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XChange: Compensation Is Part Art, Part Science

Solution providers are itching to hire more experienced sales reps, according to an XChange session. They're also creating stronger performance-based compensation plans.

Solution providers are itching to hire more experienced sales reps, create stronger performance-based compensation plans and promote recurring revenue without cannibalizing core business.

That's what Joe DiMisa, senior vice president of Sibson Consulting in Atlanta, said during a breakout session at 2015 XChange Solution Provider in Dallas.

Companies are often too eager to set quotas or decide upon the perfect compensation strategy, DiMisa said, without giving proper consideration to job roles or strategic drivers.

[RELATED: XChange 2014: Succeeding In Cloud Requires Major Sales Transformation]

"Compensation is part art, part science," DiMisa said. "In many cases, it may be more art than it is science."

Although companies are still looking to operate efficiently, DiMisa said the cost-cutting experienced during the recession is on its way out. Only 5 percent of organizations today indicate that they can meet their revenue expectations solely by cutting expenses, he said.

Data compiled by Sibson Consulting suggests that companies expect on average to grow their sales force by 4 percent in 2015, with 15 percent of IT businesses suggesting that they plan to grow headcount by more than 15 percent.

High-tech and telecom companies, though, are primarily hiring seasoned sales reps with seven to 10 years of experience who are interested in better compensation, DiMisa said, rather than folks straight out of college.

But with increased headcount comes increased expectations.

Companies surveyed by Sibson Consulting have on average increased their sales quotas in 2015 by 7.5 percent, with a quarter of the businesses boosting their quotas by more than 15 percent, DiMisa said. Quotas in the technology space tend to range between $2.5 million and $3.5 million for each sales rep, he said.

These quotas are often unrealistically high, according to Sibson Consulting's findings. Just 24 percent of companies expect their sales reps to hit their quotas in 2015, according to DiMisa.

"That's not a good thing," he said.

He said quota results from a typical sales organization should yield a bell-shaped curve, with 60 percent or 65 percent of sales reps hitting their quotas, 5 percent to 10 percent being rewarded for excellence and 10 percent falling below the threshold for proficiency.

With economic prospects improving, companies increased their sales force compensation levels by 2.7 percent in 2014 and plan to boost them by another 2.9 percent in 2015, according to Sibson Consulting.

But just 14 percent of that money is being provided as an across-the-board salary increase, DiMisa said, with the remainder only going to reps who meet quotas or other performance metrics.

That mirrors broader industry trends, DiMisa said, where over the past half-decade, compensation has shifted from a 60-40 split between base and incentive pay to more of a 50-50 split.

"A true sales rep likes that," DiMisa said. "The more you have on quota, the more opportunities you have to exceed market pay."

Sales and account managers, though, continue to have a 70-30 split favoring base pay due to the differing nature of their jobs.

Businesses typically invest roughly 6 percent to 8 percent of their profits into the sales channel, DiMisa said, with 3.5 percent being allocated as fixed pay and another 2.5 percent to 3.5 percent coming in the form of variable pay.

NEXT: Signing Bonuses, SPIFs Are Back Big Time

Modern Business Computing, Elgin, Ill., today primarily compensates its sales force with base pay, but is considering changes to its compensation model to make it more variable, according to company President Kurt Claussner.

The solution provider is looking to add sales reps as it transitions to more of a managed services model, Claussner said, and is trying to determine the best types of sales incentives for a more services-based practice.

Another form of growing compensation has been sign-on bonuses, which are being used by 45 percent of companies today, compared with just a quarter in 2013 and 2014. The bonuses are normally worth between 5 percent and 20 percent of total salary, DiMisa said.

The uptick in the economy has also led to a huge increase in spifs, which often come from marketing or human resources departments and now equate to 5 percent to 7 percent of total pay, DiMisa said.

Yet at the same time, non-cash recognition programs dating back to the recession continue to make up 5 percent to 7 percent of company's total compensation budget.

Although these programs made sense when the economy was struggling and sales reps weren't hitting their incentive targets, the non-cash recognition now often accompanies incentive payments, creating a major hole in the budget.

"It's like a drug," DiMisa said about the non-cash awards. "It's very hard to kick the habit."

DiMisa is more favorably disposed to president's club that reward reps who hit more than 120 percent of their sales target.

Roughly 85 percent of companies have a president's club, DiMisa said, with more than 95 percent of the businesses rewarding their highest-performing sales reps with vacations. The rewards are worth on average $8,500 per rep, DiMisa said.

As IT companies embrace recurring revenue to reflect their increasingly services-oriented approach, DiMisa said it has become increasingly difficult for sales reps to figure out how much they're going to get paid.

Additional recurring revenue opportunities have pushed businesses to put more thresholds in their compensation plans, DiMisa said, to ensure that sales reps aren't growing recurring revenue by chipping away at their traditional revenue base.

Although DiMisa sees a reason for thresholds, he does not advocate for using caps since its disincentivizes reps from selling as much as humanly possible. Caps should only be used when assessing on subjective measures, DiMisa said.

Recurring revenue has also driven increased usage of customer satisfaction ratings in determining sales rep compensation since repeat business is vital to the success of this model.

The most prominent compensation measures, though, continue to be sales volume and profitability, DiMisa said.

Businesses also have to chart a path between the growth mandates from Wall Street or company executives and the actual market opportunities as perceived by the boots on the ground. Unsurprisingly, DiMisa said the initial figures are often larger than the later ones.


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