(Conclusion)
So the demand to be accountable for profit was not difficult. In fact, it came with a welcome second order benefit. It was responsible for making marketing and sales efficient. They learned to practice waste cutting (not cost cutting).
This was true with such big budget items like distribution?s inventory, delivery expenses, sales? entertainment and representation outlays, advertising, sales promo campaign materials and labor costs.
The Gerstner-IBM model
In 1993, after Lou Gerstner took over the leadership of IBM, he became famous for introducing a radical compensation scheme for the IBM sales force. He came out with a compensation formula that said sales force pay should be equal to 60 percent based on profitability, 0 percent based on sales, and 40 percent on customer satisfaction.
The computation for profitability followed a straight forward accounting equation. It was with the 40 percent on customer satisfaction that earned the scheme its radical reputation.
But first, why give 0 percent weight for sales? Does that mean sales is not a consideration at all?
Gerstner argued that to consider profitability would be to consider sales. After all, profit comes out of sales after deducting costs.
What about the 40 percent for customer satisfaction? Of course, it?s not difficult to admit that this is ?doing something about your mission statement?s commitment to consumer focus.? But will your board agree that the 40 percent constitute ?a major basis for reconfiguring your sales force compensation??
It?s logically easy to build a case for this. The board only asked for ?a? and not ?the? major role. The 40-percent weight certainly makes for a major basis.
Sales compensation framework
But let?s get back to where Gerstner started in this compensation equation. He was said to have used a popular conflict resolution method.
He first set priorities:
?For a sales force compensation framework that will satisfy the conflicting demands of the board, marketing and finance, here?s what I propose. Profitability is first and I give it a 60 percent weight. And since profit comes from good costs management, then sales and expenses together are second. Fortunately, this priority is already included in the profit weight. Customer satisfaction (or focus) is third and it gets a 40-percent weight. Actually, because profitability is a composite that has with it sales and costs, then its 60-percent weight is shared by 3 forces and not just one. This effectively makes the 40 percent of customer satisfaction as the major basis.?
That?s not Jesuit sophistry. It?s a simple, ?generally accepted? accounting equation. It makes logical and common sense not only to accountants but also to the rest of the functional business disciplines including top management and the board.
But how did Gerstner obtain the metric for customer satisfaction?
He commissioned a survey of IBM customers to find out how happy or unhappy they were with the local sales group that called on them, and whether the sales reps assisted them in attaining their purchase goals. The 40 percent was calibrated in proportion to the obtained customer satisfaction rating.
After setting and proposing priorities, Gerstner proceeded to the next step. That?s to earn the agreement from the initially disagreeing quarters of the board, marketing and finance, not to mention sales. This took quite some time, but Gerstner exercised good win-win negotiation skills and, in the end, earned a consensus to no other than his 60-percent + 40-percent formula.
So there?s our diagnosis and prescription. Essentially, we recommend that you adopt the two-stage Lou Gerstner approach. Let us know what happens.
(Thanks for your questions. Keep sending them to drnedmarketingrx@gmail.com or marketingrx@pldtdsl.net.)
