The Case for Sales Performance Modeling

By Lorna Heynike, Senior Vice President, Marketing All finance and sales leadership teams aspire to gain control amidst uncertainty. They need to make sound business decisions that can outlast dynamic, complex market and competitive conditions. Each quarter, financial analysts and sales leaders spend weeks locked away with spreadsheets, CRM systems, and Financials platforms to forecast top-line and margin performance, and to make business development decisions that drive increased sales efficiencies. In many cases, these decisions are drawn from corporate-level forecasts that fail to take into account the impact of changes on specific staff. What is unique in sales performance management is that the impact to the individual sales rep and producer, especially top producers, can disproportionately affect total results, offsetting the validity of any macro-level forecast. It is this impact that drives the need for sales performance modeling. Sales performance models help financial and sales analysts understand the impact of different inputs on sales outputs at both the macro and micro levels. These types of what-if models simulate environments to enable analysts to quantify how changes in sales capacity, territory boundaries, goals, and compensation regimes impact revenues and costs not only in aggregate for the organization, but also for each individual sales rep. This includes reducing territory potential, displacing earnings negatively, and impacting overall alignment with pay and performance. It’s critical to isolate and understand the impact of these changes to each individual to ensure the expected behavioral response is in line with corporate strategy. An example will help illustrate. A major health insurance company that paid its producers commissions based on percentage of policy premiums wanted to cap their total compensation costs in the upcoming year, aiming to isolate sales performance from increasing inflation in healthcare costs. The company modeled moving from premium-based incentives (Model 1, real-world) to a fixed fee per-policy rate (Model 2, proposed scenario) that was cost neutral with the current commission expenditure.


Figure 1: Intersection represents the cost neutral per-policy rate.

The flat, per-policy commission structure achieves the corporate-level cost target; however, cost neutral doesn’t mean there is no impact.

Side effects of apparent cost neutral proposals

  1. Flattening the pay for performance curve. The proposed model (Model 2) actually reduces the degree of differentiation of compensation pay relative to performance—see figure 2.That is, because all producers will now be paid on the number of policies sold (set by the average rate), the premium for higher value contracts is removed, and the average rate per contract is applied at all levels of performance. flat-payout-rate Figure 2: Payout curve in a fixed fee payout structure based on number of contracts sold. This change signals the first side effect of the proposed change: because the degree of differentiation of pay relative to performance is reduced, this incentive structure fails to motivate higher levels of performance, which may cause a reduction in the number of policies sold at all levels. To eliminate this undesirable side effect, the company evaluated various scenarios and settled on a tiered commission structure, wherein the overall differentiation of pay for performance increased at the maximum degree of differentiation while remaining cost neutral — see figure 3. payoutcurve Figure 3: Payout curve in a tiered payout structure. Total commission costs are capped at the previous level (equal areas), but the new structure motivates performance at higher levels with the promise of accelerated payout rates.
  2. Shift in sales behavior. The second problem highlighted by this model is that of a projected change in sales behavior: because higher pay is now rewarded in proportion to higher numbers of contracts at any premium, there will be a shift in behavior to sign contracts by volume as opposed to value. The resulting impact on overall margins must be evaluated before rolling out any change. For example, where is the breakeven number of contracts (the point of scale) that must be sold, what is worst case scenario alongside expected?
  3. Impact to existing top producers. Finally, the model highlights the negative impact to the top producers, today. The model projects a shift in the profile of the top producers to those who sell more policies, negatively displacing the earnings of current top performers in favor of high unit producers. The potential attrition of existing top performers arising from this change must be factored into the revenue and margin forecast, including hiring or appointing new producers, time to productivity, and capacity shortages. Figure - 4 summarizes the potential impact on the producer community and the actions that the company can take to mitigate some of these impacts.


Figure 4: Impact of compensation structure changes on producers

This real-world case study, simplified for brevity, is an illustration of how a macro-level forecast may lead to unforeseen consequences due to behavioral shifts in the sales force. By leveraging a sales performance model to explore these impacts at the micro level, you can identify risk factors that may threaten your Wall Street targets, and develop countermeasures to avert these potential side effects on the health of your business.

By CallidusCloud | August 30th, 2011 | Sales Performance Management (SPM)

About the Author: CallidusCloud


CallidusCloud is the global leader in cloud-based sales, marketing and learning solutions. CallidusCloud enables organizations to accelerate and maximize their lead to money process with a complete suite of solutions that identify the right leads, ensure proper territory and quota distribution, enable sales forces, automate configure price quote, and streamline sales compensation — driving bigger deals, faster. Over 4,000 organizations, across all industries, rely on CallidusCloud to optimize the lead to money process to close more deals for more money in record time.