Lou Gerstner recently wrote an op-ed for the Wall Street Journal, The Culture Ate Our Corporate Reputation, in which he discussed corporate leaders blaming their culture for poor performance. In the article, Gerstner wrote that leaders were missing the critical component of culture that people do what you inspect, not what you expect. The corporate processes, not just words, need to reflect the corporate priorities; and compensation is a big part of those processes. In other words, you get what you pay for.
In many companies, pricing is a microcosm of processes not matching the words. Over the years, I have talked with many companies who state that they want to improve profitability by being more strategic in their pricing. Their strategic plans and business plan refer to competing with differentiated products and services, and pricing to customer value. Those principles and goals are communicated to all employees, and sometimes the companies invest in new analytics or build new tools to help. But they experience limited to no success in improving profitability. One of the reasons for this lack of success is the companies never adjust their compensation schemes to reflect these priorities.
Sales people are critical pieces of the relationships between suppliers and their customers. We have found the stronger those relationships are, the more hesitant companies are to adjust their compensation plans. This fear is most acute when the compensation plan is based solely on sales volume. The fear is – if salesperson X does not like the new compensation plan, or makes less money because they don’t capture any higher prices, X will leave for a competitor. And if X leaves, many of X’s customers will switch to the competitor. So the compensation plan remains the same. In these situations, the result is the sales team hears the words of the company strategy, but they are not paid to execute it.
From a sales person’s perspective, trying to capture higher prices often means increasing their risk of not getting sales. Basic economics says higher prices reduce demand. If there is no upside to the sales person from raising prices, why take the risk?
Year-end sales awards are similar to the compensation plans. Sales people are like all of us. We like to be recognized for a job well done, and we like to receive awards. So if the year-end sales awards are all based on sales volume and hitting sales targets, but do not recognize pricing, what do you think the sales team will focus on? Sales volume of course.
If you, or any company, are serious about capturing the value of your products and services, and you are serious about improving profitability through more strategic pricing, your compensation plans need to reflect it. That does not necessarily mean you need to drastically change everything in the comp plan, but it does mean you need to make incremental changes that create a risk/reward opportunity for your team to sell at higher prices. Your compensation plans need to reflect your priorities.
One word of caution – your plans should not encourage destructive behavior. Earlier this year Turing Pharma raised the price of Daraprim more than 5000%. Doctors, insurers, and patients were furious. Then the CEO appeared before Congress to try to defend the company. In the end, they reversed course. More recently, Mylan had a similar reaction to a 5X increase in the price of an EpiPen. They have also back pedaled, creating a new lower priced offer and agreeing to pay $465 million to the government.
Your compensation system needs to balance your desire for your prices to capture the value you deliver to customers with the need to remain a value to your customers. It should balance the need for rewards that encourage taking appropriate risks with constraints that prevent excessive risks that could damage your brand. When you do that, you get what you pay for.
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[…] Our View: Leaders who adapt their pricing strategy for customers must also adjust their sales team’s compensation plans to reflect the right incentives to sell at higher prices. Aligning compensation plans with corporate priorities and customer value helps manage the change resistance that inevitably joins a price increase. Further Reading […]
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