of tactics as well. The changes are typically reflective of / influenced by:
• Industry and the level of impact the economy is having on it.
• The supply of good/proven sales talent for a company and its key competitors.
• Financial stability of the company.

For the most part/the general trend, is companies trying to be fair by adjusting quotas to balance CCOS (Compensation Cost of Sales) with realistic revenue generation expectations given the economy and its pressures. I have not seen people raising rates too often, but have seen keeping people in the game through the use of cost conscious SPIFFs.”

Rossi makes some excellent points here and his second bullet speaks to our observation related to experience and skill sets required for a particular sales role.

One additional observation we made during our very informal survey was that corporate culture in no small way influences how these decisions are made. Different companies, sometimes even within the same industry, look at their issues from widely varying perspectives. Having worked with all the companies we spoke to, we were not surprised by any of the answers we received. Knowing the culture of the organizations and having a good feel for how they generally respond to issues allowed us to anticipate the answers we received.

The reality is external factors affect sales all the time, not just during a global recession. Events such as an earthquake in San Francisco or a power outage in Cleveland might impact the sales of businesses to the point that plan adjustments and quota relief are considered. Prudent companies will consciously consider their corporate culture as well as the other more objective factors mentioned here when shaping their responses. We’d love to hear what your company or clients are doing.

-Jason Kearns
-Michael Stus