After the first set of case studies detailing
the missteps of the banking industry prior to the recent avalanche of problems, there’s already one key lesson
from the in-depth reviews of the industry’s
sales management practices that should gain
the immediate attention of all CEOs, says
Scott Barton, Senior Consultant for the Sales
Effectiveness and Compensation Practice at
Watson Wyatt Worldwide. Barton’s top observation: Don’t wait until revenue growth stalls
to review the ROI of your sales force.
“When the banking industry was in the
midst of an unprecedented growth cycle,
there just wasn’t much attention paid to sales
force effectiveness,” he says. “Management
was adding people and not caring about the
return it was getting for its compensation
expenditures, until net income plummeted.
Now, there’s renewed interest in looking at
what caused the disconnect between revenue and compensation expenditures.”
Smart Business spoke with Barton about
learning from the banking industry’s renewed rigor around sales force effectiveness.
What was the first problem you found?
The first issues that created sub-par sales
performance in the banking industry were
poorly defined sales roles and a general lack
of discipline in reviewing how the sales team
was spending its time. We know from our
research that top performing sales teams
spend 20 percent more time in new business
generation activities when compared to the
time spent by average performing teams.
This produces a much greater return for the
associated compensation expenditure when
compared with the cost for client maintenance or administrative duties. Management
should review the sales staff’s time allocation
between hunting and farming activities and
make certain that variable compensation is
calibrated to reward more generously for
growth, and limit the staff’s activities that
don’t directly correlate to new customer
development and revenue growth.
Did adjusting the sales structure help?
Some banks are now breaking out their
sales positions into roles that are strictly dedicated to either new business development or customer maintenance. What they found is
that one person can handle larger volumes of
existing customers, so the company achieves
better revenue leverage for the allocated
expenditure. Banking executives also found
they could hire for specific attributes when
hiring strictly for hunters or farmers, instead
of hiring for a composite profile for blended
roles, and they achieved better results from
dedicated business development and customer maintenance personnel simply because of increased focus. This type of functional realignment also affords management
greater visibility into the disparate cost detail
and performance of the two groups.
Was there sufficient accountability for profitable business generation?
Many organizations wind up with a poor
sales compensation ROI because the basis
for variable compensation is business that
does not contribute to profitable growth. Last
year was a tough one for many commercial
lending organizations, but you wouldn’t have
known it by looking at some of their relationship managers’ pay checks. Relatively high
base salaries and incentive metrics tied to
overall asset volume meant a portfolio could be flat and unprofitable, but the relationship
manager made good money. Similarly, new
business development officers were paid on
new loans, many of which ended up being
bad bets for the bank. Management should
ensure each sales person carries a goal that
covers a portion of the company’s revenue or
margin objectives. Commission-only plans,
based purely on volume, are appropriate in
some instances. But too often we see this disconnect between company objectives and
sales rep pay, where goal-based plans at the
rep level would have closed the gap.
What’s the best way to align sales compensation with company profitability?
Start by understanding how each sales role
impacts revenue or margin. Establish individual goals based on these measures. For
example, if a business development rep has
considerable influence over revenue volume
in an assigned territory, base the goal on revenue volume and the forecast of growth for
the territory. Setting the goal on measures
that do not impact revenue or margin, or
financial measures over which the rep has little influence, won’t help the bottom line. Similarly, setting the goal too high, or providing
only limited variable compensation opportunity, won’t sufficiently motivate the rep.
Does sales turnover impact profitability?
Some critical client-facing employee
groups still churn at an alarming rate, which
in turn creates customer churn. Low pay
often results in poor morale and disengaged
staff; we know from our research that profitable revenue growth is a function of having
engaged and skilled staff. Develop and maintain an effective communication strategy that
reinforces the alignment of business change
with changes in customer preferences; offer
junior-level employees career development
and training to foster a longer-term perspective. Also, calculate the cost of lost customers
and review your sales compensation levels to
make certain it’s adequate for your exposure.
It can be very expensive if a sales person
leaves, taking a customer with him.
SCOTT BARTON is a Senior Consultant in the Sales Effectiveness and Compensation Practice at Watson Wyatt Worldwide. Reach him
at (415) 733-4263 or [email protected].