What Your CEO Needs to Know About Sales Compensation

Connecting the Corner Office to the Front Line

 What Your CEO Needs to Know About Sales Compensation

Author: Mark Donnolo
Pub Date: January 2013
Print Edition: $39.95
Print ISBN: 9780814437957
Page Count: 288
Format: Hardback
e-Book ISBN: 9780814432280

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CHAPTER 1: Your Revenue Roadmap:

Driving Your Sales Strategy

with Sales Compensation

ON A CHILLY MORNING IN SACRAMENTO, I sat perched on a vinyl

bench seat, warily eyeing my rolling workplace for the day: an

18-wheeler, windows fogged from the cold, vibrating slightly as

its engine idled. My tour guide, Cliff, was a driver sales rep for a

major brewing company. Cliff climbed into the cab and slid over

to the driver’s seat, and we pulled away from the distributor’s

warehouse toward a 10-hour day of sales calls to convenience

stores, supermarkets, bars, and restaurants.

As we drove, we talked about how Cliff sold beer. He had

been with the company for a number of years and was very successful,

but he explained that his role had changed. “Two years

ago, I was selling cases of beer to store owners,” he said. “Now,

I’m trying to make the beer they already have move faster. I check

the signs, inspect the coolers, and try to get our beer in the best

position.” In addition to being a driver sales rep, Cliff had also

become a bit of a marketer, since the company had changed his

objectives a short time ago.

In the parking lot of a convenience store in a gritty urban

neighborhood, Cliff dragged down a hand truck. I followed him

to the back of the store and into a huge cooler that held cases

upon cases of light beer, regular beer, and premium beer in 12-

ounce, 16-ounce, and quart containers. Cliff looked through the

stacks, pulled the expired boxes, and loaded them into the truck.

He then lugged beer from the truck and packed it into the cooler.

As he did this, he talked to the store owner about what was selling

and what was not. Then he detailed the cooler display at the

front of the store, making sure the facings of cans and bottles

were aligned and that the packaging and tags for the week’s specials

were clearly displayed.

The brewery Cliff worked for had recently changed its sales

strategy. The old approach was to sell as many cases of beer as

possible, as often as possible, to as many retailers and restaurants

as possible. Cliff and the other driver sales reps were paid cents

per case commission to load more cases into the coolers, rotate

the stock, and pull out old beer.

Eventually, the brewing company realized that pushing more

bottles and cans into the back room of a retailer wasn’t necessarily

selling more beer to the customer. With competition at the

point of sale increasing over the years, sales out were less driven

by stocking the cooler and more driven by effective marketing.

Strategically, what was important to the brewing company was

selling beer to the end consumer. The company learned that the

consumption of beer was driven by TV, radio, and social media

advertising. Point of sale advertising, the company discovered,

was another driving force.

For years, the company had missed the opportunity to mobilize

the driver reps and had motivated them toward the wrong

goal. It had mistakenly promoted a transactional model of selling

into the back room. Finally, it realized what actually sold beer:

product placement, use of signs and displays, and matching price

points with competitors. But the question remained: How did

that translate to the sales organization? How could this strategy

convert to incentives that were meaningful to the driver sales

reps? The quest for that answer found me undercover in a convenience

store cooler, wearing a starched uniform with “Mark”

neatly scripted above my left shirt pocket.

We worked with the company to determine how to motivate

the sales organization with performance indicators that could

ultimately steer consumer preference. The company moved its

sales compensation plan off a purely volume-based plan and connected

it to the metrics and activities that drove beer consumption.

It developed performance measures that were focused on

merchandising, such as the number of facings, positioning the

product closest to the cooler handle, the placement of signage at

the retailer, the location of large displays, and competitive matching.

If its competitor’s malt liquor was in 32-ounce bottles, then

the company made sure its 32-ounce bottles of malt liquor were

positioned right next to them, hopefully with a larger number of


By understanding what influenced the purchase of beer and

connecting it to something that was important to the driver sales

rep, the company was able to change the behaviors of the reps

and get them to sell more beer. Now, Cliff did not just talk to the

store owner about how many cases of beer he wanted and yesterday’s

baseball scores. Cliff also talked to him about how the

beer was selling and ideas he had about improving the marketing

of certain products. Cliff talked about the positioning of the

product and displays, and he had statistics on how much that

could increase the volume. The store owner listened because he

knew Cliff’s advice was in his best interest.

Because Cliff’s compensation changed, his conversations

changed. Because his conversations changed, the results changed.

This retailer had struggled with the sale of premium beer brands

in this particular market, but the store owner had seen a dramatic

improvement in those sales over the past 24 months because of

Cliff’s marketing.

The company and Cliff had learned an important lesson about

translating the new sales strategy to the front line. The customer

had learned an important lesson about how to improve the results

for his business, and together the company and the customer saw

significant improvement in results, demonstrating the power of

sales compensation and its connection to the sales strategy.

Aligning to the Strategy

One of the first things our firm does when we look at sales compensation

is understand the sales strategy. We ask: How should

the priorities of the business be represented in the sales compensation


One of the ironies of sales compensation is that while it’s a tactical

program, it can churn up issues that are actually bigger misalignments

of sales effectiveness. For example, Cliff’s original sales

compensation plan paid him for generating pure sales volume, an

activity that was out of alignment with the company’s strategy of

positioning product competitively and playing an adviser role to

help the retailer grow its business. A transactional plan like this

would ultimately cause a breakdown in the company’s ability to

achieve its goals. Sales executives have to be able to distinguish

between issues that are related to sales compensation and those

that are indicators of bigger strategic challenges. They have to

know when they have a sales process issue that needs to be fixed.

Mike Kelly, former CEO and president of The Weather Channel

Companies, began his career years ago at Fortune magazine.

There, Kelly worked directly with the business customer—sometimes

the CEO of the company—who would have a personal

preference for a business magazine, whether it was Fortune or

Forbes or BusinessWeek. Because the decision maker was at a

senior level in the organization, it was important to understand

the corporate strategy. When Kelly took over the sales organization

of a new magazine, Entertainment Weekly, he took that customer

orientation with him.

Traditionally, a magazine would research target companies and

try to prove to clients and agencies that their audience was the right

audience, as opposed to trying to connect customers and advertisers

to the subject matter. But Kelly implemented a customized, consultative

approach, connecting advertisers to entertainment

marketing. Unfortunately, Kelly explains, “We over-customized it,

and the organization had a hard time making money.”

Entertainment Weekly was scheduled to be profitable after

two years, but by year five it was still losing money and Kelly was

feeling some pressure. “We would always point to our growth.

Our circulation growth was great, our revenue growth was great,

and everybody assumed, ‘Okay, at some point or another we’re

going to get to profitability.’”

Kelly enrolled in an executive education class at Columbia

University where he met Professor Larry Selden, who talked

about an idea called customer segmentation. Selden told his

class that the best companies understand not only who their customer

is but also what their customer’s needs are. They group

their customers based on needs as opposed to what they want to

sell them. By segmenting his customers, Kelly could understand

the profitability of each customer and each customer segment.

Then he could align his resources against those customer segments

that were most profitable.

“It was revolutionary for me,” says Kelly. “No one—and certainly

no one in the magazine industry—thought that way. All revenue

was good revenue. And we typically thought our biggest

customers, our highest volume customers, were the most profitable


So Kelly took the customer segmentation idea back to Entertainment

Weekly, and his team analyzed the profitability of all of

the advertisers and all of their segments. They figured out that

cable advertising was starting to explode. Networks wouldn’t let

cable channels advertise on television because they thought they

would steal viewers. So cable had to buy print advertising; it was

the biggest, broadest reach they could get. Entertainment Weekly

had a smattering of cable channel advertisers, but it hadn’t been

a big focus. Kelly and his team had concentrated on what everybody

else was concentrating on: automotive companies and

health and beauty companies. They were big advertisers that had

a lot of appeal, but they were price sensitive. Kelly, however, realized

that the cable television advertisers were actually Entertainment

Weekly’s most profitable advertisers because they paid full

price. This was because they were time sensitive—they had to be

in certain issues of the magazine because a show was on a certain

night—factors that compelled them to pay a premium.

Kelly completely changed how his organization thought

about who its customer was, who its most profitable customers

were, and how it should go after its customers. He realigned the

sales force, putting more people and sales incentives on the most

profitable categories with strong growth expectations and fewer

resources against the customers for whom it was really just a

price buy. Kelly says:

We were supposed to lose money that year. We made money.

And then we went on to have 30 percent CAGR [compound

annual growth rate] for the next five years.

I learned that sales is sales. But there are principles of

finance that if you apply them to sales, including incentive

plans, you can accelerate what you do. I’ve brought that to

every other job I’ve had. We really try to understand who the

customer is and what our value proposition is to that customer.

Then we segment those customers so we understand

who the most profitable ones are and who they aren’t. We put

our resources behind that profit.

If your compensation plan doesn’t align with the strategy

and the segments you want to target, then you’re going to be

working at cross-purposes. It’s hard work to get an organization,

any organization, to start to think differently. And

in most companies, sales is product-focused or platformfocused.

They’re going to go sell their product wherever they

can. When a company becomes more customer-focused, all

of a sudden it starts to define the product mix based on what

the customer needs are.

The sales compensation program can support that customer

focus, run counter to that focus, or create confusion. In Kelly’s

case, the priorities of the sales strategy were well represented in

the sales compensation plan, and it drove the desired behavior.

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