Medical Device Link.

Originally Published MX March/April 2005

ADVERTISING, DISTRIBUTION, & SALES

An automated sales performance management system that includes compensation management software can motivate reps and boost revenues and profitability.

Bob Conlin

Medtech industry sales executives would probably generally agree that sales compensation should be designed to be the dangled carrot that will most effectively drive company sales performance and, ultimately, revenue production. Sales representatives have always been willing to accept relatively modest salaries in hopes of having the reward of significant additional income that comes when they meet or exceed their sales targets.

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But many sales executives would have to admit that their own sales compensation programs are in fact more tactical than strategic with respect to sales performance. For most companies, sales compensation is little more than a back-office administrative task that at best calculates commissions accurately. And, at worst, the form it takes may promote behaviors that have a depressing effect on sales performance.

As the medtech industry evolves, pressures related to bringing new products to market, consolidating sales organizations through mergers and acquisitions, creating and refining distribution models, and acquiring new customers cost-effectively drive the search for new and better ways to motivate the sales force to achieve corporate performance goals. One solution companies are beginning to discover is sales compensation software, which is the heart of a sales performance management (SPM) tool kit.

Traditional Compensation Administration

Commissions, bonuses, and other sales incentive programs (contests and sales promotion incentive funds, for example) should motivate sales teams to focus on achieving and exceeding desired performance results. In fact, companies that fail to execute sales compensation effectively, or in a timely and accurate manner, have been found to sacrifice 20% of potential sales productivity as a result of lost selling time, reduced sales-force motivation, and so-called shadow accounting.¹ This last is the time sales reps spend reconciling their commission statements owing to their mistrust of the corporate system.

The analysts that have calculated this productivity loss go on to say that automating incentive compensation management can add significant value to the sales process. Automation eliminates repetitive, labor-intensive, error-prone manual processes while providing accurate, timely commission; ranking; and attainment information that serves to keep sales reps motivated. In addition, it provides detailed, near-real-time results analysis that gives management time to make a course correction should performance issues come to light.

Today, most medtech companies rely on sales compensation systems that arguably are inadequate simply to administer such a key financial cost center, let alone to produce and maintain superior sales performance. Calculating and paying incentive-based compensation is generally a data-intensive, calculation-intensive, tedious, and thankless task that can consume hours of time from compensation analysts, corporate and sales controllers, and sales administrators.

While sales compensation is recognized as the key component of SPM, it is the last significant cost center many companies think to automate. Automated systems for enterprise resource planning, customer relationship management (CRM), supply chain management, and control of other business cost and revenue streams may be in place, but the key system for driving sales performance typically is nothing more than a series of Excel spreadsheets or an outdated home-grown application.

Bringing in SPM

Sales performance management is ultimately about building revenues and profits, not about building new software systems. In this, it is an element of corporate strategy. However, before medtech companies can meet their sales performance objectives, they must streamline the tactical processes involved in managing sales compensation.

Software technologies to do just that have been available for several years, but the costs associated with purchasing and implementing them have put such systems out of reach for all but the largest companies. Now, more-affordable on-demand SPM systems are being offered to help medtech companies of all sizes automate the sales compensation process in the service of sales performance optimization.

SPM need not be a stand-alone solution. In fact, it can add value to the sales force automation (SFA) and CRM tools medtech companies commonly use. These tools have caused headaches for sales executives who cannot get their reps to employ them diligently and consistently. But integrating SPM with CRM and SFA systems enables reps easily to associate opportunities in their pipeline with potential commission earnings. Their new ability to model earnings provides the incentive some salespeople need to keep customer and prospect information current.

Sales managers have long known that the best way to motivate and retain skilled reps is through the wallet; commissions drive loyalty as well as performance. Focusing on staff retention and motivation and on revenue production, some medtech companies are now embracing SPM-based compensation programs that encompass various aspects of a sales rep's relationships with the end customer and the distributor. Diversification of product offerings and performance measures redefines the compensation landscape and helps sales reps establish relationships, build distributor trust, and present the company to the market in the favorable light of employee loyalty and product innovation.

Medtech companies that have adopted SPM systems not only are benefiting from better sales management but also are able to transform their market presence through offering high-performing producers and distribution groups such extras as flexible selling agreements and payment periods, single-check and statement processing, innovative bonus packages, and on-demand reporting. These companies are leveraging sales performance and loyalty to secure lucrative selling arrangements. Thus, they see SPM solutions as a vehicle for remaining competitive.

Automated Compensation Management

Like so many medtech companies, Welch Allyn Inc. (Skaneateles Falls, NY), a manufacturer of medical diagnostic equipment, patient-monitoring systems, and miniature precision lamps, faced the challenge of aligning sales approaches, quotas, and commissions with corporate sales goals so as to ensure company profitability and growth. The global company decided to overhaul its compensation system by replacing its existing multilevel spreadsheet system with a scalable, easy-to-use automated program that could both manage incentive compensation and tie employee objectives to corporate goals.

Welch Allyn executives saw a need to take sales compensation to a strategic level. They recognized that a dedicated and motivated sales force was fundamental to selling products in a highly competitive marketplace. However, as many as 70% of the company's sales reps had been meeting or surpassing their quotas, so achieving sales quotas was not the issue. The problem for Welch Allyn, caused by imperfect goal alignment, was that its compensation plans led sales reps to focus on selling new products almost exclusively; nothing in the system motivated employees to sell the core products that drive the firm's bottom line. So the executives looked for a way to address this misalignment and introduce accuracy and automation into their incentive compensation programs.

The existing Excel-based spreadsheet process restricted the frequency of incentive pay to once every three months. Also, reporting was limited to hard-copy reports containing minimal transaction detail. The automated compensation management technology implemented in place of the old system provided Welch Allyn with the requisite functionality to model and manage its incentive compensation plans in alignment with corporate objectives. "Previously, Welch Allyn modified its incentive compensation plans only one time each year," says John Tierney, vice president of hospital sales at Welch Allyn. "Using an automated solution gives us the power and flexibility to model new plans and modify our existing programs." It also enabled those plans and sales results to be communicated in a timely fashion to a sales organization that generates some 150,000 sales transactions monthly.

Welch Allyn's fully automated solution now manages, reports, and analyzes commissions and sales bonuses across every business channel. Since its implementation, in addition to improving the communication of results data to sales reps and issuing accurate and more-timely commission statements, the company has experienced a decrease in sales- force turnover and increases in sales performance and profitability. "For the sales force, the real benefit is an incentive-compensation program that is adaptable, reliable, and comprehensive and that enables us to make sound strategic decisions," says Tierney. "These characteristics allow our organization to better align the sales force's actions with the company's goals as we identify and respond to the need for change. The new system enables Welch Allyn to increase its profitability by effectively motivating its people."

Implementation Options

Any decision to move ahead with SPM implementation involves the question of whether to build or buy. That second decision should be based on both short-term and long-term considerations; that is, what the company needs today and what it will need down the road. Also a factor is the personnel the company will have in-house to support its needs when they change. In medtech, where change is constant, company executives are advised to consider how rapidly they will need to roll out new compensation plans and programs in order to adapt to market changes. The initial costs involved in building the company's own system may seem reasonable; however, the calculated long-term costs may turn out to be overwhelming.

A decision to buy should also be preceded by the consideration of several factors. On-premises SPM solutions offer the full functionality of a custom-built system, but they come with big up-front licensing and implementation costs. Still, these systems may be a good fit for large medtech companies with very complex compensation requirements.

More suitable for smaller enterprises are hosted, on-demand systems. These offer a best-practices framework along with ease of integration and implementation. The training required is minimal, and deployment can take as little as 30 days.

Whether building or buying, medtech companies have the advantage of maturity within the incentive-compensation management function to make justification of investment in this technology an easy question. Welch Allyn, for example, justified its project on the basis of:

• Eliminating time-consuming shadow accounting.
• Reducing costly information technology requirements through the elimination of the spreadsheet system.
• Gaining a better-informed workforce.
• Being able to model and modify its incentive-compensation plans in accordance with current market conditions and future company goals.
• Projecting a minimum 1% increase in sales performance from the proper alignment of sales incentives with corporate goals.

Its historical sales information, including records relating to individual products, individual sales reps, and regional sales forces, gave the company the wealth of data needed to develop and implement highly creative, efficient incentive compensation plans managed by the automated SPM system.

Once a company has selected and deployed a sales compensation system to streamline the tactical aspects of sales performance management, it is ready to lift sales compensation to a strategic level. Strategic SPM benefits can be expected to follow when automated companies:

• Align compensation plans with big-picture corporate goals.
• Integrate compensation management with front- and back-office systems.
• Motivate sales reps through real-time provision of information.
• Monitor compensation program effectiveness.
• Adapt compensation plans to changing conditions.

SPM in Corporate Strategy

One of the first steps toward effective strategic SPM is to define appropriate incentive compensation plans, then implement them for production use, making modifications as necessary. While this is theoretically possible with spreadsheet-based tracking systems, it is not terribly practical for organizations with more than, say, 25 sales reps. However, sophisticated SPM systems enable companies to create and modify plans easily.

Each sales representative is motivated by plan elements that reflect his or her particular sales tasks and responsibilities. For example, the plan might include compensation based on profits versus revenues, on sales of new products, or on the acquisition of new customers. Customized compensation plans embody the company's strategic direction. They convey personalized instructions to each sales representative, stating the precise performance goals the company expects to see achieved. Designed properly, the incentive plan is a powerful and unambiguous motivator.

Once a company has defined and implemented its sales compensation plans, it can begin to use those plans to drive performance and profitability. A comprehensive automated foundation to underpin such efforts is essential. Also essential, for streamlining the calculation, reporting, and payment process, is integration of the SPM system with automated front-office and back-office systems for financials, logistics, human resources, CRM, SFA, and orders and fulfillment. Input transactions then come in cleanly, and postings to payroll and the general ledger for payment tracking and expense are seamless. Being a data-driven solution, SPM provides a solid foundation for detailed reporting and analysis.

The Motivated Sales Team

The right customized compensation plan is only part of the equation; an individual's motivation comes from understanding how he or she is performing against the plan. Salespeople do not want to wait until the end of the quarter to learn how well they did. Rather, they want to know—they feel a need to know—continually how they stand. With SPM, this can be accomplished via up-to-date information on performance and commissions earned that the system makes readily available. SPM motivates by providing fast, accurate performance feedback.

To make sales compensation a strategic tool, companies have to provide near-real-time access to information appropriate to the person seeking it. Individual contributors to the sales effort need secure access to their own information, for example, their commissions earned to date, transaction details that lie behind those commissions, and motivational information such as their ranking among their peers. With SPM, managers have access to their own personal performance information as well as that of their subordinates. They may even view corporate attainment information so that they can see how their team is performing relative to other teams.

Following the close of a period, a company's SPM system should provide sales reps with detailed commission statements so they will understand how the payment was calculated. This minimizes payment disputes. By putting timely, accurate information in the hands of its sales staff, the company strengthens the links between activities, goals, and rewards.

Maintaining Optimal Sales Performance

Gauging the effectiveness of its sales compensation programs will be a nearly fruitless task unless the company has integrated an automated SPM system. With a comprehensive SPM system, company leaders gain both a greater perspective on the effectiveness of current sales performance programs and insight into the implications of changes to the company's programs. Modeling capabilities allow managers to evaluate new compensation programs, manage quotas better, anticipate the impact of organizational changes and shifts in revenue, and properly accrue the cost-of-sales or commission expense. Thus, they can see in advance how a change will affect groups of payees. They can also forecast expenses, revise quotas and attainment distributions, and measure results through what-if analysis.

With executive-level, fact-based reporting supplied from a centralized source, the SPM system, a company is in a good position to make the decisions that will successfully support change.

No sales plan remains optimal forever, of course. Market conditions change. Companies change. Strategies change. Management and organizational structure may change. In order for a company to retain its power and relevance, its sales compensation plans, and their underlying metrics, must be quickly adaptable to changes in the organization and changes in the market.

Unlike spreadsheets, fully automated SPM systems can easily accommodate mergers, acquisitions, new product introductions, corporate reorganizations, and other significant changes that are common in the medtech industry. Their ability to be adjusted on the fly enables companies to create an iterative cycle of sales performance management.

Conclusion

Sales performance management delivers to medtech companies a strong pay-for-performance environment that fosters trust and satisfaction throughout the sales organization and supports the retention of productive sales reps. Ultimately, SPM provides higher revenues, lowers costs, and improves forecasting. Indeed, by reducing the direct costs and eliminating the indirect costs—shadow accounting and lost sales focus, for example—associated with sales compensation, an automated SPM system may very well be cheaper for some companies than continuing to manage sales compensation the way they do today.

Reference

1. Integrating Sales Compensation Systems with SFA (Stamford, CT: Gartner, 2002).

Bob Conlin is vice president of marketing at Centive Inc. (Bedford, MA), a provider of sales performance management solutions.

Illustration by ARTVILLE

Copyright ©2005 MX