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Sales Incentives, Ethics & Honesty

October 28, 2009

IACCM’s recent study of the global economy revealed growing concern about the impacts of the recession on business ethics. In particular, many commented on the extent to which sales representatives were over-committing or overstating capabilities.

A report by CSO Insights on sales compensation and performance management offers useful perspectives on why this may be happening. Based on input by more than 1,000 companies, the research reveals growing pressure on sales teams from higher quotas – in many cases up by almost 40%. As a result, the percentage who make quota has fallen – down by more than 10% in the last year, to just over 50%. When combined with delayed deals and longer sales cycles caused by the recession, it is not surprising if many sales people feel a sense of desperation.

There are many problems associated with over-commitment. Most obviously, it undermines trust – both by customers and by those who support sales. This tends to make negotiations far harder and causes both sides to push for protective terms.

Interestingly, the biggest single reason identified by sales as the cause of losing business is ‘the competitors price and terms’. This was highlighted by 79.6% of those responding. Product superiority comes a distant 4th, with just 22% citing it as a cause.  So again, our community may well be at the forefront when it comes to observing overcommitment – and perhaps we should also be at the forefront when it comes to driving change.

If this is something that Procurement, Sales Contracting and Legal care about, what can we do to fix it? The CSO Insights report is blunt about the problem. “Companies elicit the behaviors they reward”, it states, commenting that “Compensation plans typically track three or fewer metrics”. Not surprisingly, those metrics have no connection with ethics or terms and conditions.

Sales compensation schemes are generally believed to be relatively effective in driving sales behavior, but they cause focus on new accounts, new products, farming existing customers and cross or up-selling. Utilizing the established sales process comes 8th on the list of behaviors – with just 22% adherence. Sales also show little interest in sharing practices or accurate forecasting, because while these are declared priorities, they are not rewarded as practices.

Many complain about the narrow metrics of Procurement groups, focused strongly on driving price reductions and claiming notional ‘savings’. This is the direct counterpart of revenue-driven sales activity. Far too often, neither side is directly interested or motivated by outcomes, beyond getting a contract signed. While this continues, the contract inevitably becomes a battleground for honesty and protection – and meaningful collaboration (internal or external) is a victim.

In an ideal world, those involved in negotiating and managing contracts would push for more balanced and appropriate performance incentives and metrics. Certainly this is an area where we should seek to exercise greater influence. But at a more immediate and practical level, we should also consider ways that we can facilitate better deals with more appropriate terms and processes.

For example, one key pressure for sales groups is the amount of time they spend overcoming internal barriers to higher productivity. In many organizations, up to 25% of sales time is spent on contract-related issues. Perhaps if we tackled those inhibitors and freed up more sales time, they could afford to be more honest. And second, if indeed price and terms is the most important reason for losing against competition, what are we doing to address that concern and ensure the terms we offer equip us to win. Indeed, how often do we even know what terms our competitors are offering?

So before we cast too many stones at our colleagues in sales, it is perhaps time to examine whether we are truly doing all we can to assist their success – and the prosperity of our company.

  1. One interesting trend I have seen is companies tying compensation to the quality of the sales contract. This can be done manually but is a great example as well of how contract automation can help reduce the time and cost of sales but also help managers better create strategic assets with their contracts. If you capture the contract data during an automated contract automation process, you can then rate the contract based on an internal algorithm using metrics such as length, liability limits, etc. This risk score or quality score can then be used to reduce or improve the commission that was based most likely only on revenue or profitability goals.

  2. Terence, thanks for this great illustration of ways that we can have contracting better integrated into the sales process.

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