A company’s variable compensation process consists of several factors:
Source of information used to measure indicators
Rules to calculating each indicator
Variable Compensation model (commission, levels of achievement/merit based, etc.)
Tools that monitor and report each indicator’s results
Any compensation model is composed of the selected indicator’s payment structure based on its result.
According to the indicator’s result, there is an intersection with ranges and defined scales of achievement; the longer the range, the greater the employee's variable compensation. Variable Compensation can be, for example, a percentage of salary or a fixed value.
Outcome Indicator: 97% (Actual/Target) VC: 15% of salary – Employee A achieves 97% of their target, using the defined scale below, Employee A receives a bonus equivalent to 15% of their salary.
Ranges of Achievement:
90% - 95%
95% - 100%
100% - 105%
VC (% salary)
The range model is widely used by consumer goods companies for sales team compensation. However, some important details must be taken into consideration to ensure better use of the model, which then encourages the team to reach better individual results and thereby increase the company's results.
Size and number of ranges: Range achievement should be defined according to the results of the team. The greater the dispersion of results, the greater the size/number of ranges need to be in place in order to encourage employees to improve their performance. See the two examples below.
Amount paid per range: The range must pay a higher variable compensation to reward the employee's effort and encourage them to "jump" from their current position to the next range set. Often this is overlooked resulting in the employee not trying to achieve better results. Below is an example of what NOT to do… The additional amount paid per range is not attractive enough to incent the employee to try harder.
If an employee with a fixed salary of $ 2,500 "jumps" ranges – the result: a gain of 0.7% (between range 1 and 2) which, for this person is only an additional $17.50. Not so motivating.
The “human factor” prevents constructing a model that is empirical variable compensation. Conducting analysis on the results of the team and the amount paid per track, as shown, are very important in defining a model that, in fact, encourages staff to achieve better results in return for a financial reward, that rewards the efforts of the best people and, finally, optimizes business results.
As the market is more competitive than ever, marketing strategies and sales alone are not enough to achieve the company’s desired results. Thus, trade and “market execution” have become a very powerful weapon for organizations.
“Market execution” can be defined as all of the company’s actions the point of sales:
Presence of product, considering the right place and exhibition
Product price positioning
Placement of merchandising material
Extra promotional spaces and product or brand exhibition can also be considered as execution actions
Market execution is usually the responsibility of the account manager and/or POS promoter.
You must align demands and expectations of the entire company and also ensure they are aligned with the current company’s market position. Therefore, it will be possible to migrate to a Marketplace execution model or develop what is already in place.
Considering the different activities related to market execution, it is possible to classify companies according to their stage of maturity:
Basic: product presence in store and Consumer Price positioning
Intermediate: Share of shelf in the category and Communication (promotion, price, presence)
Advanced: Extra promotional space in the POS and Temporary Promotion
Within some organizations, it is easy to find the desire to reach the advanced execution level without first having established a consistent performance in the basic or intermediate level. There is no question that a temporary promotion can have a major impact on share gains and increase sales volume. But, what is the purpose of a temporary promotion if products are not available in the store or consumers do not have a reference price of the product?
Often, we find several departments of the company directing their efforts towards different goals. For example, sales team may be concerned with increasing the inventory of a client and negotiates high volumes at low prices. On the other hand, Marketing is now using all of its resources to correctly position Consumer Price. In the end, none of the teams accomplish what they set out to do – all they really managed to do was waste time, energy and resources.
We believe internal alignment across the organization is fundamental to direct all of the available efforts, tools and resources towards the same goal. For example, if the goal right now is in-store presence and correct positioning of the Consumer Price, this indicator should be reflected in all possible places – sales team variable compensation, commercial policies, set indicators to monitor promoters, the bonus of executives, in addition to directing the investment from all areas. The result: maximization of market investments. After the ‘basic’ step has been overcome, the entire organization should target their efforts in the next step – as a united front.
By ensuring the correct understanding of the organization’s present situation, aligning all involved and properly directing efforts and resources, your company can focus on the difficult activity to ensure implementation in the market and achieve a great result of healthy sales.
Contact Intelectas to learn more about aligning your company's efforts to maximize market execution.
Note: This post was written from the perspective of a consumer goods manufacturer but the principles will be the same across all industries.
During the search for a beneficial agreement on the exchange of goods and money, there is also exchange of information when negotiating with clients. This exchange might be through a formal process, or incidental, as it generally is, but it always tells the client something about the company, it shows them your company’s "personality." The delivery of this information should also be taken into consideration.
We call this “personality” a commercial policy, ie, the entire agreed upon investment, discounts or allowances, or gratis policies negotiated with the client
The salesperson’s subjectivity will alter the client’s interpretation of your company as well; and having a great amount of subjectivity in the negotiating process on a client-by-client basis can result in market distortion (for example, selling the same product at very different prices to clients with a similar profile).
To avoid these distortions, you need to have a well-structured commercial policy that is clearly communicated across the board, to clients and the sales team. To construct an efficient policy, one must keep in mind the following “requirements:”
Transparent, fair and ethical for all parties.
Clear, understandable, communicable – No questions, no room for interpretation.
Based on counterweights that reflect your company’s strategy - The client will be rewarded only if it complies with certain rules that are linked to the business strategy. By doing this, the client understands why it is receiving the investment and your company knows why it is investing.
Counterweight examples: Achieve the planned volume, buy the right mix for its profile, or sell the products at the defined price.
Linked to the company strategy – the counterweights should be defined to help the company to achieve its strategy
Example: Your company has an average of 2 categories per store and it want`s to increase to 3 so your company can give a discount if the clients who buy at least 3 categories.
Measurable – Use available and quantitative information and not dependent upon the subjectivity of evaluators.
Reliable - Information sources must be deemed ‘reliable’ for the commercial policy to be taken seriously.
Align the interests of your value chain – It is possible for the counterweight of the commercial policy to vary with the role of each customer in the value chain.
For example, a distributor discount criteria may be the number of clients to which it sells the company`s products or its sell out price; for a supermarket, maybe the product’s presence or shelf position and the price to consumer.
Moreover, it is also necessary that the commercial policy ensures there will be no cross channel, for example, prevention of a retailer selling the products to customers at a lower price than the distributor sells to its clients.
A well-structured commercial policy makes it clear to the customers and the sales team important items for the company, which begins to align the different links of the value chain and their efforts on achieving the same goals. In addition, the company`s negotiations are less susceptible to the subjectivity of each sales team member, ensuring uniformity in the "personality" of the company.
When thinking about Strategic Pricing, monitoring and tracking the price charged to consumers at retail stores is essential.
These questions will help you track the price at which consumers are buying your product and run some additional analysis:
Does the price of your products on the shelf indicate your company’s consumer price strategy is being followed? Remember that the definition of the ideal price point takes into account various factors such as consumer research, elasticity, market analysis and other studies. If the price point is not met by retailers, the brand strategy for the product is likely to fail.
Is the ratio of price compared to the competition healthy? Monitoring market prices can identify a price outlier relative to competition, which can cause loss of market share and profitability.
How is profitability distributed across the value chain? Analysis of the industry’s sales margin at each link in the value chain (from start to end) allows us to understand if the margin (or mark-up) is rewarding every step of this process fairly. Thus, it is possible to identify lucrative opportunities across the value chain and balance the division of gains.
However, it is noteworthy that the data capturing process in the field is not a simple task. Rather, it is a laborious and costly activity:
Data capture agents - research can be performed by internal agents (e.g., sales or merchandising promoters) or by companies that specialize in data collection at the point of sale. Some factors should be considered when making this decision:
Cost to hire a third party or add an additional activity to employee's routines (which takes time; training can remove focus from other activities and requires a tool to help capture prices).
Reliability of data collected - since the data can be used, for example, in the pricing strategy, negotiations with clients, investment payments and variable compensation of the sales force, it needs to be accurate and dependable.
Defining products with data collection - depending on the size of a company's product portfolio, it is impossible to monitor all of them. To collect data in a manageable and successful way, you must set a process for choosing products. For the selected group of products, you can consider a number of indicators: Profitability, the importance in volume or revenue, portfolio strategy, etc. This process should include prioritization criteria to select its own products and the competition’s products, and provide a periodic review of the product list.
Sample of stores and frequency of price surveys - the purpose of collecting prices directly impacts the criteria for defining the survey sample, and its regular price. For example, if used for variable compensation you should follow the assessment period while also considering a number of stores which are representative for each employee of the sales force. For a Pricing Strategy, it is important to define a panel of stores - considering the channels and regions - to understand the dynamics of price fluctuations and placements; and, if it is possible to act promptly, the collection timeline should be more frequent.
Therefore, the price survey can provide information of extreme importance not only for strategic pricing, but also for other company processes. However, as we have seen, it is essential to have clear goals and a purpose for the survey sample to set price, frequency and products to be surveyed, as well as the agent and the process of capturing price.
Finally, it’s not enough to just have the data available. You need tools that consolidate all data and submit reports to help the decision-making process and, better yet, that points opportunities or directs tactical decisions according to the direction and strategy.
Today, there is a lot of buzz around Performance Management, but what does it really mean? The concept goes beyond simply evaluating an officer or employee and aims to improve the performance of each individual. To start, define clear and unbiased objectives then provide support for employees to achieve their targets. This will result in the company, as a whole, realizing its goals and having superior results.
Performance Management involves the whole human resource development process at the individual level - from planning, through monitoring and coaching, and onto evaluation. This process should be cyclical and continuous:
The first step in the planning stage consists of defining the indicators or KPIs by which the employee will be assessed. As you define the KPIs, always keep in mind that they must be measurable and easy to monitor. In addition, the indicators chosen should be relevant to and aligned with company strategy.
After defining the KPIs, the company must establish a mechanical evaluation of the employee, i.e. what rules will be followed to determine their performance results? For Example:
Do all indicators have the same relevance? Should some of them have a greater weight at the time of evaluation?
What scales are used to measure the results? Will the outcome be comparative (in relation to the rest of the group)?
How frequently will the calculation occur?
By defining these rules, you can also coach employees to improve or focus on challenging areas that will yield great results for them and the company.
In defining the evaluation mechanics, it is necessary to also set the benefits/rewards that will be given to those who meet or exceed their goals. Also create and define the possible consequences that an employee will suffer in case of negative outcomes or performing under the target for a given time period.
Speaking of goals, this is a great challenge for a company: setting the target for each KPI for each employee. How do you ensure that the target, and therefore the evaluation process, is fair? There is no simple answer, much less a magic formula, to ensure the proposed assessment process is fair to all who are being evaluated.
To create fairness in the goal setting process, consider the following aspects:
The history of the indicator. If there is no history, it is best to have a more flexible goal. When a history and pattern become apparent, you can slowly decrease the flexibility.
The potential of the indicator, considering the characteristics of the market. For example, should it be easier to increase the number of customers in a region where the distribution is 70% of that region or where the distribution is 90%? Use a weight for this indicator hat reflects this discrepancy.
And finally, the company cannot fail to consider its own goals, ie, the result it wants to achieve. It is extremely important that the goals defined by the company for its employees are fully aligned with the objectives - the goals that shareholders or executives defined!
Last but not least, the company must ensure that employees have clarity and understand how they will be evaluated: which indicators are considered, the calculation methodology, targets for each indicator and what they can expect for rewards and consequences. For the performance management process to work, that is, for the individuals and also the company to achieve extra-ordinary results, you need clear communication. All employees must understand how the program functions and have a clear definition of their goals and priorities.
Contact Intelectas to learn more about performance management and how your company results can grow significantly with a few tweaks.
There are several factors that feed a meritocratic model of management; one of the most vital factors to succeeding is identifying and selecting the best* indicators for your company’s GOALS (as discussed here). Unfortunately, this is just the first step in pursuing superior company results.
After discovering the “best” performance indicators for your company and throwing out the frivolous data, the trick becomes correctly distributing them between the various jobs and organizational tiers. Indicator X, identified as critical to the success of the company, may not need to be collected for all employees – are you surprised? Well, don’t be. Building a good equation from selected variables and spreading responsibility among different functions is essential to achieving a more synergistic result.
Imagine a company facing problems maintaining high inventory for a particular product line... An initial idea pegs inventory turnover as an indicator which can be applied to all teams that are somehow involved with this process - logistics, sales, trade marketing, etc. This approach is rarely the most efficient way to address problems. High inventories may be caused by a number of factors at different times of the production and sale. To account for the variances, assign responsibility for different goals to diverse areas of the company. This will produce more convincing result. So, to map out an entire sales cycle:
Planning: Individuals responsible for setting the sales objectives and predicting market forecasts/trends can be measured by an 'assertiveness of sales planning' such as MAPE (mean absolute percentage error).
Production: Producing as planned – amount and on time.
Selling: For the sales team, assign an indicator for the amount of clients that purchase out of your total client base for the given product line.
Close: The Promotion team should be graded on the presence of products at the Point of Sale (POS).
This expands the coverage of possible causes for the observed high inventory and helps fix the issue quicker.
It’s important to limit the total number of indicators by which the employee is measured. Assigning too many targets can cause confusion, poor time management and lack of focus on what really needs to be accomplished to achieve results. Ultimately, performance is compromised, motivation suffers and morale falls.
Once the indicators are aligned and well distributed throughout the team, it's time to put them to work: it is necessary for the team to hit the expected results. Again, the company has a vital role for this process to run smoothly. To see results, it is essential to promote robust and transparent indicator monitoring.
To be successful, your team members ONLY need the tools and information necessary to help achieve their goals – that. is. it. They don’t need the kitchen sink too. If you over inform with analysis, forecasts, charts and reports, you force them to identify and extract the relevant data and potentially create analysis paralysis. This effort uses TOO much time and energy, which they could be using to effectively pursue their goals. Therefore, all information that reaches the hands of the team should be lean and focused.
To close this cycle, it is a great practice to verify results. In reality, the calculation of results generates the richest input of the whole process, so we must dive deep. By doing this, it is possible to identify the existing strengths and opportunities at an individual level and feed a concrete plan for the next period. Basically, derive and communicate an objective plan from the verified results that mitigates the main gaps in the next period. You will increase team motivation, responsiveness to expectations of your company and pave the way to achieve the expected results in the short and long term.
Going through each of these steps is like planting the pillars for a strong process that feeds a robust meritocratic management model. Without any of them, the strength of this model is put at risk along with the results and profits.
To find our more about how Intelectas can help you plan, create and implement a meritocratic culture, contact us!
*(don’t be fooled – “best” is a loaded word. Make sure you ask the right questions and perform the right analysis when picking these indicators.)
Pricing managers constantly contemplate the impact of a pricing decision and how it will affect traffic or purchase frequency.
A typical preconception links price and demand – the lower the price, the higher its demand (a.k.a the Price Elasticity of Demand). Different products have different rates of elasticity, so the typical preconception is negated and pricing managers have to really work to stay ahead of the curve.
Some products behave and follow the linear logic of price elasticity, where low prices induce higher demanded quantities. However, some products rebel and go in the opposite direction, where sales volume increases by means of a price increase. The preference for this kind of item (known as a Veblen good) becomes higher as the prices increase because the prestige for the item lies in its high price. Luxury cars and clothes are strong examples.
Knowing these phenomena occur, pricing managers should be aware of the effects that a price change can cause on sales volume. This means understanding the role each product plays in the company’s portfolio AND understanding the elasticity direction. If these are correctly identified, pricing can be set in a way that maximizes company opportunity. Furthermore, the managers must know that the additional or missing sales volumes, caused by price changes, ought to bring higher profits than the previous situation, otherwise it’s not worth doing! If you can figure out which products can be used to maximize price and which products should be traffic drivers, you will succeed!
To prove our point, a large Brazilian retailer implemented a pricing strategy based on elasticity. Essentially, this strategy assigned discounts to elastic goods and held inelastic goods at full price without giving any discount. Elastic items should respond well to promotions, increasing sales volume, and, consequently, having bigger profits. On the flip side, not giving a discount for inelastic products (or even a price increase), since these goods always have a regular demand, increases profits and avoids money losses. In this case, the price increases represent profits increase compared to the previous situation.
Being able to identify the elastic products is a start and will certainly play into a profit maximizing strategy but going one step further and identifying the right products to promote within that group will boost traffic and likely increase basket size. Clients will perceive a good buying opportunity and return for more positive experiences.
Managers also need to consider complementary and substitutionary relationships when setting discounts for elastic goods. If a specific product has a price decrease, its demand can become higher but, if the decision isn’t fully analyzed, the demand of another product can decrease and if it is priced higher, this decision can harm profitability. As an opposite case, if a product has a price increase, two complementary products can have its demand affected in the same way.
So, the impacts of pricing decisions depend on factors like price elasticity of demand, type of good considered and the relationships between products. It is important to consider all of these variables when making pricing decisions to ensure they create a positive impact and forge the way to bigger profits.
Let's face it, every company wants to be the best at something. Be it the most profitable, the lowest price, best market penetration, there is always a 'corporate' goal. In order to quantify how well/poorly your company is executing against these goals and find areas for improvement, you must translate performance into numbers. Simply put, you need KPIs.
Making and implementing KPIs isn’t as easy as it sounds…if it was, everyone would do it. And they don’t. To be successful, KPIs must focus on measuring what is really important to the company. If you want to boost volume, why compensate your sales team on $ sales? Focus on quantity! It is very difficult to follow several indicators simultaneously and make sense of what they are saying, so it is better to have a few indicators that are important and actually followed, than having a plethora that say nothing and no one trusts.
You also need to measure team results. From the second people know they are being evaluated by their work, it becomes clearer to them where they should focus and how they should improve, especially if the measures are linked to their compensation. For example, a delivery company's slogan is “fast and safe delivery.” Some drivers will hear “fast,” some will hear “safe” and others will be confused at which is more important – fast or safe – so will always balance the two but never excel at either. However, if you provide instruction that “fast and safe” means ‘at the speed limit, but not over,’ your employees know exactly what is expected and can deliver on each task.
Performance indicators and business objectives must always be aligned. This is arguably, the most important thing when defining KPIs for the teams - this drives your results. This helps focus every effort toward the same goals - the company goals. It's pointless to have the marketing team focus all of its efforts on product/service A, if the sales team performance indicators focus only on product/service B.
Choosing the right KPI and calculation method are essential to direct action.
To illustrate, it's important for the sales team to achieve the company's sales goals, but sales can be measured in different ways: Volume, Gross Sales and Net Sales. Unfortunately, there is not a perfect option for choosing the indicator:
Volume: Usually, easy to measure, volume can be a good indicator to track sales and market share but it doesn’t necessarily reflect revenue or profitability. Perhaps the sales team gives too much discount in order to increase volume, or they choose to sell the easiest / cheapest product in the portfolio, even if it is unprofitable, to increase volume.
Gross Sales: Easy to measure, even when a company’s portfolio has a variety of unsimilar products that can not be measured in the same volume measurement. It can be a good indicator to track sales and market share but, like volume, it can not be translated into profitability. Maybe the sales team gives too much of a discount and destroys the profitability of the company but yet, still reaches his/her goal.
Net Sales: A sales indicator that takes discounts into consideration and communicates the actual amount of money from sales. Like the two before, it doesn’t reflect profitability. Different combinations of volume, price and discount can result in the same Net sales but in different levels of profitability.
As you can see, the best method for choosing a KPI is assessing your primary need and choose the indicator that best fits the profile and availability of that information.
Imagine a consumer goods company has chosen Net Sales as a KPI and this company has six different categories, which have different margins:
To achieve revenue goals and market strategy, it is important that the company sells the full mix of products within the portfolio. If the KPI measures only the total amount of Net Sales, it might achieve the sales goal with category 6 only - which would be bad for both the company's profitability and visibility in the market. The consumer wouldn’t be fully informed on the company`s portfolio
That being said, the indicator also gives guidance to the team and encourages the company’s desired performance. For example, assigning different weights for different categories and giving each category a separate target.
Another possibility is to create a new extraordinary KPI for multiple categories. Imagine that category two is a market launch, category 5 has a new strong competitor in the market, and category 3 is more difficult to sell, but is more profitable. The company could create a new indicator with a bonus for hitting the target in each category, plus an extra bonus for those who hit the target in all three categories.
It is important to notice that a defined, black and white, indicator does not exist but there is always a way to find the most suitable indicator for your company’s goals and market circumstances. And don`t forget the KPI must be simple to understand! If it`s too complicated, even if it`s well aligned with your strategies, it won`t convey the message if no one is able to understand it. Furthermore, the goals must eleveate team performance, but shouldn`t be unattainable, otherwise they will be discouraged.
If you would like more information about finding the right KPI for your company, please contact us!
Price is the greatest lever for profitability in a company. However, in most companies, the pricing decision process does not capture the existing opportunities that maximize profit. According to Kottler, Keller’s book "Marketing Management" (2006), in a survey polling several companies, managers spend less than 10% of their time on activities involving pricing decisions. This happens in large part, because pricing decisions are complex and difficult - they must take into account several factors - the company, customers, competitors and industry performance.
Main culprits for inefficient pricing plans:
Reactive Decisions - Often, prices are changed as a reaction to market conditions. Consequently, the decisions are made quickly and without the necessary information and analysis to optimize impact.
"Cost + Margin” - The most common pricing strategy
Product launch - Problems arise from this strategy because it is extremely difficult to determine unit cost before setting the price. Why? Price determines sales volume, which typically changes fixed manufacturing costs.
Existing product - This type of pricing, while it does secure financial goals, does not take into consideration how much consumers are willing to pay, and thus the company may not be capturing all the possible profits. For example…
In Brazil, a large national food company is the dominant player in a region but they set prices below all other competition – actually, their prices are significantly below the second lowest market price. Isn’t there an opportunity for a price increase?
In other cases, the product may be too costly for their consumers and the sales volume will be compromise. A multinational healthcare company launched a new, personal medical device in Brazil. It has fewer features but in a smaller, more convenient size. This device was previously launched in the USA at a higher price point than its larger, more robust version with great success so the company tried to market it in Brazil the same way - at a higher price and margin. Unfortunately, sales were not good. The result - the company had to lower its price in order to match the supply of its products to the value brought to clients.
The decision is not cross-functional - Most companies rely on one division to set price (marketing, sales, product development, finance, etc.) instead of creating a cross-functional team to make such decisions. Each division has its own motives for price - Finance wants to ensure a minimum margin, Marketing wants to increase market share and Sales wants to have a price level that facilitates negotiations with customers. If these conflicting interests are considered in isolation, they can lead to decisions that prevent maximizing profitability for a product.
The pricing model should be:
Strategic: The pricing decisions should be proactive, i.e. the price of a product should reflect the market position desired by the company within the segment that it wants to act.
Directed at profit, not volume: At the end of the year, profit ensures the compensation of shareholders, not market share. Each price level corresponds to a turnover; the right price is one that, combined with the volume of sales, maximizes the absolute contribution margin.
Based on value: The price of a product should reflect the value brought to the client. The value perceived by consumers depends on the benefits of the product compared to competitors. This perception is not the same for each person. Thus, the company must know which segment of the population it wants to target then identify this segment’s willingness to pay.
Multifunctional: To make a pricing decision, you need internal and external information. Internal - such as a cost projection, production capacity, logistical constraints, financial goals; external - competition price, surveys about perceived value to the consumer and macroeconomic information. This information is often scattered among different sectors of the company making it nearly impossible for 1 division to make an informed decision. Therefore, it is necessary to create a multifunctional governance that ensures the provision of all information to prevent decisions that reflect the interest of one division. Creating such a team facilitates sharing the burden of pricing decisions and creates a common goal for all teams - maximum profitability for the company.
Communicated effectively: The price of a product should reflect the benefits to the customer. However if these benefits are not clearly communicated to customers, negotiations will be more difficult and the volume of sales can be lower than what is actually possible. Therefore, the sales force and marketing team must be aligned and prepared to justify the price being charged for the product from the standpoint of the consumer.
At Intelectas, we are passionate about what we do, how we do it and who we are as a company - we want the world to see that too. So, to better communicate this message, we have decided to create a new look that better aligns with our growth, values, philosophy and people. Our hope is that this decision will align internal and external perceptions of Intelectas and allow us to flourish.
If you have visited our website recently, you have already begun to notice the changes - our logo colors, a new website and our messaging. We are very excited about these changes and hope you are too. Our communication style and culture are both informal and fun - now our image is too. We hope this channels focus onto the really important things - our hard work, our great people, and our proven results - and away from flowery language and formalities...like business suits.
This new look represents our movement from strictly a consultancy to a consultancy and software company and also our expansion to the U.S. We made this strategic movement to offer our clients the most customized, implementable solutions in order to better equip them to win in the marketplace. Intelectas continues to serve to some of the best companies in the world and looks forward to expanding our experience and products in the U.S.
The world is changing how it does business and we are excited to be a part of it. Our team has worked on projects across the globe and is always pushing the envelope when it comes to our software, methodologies and new solutions. We are anxious to see what opportunities present themselves in the future and how we can help steer the direction of technology’s role in business.