3 Sales Comp Plans to Avoid a Mass Customer Exodus (and a $185M Fine…)
Last year Wells Fargo, one of the oldest and most respected financial institutions on the world, was fined $185 million for fraudulent activity, 5300 employees have been fired, and the CEO was forced to resign.
What caused this? Bad sales comp plans.
Like many companies, Wells Fargo used sales contests, commissions, and other incentives to incentivize sales. Like many companies, Wells Fargo wanted to get their existing customers to spend more money with them. To achieve this, Wells Fargo designed a sales comp plan that rewarded associates for pushing additional products to consumers, and punished them for missing quotas.
Employees allegedly opened credit and other accounts on behalf of customers that didn’t want them and even invented wholly imaginary customers (with clever names such as “noname@wellsfargo.com”…).
Carrot+stick incentives work very well at compelling specific behaviors. If you want someone to press a button, the best way to get them to press it early and press it often is to give them a dollar every time they do, and tell them if they don’t press it enough they’re fired.
But carrot+stick incentives will only influence the behaviors that are being measured. Humans have a vast yet still limited cognitive capacity. When we laser-focus our employee’s attention onto a single action, it’s inevitable that people will have diminished ability to focus on other aspects of their job.
Sales comp plans are one of the most powerful tools that executives have to shape rep behavior, and it is one that needs to be handled with caution.
Where Wells Fargo went wrong
“There are only three ways a company can grow,” wrote John Stumpf, former Chairman and CEO of Wells Fargo, in remarks to Forbes,
“First, earn more business from your current customers. Second, attract customers from your competitors. Or third, buy another company. If you cant do the first, what makes you think you can earn more business from your competitors customers or from customers you buy through acquisition?”
Stumpf was not wrong. Growing revenue from within your base of customers is a core point of leverage for any business. The “earn more business from your current customers” piece can come from influencing two metrics: Average Order Value (AOV) and Customer Retention.
Such incentives worked for helping Wells Fargo, the cross-selling king of the banking world, increase the number of products per customer. According to Forbes, in 2012, Wells Fargo averaged 5.9 products per customer in its retail banking business — better than any rival and more than double their previous decade.
I’m going to say something here that lots of entrepreneurs know but few want to admit out-loud: Startups can outgrow churn for a long time. When you’re brand new, it’s okay if your early adopters don’t stick around forever. Your sales and marketing teams can generally add revenue faster than your customers can cancel.
But that luxury ends, and companies that miss that pivot don’t grow. Many don’t survive.
To grow revenue outside of M&A, a company at the scale of Wells Fargo can either increase the number of new customers they acquire (with their sales and marketing teams) or increase their average customer value by selling additional products (such as new credit accounts or loans).
Eventually, no matter how effective their sales and marketing, all companies with poor customer retention reach a point where they can no longer grow new customer acquisition faster than they churn them. As customers “churn”, companies reach a point where they can’t outgrow poor revenue retention:
If your revenue retention is good, your “old” customer base stacks on your “new” customers and you have a healthy, growing business:
The sales comp plan that got Wells Fargo in trouble was based on its desire to boost “cross-selling” to grow average customer value.
Some have hypothesized that gathering more of a customer’s products under the Wells Fargo umbrella would make it more difficult for customers to leave. There’s an argument to be made that increasing the difficulty of customers leaving will increase customer retention, but — unless you have some sort of natural monopoly— I’ve rarely found customer rage to be an effective retention strategy.
In the case of Wells Fargo, this company-centric obsession caused significant damage to their reputation and the trust of their customers.
Customer-centric compensation models
Ok, so let’s assume that you’re not interested in screwing over your customers to boost shareholder value and you genuinely want to design a good compensation plan. Remember this:
There has never been a commission plan that sales reps can’t game. The key is to design the game so that your sales reps win when your customers win.
Below are three potential models that customer centric companies can use to better align sales behaviors with long-term customer success.
Behavior based
Using regression analysis you’ll identify what drives the desired customer behavior, and incentivize that behavior.
For example, if you know that the number of times a user logs into the “Cardmember Benefits” tab correlates strongly to their purchasing of additional financial products, you may want to incentivize your accounts team to follow up with those who have not done so in a while.
Be very wary of this. While correlation can be a powerful tool, it can also misalign employee behaviors with customer needs just as effectively as commissions based on product sales. If the plan is obfuscated to the point where sales reps can’t figure out the component variables to game it, it loses its effectiveness in driving behaviors anyways. The variables have to be transparent in order for it to be an incentive.
Even if you only surface a few of the larger variables, when you implement a compensation plan like this you may be astonished how quickly your sales reps turn into math savants who reverse engineer the details.
Customer satisfaction based
Not all sales organizations have access to long term customer success data. Not all companies even track that sort of data. HubSpot’s 2016 State of Inbound shows that 28% of companies aren’t measuring the ROI of their marketing efforts at all, much less connecting their sales performance to their customer retention data.
Even if you are a self-aware organization, your product may not lend itself to a up-sell, cross-sell, or re-selling cycle fast enough for it to be useful in sales compensation. Large purchases such as a luxury vehicle or a house or one-time purchases such as musical instruments may not be able to use re-purchase data to determine the effectiveness of their customer centric acquisition models.
For leaders in those sales organizations, consider adding a spiff or bonus based on post-sale surveys. The behavior you’re incentivizing here is to make the purchase experience a very pleasant one and to help the customer solve their goals. Even the slightest doubt that the sales rep sold them something that didn’t align with their goals will be reflected in such subjective analysis.
Throw out compensation plans
Variable compensation and commission are so fundamental to the culture of sales that any suggestion of alternate compensation plans is generally met with great resistance from both management and sales reps.
“I’ll never work salary again. Why should I get paid the same if I work harder?” Those are the exact words I’ve said to my coworkers in sales…prior to the past ten years of happily working for salary 🤓
However, commission may be a worse motivational tool than we think, and the people with those attitudes may possess sales characteristics that cause long term harm to the company.
Particularly for companies where customer success and retention are absolutely critical, sales commission may cause severe long-term damage. Not only may sales reps close fewer deals, but customers may not stick around as long — creating a lack of growth leverage that competitors can exploit.
Sales compensation is a powerful motivator
Sales comp is one of the most powerful tools that executives have to shape rep behavior, and it should not be taken lightly. Mark Roberge, former Chief Revenue Officer at HubSpot writes:
It amazes me how many CEOs delegate the compensation plan design to the VP of Sales and how many VP of Sales simply implement the plan used in their last business, with complete ignorance of how the context of their new company is different.
Your sales comp plan is too important. Your customers’ success, churn rates, long-term viability as a company, even your ability to stay out of messy, career-ending legal battles all depends on getting this right.
