Compensation Part II

This past weekend my father, a VP of sales at a local bank in Ohio, shared a challenging sales management decision he faced a few weeks ago.  He had to share with one of his top team leaders that he had interviewed and found an ideal candidate for a vacant officer position on his team leader's team.  The individual is a strong candidate, personable, years of experience, and will significantly help build the team's business.  The only caveat of this candidate was that in order to hire the individual, the bank must pay him 30% more than what the team leader currently earns.  

When my father approached his team leader - a woman who is one of the highest performing employees under his supervision - and asked her how she felt about having a person report to her who had a higher salary, the woman said that the situation was not ideal, however getting the right person for the job was the most important issue at hand.  

As I continue to study sales management, I'm learning that there are many issues that arise in managing a sales organization and ultimately most of them revolve around compensation.  In this case, one of the issues with having an employee with a high salary report to a talented manager with a lower salary is flight risk.  With the income differences, there is now pressure on the VP to quickly get the talented manager up to or exceeding the subordinate's salary in order to minimize the risk of the star performer fleeing to another opportunity.  If the VP is not able increase the team leader's overall compensation to exceed her subordinate's pay, then fractious relationships are likely to ensue.  

Unlike a "traditional" sales management organization where pay is tied directly to sales performance, the team leader and the subordinate have components of their compensation tied to the sale of the bank's services.  In a "traditional" structure, if a manager makes less than the highest producer, there is likely no animosity considering the fact that the highest producer had to generate the majority of their own sales that contributed to a higher salary.  Therefore, in this case, the VP of sales had to do something to prevent the team leader from looking for opportunities outside the bank.

The end result of the situation was that the team leader would be getting paid significant bonuses and incentives for year end 2008 that would put her close to matching the incoming subordinate.  Then when merit increases come around a few months after the end of the year, the team leader will receive a significant raise that had to be approved by the CEO of the bank. 

The lesson I learned from this circumstance is to always promote the best interests of the company.  I am sure there are situations that do not work out for all parties involved, and that is unfortunate, however when putting the company's goals first, employees have a better chance to see results in their personal growth and in the growth of their line of business.

Compensation

So I went to the Penn State vs. Michigan State football game and got to sit four rows from the top.  I could see how during the fall season, this was the best view in the house, especially for night games.  However, when the temperature is in the 20s with a wind chill, its not the most pleasant experience.  Continuing to try to learn more about sales management, I got to sit next to my friend's dad Ron, who owns an international moving company.  I've known Ron for a while and he knows his business inside and out because he started in the sales function before he went out on his own.  One of the items we discussed were the compensation and hiring issues revolving around managing sales people.

One of the greatest challenges he is currently facing is that because the last few years were so busy for his international moving business, he didn't make any attempts to hire sales people.  Unfortunately, with the economy heading in a downward spiral now, finding sales people that can go out and deliver results must be reconsidered.  Another issue he is having is the fact that a large portion of his customer base was AIG, Lehman, Merrill Lynch, and a few other financial companies.  With these firms going under and having shotgun marriages, not hiring any sales personnel in the past few years is beginning to hurt with finding new business.

One of the more interesting tidbits I garnered from my discussions with Ron were how he manages expense accounts and benefits.  The book states that there are three ways to manage expense reimbursement for sales personnel - unlimited plans, per diem plans, and limited repayment plans.  Ron however uses an entirely different plan which he learned from his days as a sales man.  The way his company manages per diem expenses is by allocating a percentage of sales rep pay to per diem expenses and then reducing the balance every time the sales rep travels.  Assuming a sales rep has a salary plus a bonus, a portion of the salary would be their travel related expenditures.  This way, the sales rep knows how much they will have in their fund for meals, hotels, and client entertainment and will then use their own judgement when making decisions based on their spending.  In summary, one of the most important parts of managing sales people is goal alignment.  When goals are aligned, the motives and purchases of sales personnel are in line with using the company's money in an economical manner.

Interviewing

The most interesting part of last week's class was the discussion on interviewing.  As a 2009 graduate of Pitt's MBA program, interviewing is the most commonly used method for evaluating the skills and abilities of potential qualified job candidates.  According to the table on p.224 of Darlymple's Sales Management book, Ability tests, Job tryout, and Biographical inventory were the top 3 predictors of on the job success.  These three factors were the most valid in assessing the future success of an applicant.  

One of the reasons this piqued my interest was that if interviewing is not a successful determinant of success for an applicant, why do so many employers use this method?  Part of this could be that the other options go against the mainstream ways of assessing applicants and one, job tryouts, are time consuming.  Other than job tryouts, if ability tests and biographical inventories are better predictors, these certainly could be done in conjunction with the interviewing process.  Reviewing resumes is certainly done when checking on biographical backgrounds and administering an exam prior to an interview can also be done through online test taking tools.

Unfortunately for companies, interviewing is not a good predictor of successful job candidates, but it does provide tremendous amounts of other information.  Some of the characteristics an interviewer can discover of a potential applicant is their ability to communicate ideas effectively and clearly.  Another benefit of the interview is seeing how well an applicant performs under pressure.  In summary, despite interviewing being a poor predictor of success on the job front, doing away with the process completely would limit how a company gets to know a potential job candidate.

Golf with a Pharmaceutical Sales Rep

This past Thursday I went golfing with a new friend of mine who happens to be in Pharmaceutical Sales for Bristol Myers Squibb (BMY).  We probably had one of the last great days to play golf of the year because it hit 70 degrees despite being in November.  I decided to take advantage of my new contact and pick his brain about his role as a sales rep for one of the biggest pharmaceutical companies in the world.  Little did he know that I was doing research for my sales management blog.

My friend, David, sells one drug to psychiatrists in the mental health field.  He really enjoys being in sales because he views it as an extension of his personality.  He enjoys getting to know his customers and many end up becoming his friends.  One of the interesting facts I learned about his position is that BMY sells based on the product specialization sales structure.  After reviewing BMY's website they list well over 50 different kinds of pharmaceuticals that they manufacture and sell to help patients with a variety of sicknesses.  This broad diversified group of medicine lends itself well to the product specialization set up.

One interesting thing about David's position is that his pay structure is 75% salary and 25% incentive compensation.  He is the #4 sales rep for his mental health drug that he sells and his territory is southwestern PA.  One of the most interesting facts that I learned about his pay structure is that his incentives are paid based on how well he can grow his business for the region in percentage terms.  For example, if his mental health drug currently holds 15% oft eh SW PA market and he grows it to 17% in one year, that is a 13% improvement from the prior period and his payout would be significant.  Another item I found interesting is that a lot of success in his field is based on the success of the drug.  Some drugs that come out and are assigned to sales reps sometimes enter an industry that is laden with tough competitors.  These drugs can be difficult to sell and very difficult to improve market share in different regions.  

My conversations with David on the golf course helped me to see firsthand how a full time sales professional puts his method into practice.  David viewed sales as an extension of his personality and it certainly helped that he had a great personality.  In addition, it also helped me to appreciate that to be in sales requires constant communication with customers and associates.  Despite being on the golf course, David was constantly on the phone setting up meetings and corresponding with colleagues.  This may have played to my advantage because despite being a successful sales rep, his talent didn't translate to the golf links.  I shot an 83, David shot a 100.  

Sales Plans & Forecasting

Prior to coming back to school to pursue my MBA in finance, I worked as a Senior Financial Analyst for a division of BNY Mellon that managed six private equity fund of funds.  This group was small and I only had four co-workers, however we managed a portfolio of private equity investments that exceeded $300 million.  The first of these funds was rolled out in 1999 with approximately $50 million in investor commitments and the fifth fund was rolled out with just over $100 million in commitments as of the end of 2006.   

One of the goals my supervisor assigned me at the beginning of 2007 was to help launch Fund VI.  I had a very small role in launching new funds, my responsibilities were somewhat contained to making sure all of the financials and performance data agreed to our records.  However, one of the goals the Chief Investment Officer set for our group was to raise a $150 million fund.  In the middle of 2007, this plan did not seem too ambitious and was probably a realistic goal considering the markets at this point in time.  However, little did our group realize that more than a year later, raising a $150 million fund of fund was very unlikely.

Due to the market gyrations in the past year, this sales plan became increasingly difficult to meet.  After speaking with some former colleagues recently, about 10 months into fundraising, coming down to the last few months, they had raised near $40 million well short of the goal.  Despite the stock market going through what some experts say is a once in a lifetime collapse unseen since the great depression, the sales forecast was done with the best intentions.  

Because of the experience, thinking in the terms of a sales manager leads me to think that sales goals and forecasts are necessary in order to encourage employees to strive to improve upon their previous position.  On the other side, they seem almost completely meaningless.  If my former PE group should raise half of their sales target for their sixth fund of fund, by market measures that should be considered a success.  However, if management were to look at their goal of $150 million, management could say that they failed miserably.  Of course BNY Mellon's management is not aloof to what is going on in the financial markets these days, so I'm sure they will consider the efforts of the group comparative to market gyrations.

With this limited experience in mind, I would lean to a more flexible sales planning process.  If I were in my former bosses shoes, I would have ongoing meeting with management to discuss the movements in the market in relation to the sales plan.  One risk that must be considered when making sales goals over one quarter's period are changes in the sales environment.  With the changes in the market that have recently occurred, sales plans should be revised and new sales targets considered on a monthly basis.  As management and the PE group learn to meet halfway between realistic goals and actual expectations, the sales plan will become accurate and a good possibility of reaching the target.

Selling vs. Sales Mgt

Myth:  Great sales people often become excellent sales managers.

Truth: Great sales managers require an entirely different skill set than great sales people

One of the takeaways from this past week's class was the huge difference in skill sets required to become a great sales person vs. a great sales manager.  One would think that both jobs are so interrelated that the skills are transferable.  Unfortunately, that is not always the case.

From the D&M Insurance case, I learned that sales managers are also sales representatives except their clients are often their subordinates.  This can become problematic when trying to communicate the corporate C-suite's changes to incentive compensation plans or overall strategies.  Sales managers are the people responsible for making sure that the sales people from the top to the bottom buy in to upper management's ideas with fervor so that sales will continue to come through the door.   

This can be a challenging position to be in for many reasons, one is because sales people have a variety of personalities.  It can be a challenge to change individuals that have strong personalities and are currently successful at what they.  Trying to implement new ideas requires a graceful demeanor and possibly telling different employees different stories in order to get them to "buy in".  Sales managers must learn how to build respect from a variety of angles if the manager wants to be successful.  

Similar to a salesperson, the manager can have tremendous flexibility when organizing their daily routine.  As long as numbers are met, corporate supervisors could care less how the manager achieves their goal.  However, because all sales organizations have a top sales person and a bottom sales person, having all employees reach their goal is unlikely.  

Another job of the sales manager is trying to encourage and train those at the bottom of the sales organization so that they can rise to at least the middle of the pack.  Taking the time to train and develop the poorest performing individuals could potentially take away time from monitoring the stars of the sales group.  This skill requires that the manager find balance in order to protect against losing your best sales people to the competition.

These are just a few of the tidbits of information I have garnered from this class thus far.  I will look forward to learning about the strategies and skill sets that separate the best salespeople and sales managers from the ones that can not sustain long term success.   

The purpose of this blog is...

to develop an understanding on different techniques, challenges, strategies, and approaches to working in the sales field.  Over the course of this class, I hope to develop an understanding of what skills are necessary to make a good sales manager as well as how sales people become successful in a field with one of the highest employee turnover rates in the industry.

Why I took this class:

The root reason of why I took this class is because I am fascinated by the sales role in organizations.  This probably stems from the occupations of both of my parents.  My father spent 20+ years in the insurance business and not runs the sales and trust office of a small bank in Ohio.  My mother also spent a brief period of her working days selling medical first aid supplies to manufacturing companies.  

As my father always told me growing up, "Rob, the great thing about sales is that you have unlimited earning potential".  You can make as much money as you can sell.  Two of the most successful businessmen I know are sales people.  One man runs an international moving company where he used skills learned in a Dale Carnegie course to grow his business into a multi-million dollar entity.  The other man worked in public accounting for six years then decided to venture out and create his own firm.  Years later he is the president of an insurance company that caters to high net worth individuals by selling them insurance policies that amount to tens if not hundreds of millions of dollars.  These two individuals come from very diverse backgrounds and have both built very successful business based on their knowledge and selling ability.

One man grew up in a middle class family and worked in US Steel's mail room for 10 years while he got his college degree at night.  The other went to an elite college, studied accounting, and eventually started his own practice once he built up a solid knowledge base to help advising high net worth clients.  

As the class progresses, I hope to learn the defining characteristics on what makes some people thrive in sales positions, while others (and unfortunately the majority) do not succeed.