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November 12, 2008
Managing Change in Compensation Plans
When you read about different approaches to compensation programs, it might trigger in you the desire to change things at your company. And if you take your ideas a step further, you might find yourself in front of executive management, presenting a new way to really align your pay plan with the company’s goals.

Good for you. But what will happen when you take your new plan to those directly affected by it? How will employees react?

These are not rhetorical questions for Gary Lawrence, who is the Senior Manager of Sales Compensation for Waste Management. He has been down that road and found that change is neither easy to make nor to communicate.

When Lawrence started at Waste Management, he brought considerable experience to this $13.5 billion company. Because of his compensation consulting background, he knew that making changes to a compensation program is challenging. In a meeting with Waste Management’s Senior Vice President of Sales, CEO and COO, Lawrence learned that change was coming: the company’s goal was to align pay with profitability for the sales team, and it would be Lawrence’s role to make it succeed.

At the time, sales reps were paid based on revenue alone. But the company didn’t just want revenue; they wanted profitable revenue. “They had decided that they wanted to have a profitability measure in all of the sales compensation plans,” Lawrence says. Measuring profitability was not a problem. “We are fortunate at Waste Management to have an in-house developed pricing tool that tells us our EBIT (earnings before interest and taxes) on every deal we do with a customer,” Lawrence says. “Our goal was to grow profitable revenue. So my task, working with sales directors who were over these business channels, was to build a profit measure into the compensation plans.”

Under the new arrangement, sales reps would be paid more when their EBIT percentage – the profitability of the account – came in higher. Sounds like a dream from management’s perspective. But how would the sales force respond?

Five components of successful change

Lawrence said that experience has taught him a few keys to successfully implementing compensation change. The first step is to be absolutely clear on the program’s goals, as was done in Lawrence’s early meeting with upper management. Don’t neglect this step, he says. “You need to be sure you have a clear sales strategy, articulated by the people at the top. They will keep sending the message, and then when the sales people get the new plan, there it is in writing. That way they know management is serious; they’ve been seeing the message for 3-6 months before they see the new plan roll out.” Once that is done, the process can begin.

1.) Build the design team. Rather than trying to create the plan alone, or even in conjunction with other compensation department employees, create a design team that represents the people who will be impacted. Lawrence says, “We put managers on the team. Usually we include our market area sales managers, and some of the first-line sales managers in that (line of business). In some cases we even take a couple of our top sales reps and have them be on the design team. Not only will these people help us craft the plan, they also help us to anticipate questions that will come up.”

The importance of this step came into focus for Lawrence through negative experience. “We learned the hard way that you tend to get a lot of push-back, lots of questions, and sometimes you design something that doesn’t quite work because you don’t understand the reality of what’s going on down in the market areas,” he says. Not only will you have lost time and money, you’ll have lost some trust. “Trust builds on itself. If you roll out the plan badly and lose trust with one sales (group), the level of trust is reduced in the other (groups) because they hear what happened.”

2.) Take Enough Time. “I recommend that you dedicate twice the amount of time that you spent on the design, for the implementation and communication of the new plan. The more change is involved, the more emphasis you need to put on communication, because this is one of those things where people really need to understand what behavior is expected of them in the new plan vs. the old plan. When I was a consultant, sometimes we even did a survey of the sales force, or interviews of key sales people, to assess where they felt like the plan needed to be changed. At Waste Management, we depend on our managers to feed that up to us.”

Lawrence also says spending enough time before the rollout is important. “One of the things you want to do is, for example if it’s a January 1st plan, get the documents into the sales reps’ hands, even if you haven’t done the training sessions yet, by December 1st. That way, they can at least look them over and float their questions up to their managers before implementation. You can consolidate the questions into a Q&A, and make it part of the communication package.”

3.) Identify and utilize an internal change agent. Lawrence says you need someone with authority to deliver the change message. “For us, it’s usually the corporate sales director for that group. We have him or her be the person who delivers the PowerPoint on the webinar, rather than ‘Gary from Compensation.’ That way, ownership starts with the team. We have this internal change agent, a major sponsor, who delivers the message when it goes out nationwide.”

4.) Think ‘communication’ all along the way. From the beginning, think about the best ways to communicate what you’re doing. “For example, if you lower pay in one part of the plan and increase it in another part, because you want people doing more of B and less of A, think about how you’re going to tell them that.” And that doesn’t mean only when the change is new; it also means communicating the pay plan and goals from the beginning of an employee’s career, at every opportunity.

“We have new hire training for our sales reps,” Lawrence says, “and I get on the agenda for a half hour to talk to them about their compensation plans. For instance, if I have one more hour today, what does the compensation plan tell me I should do? There are three or four things I could do; where will I, as a sales person, make the most money with that one hour? Thinking that way when you design the plan is really important.”

5.) Keep a consistent message. The message employees hear from every level of the company should reinforce the desired behavior. “The change needs to be communicated clearly and consistently, from the VP of Sales all the way to the first line sales managers,” Lawrence says. “In our case, we wanted to focus on profitable business, and we wanted our customers to sign contracts. Sales people could sell at below-target profit, but then they make less money. We pay extra when a customer signs a contract, and less when they don’t. So the message for the sales force is part of the plan; it is clear and consistent.”

Change has been positive at Waste Management, and Lawrence is proud of the results. While cost-cutting and other measures share credit for Waste Management’s corporate results, changes made to the compensation plan contributed. The company saw an increase in retained earnings from $3.6 billion in December of 2005, before the plan’s implementation, to $5.1 billion in December of 2007, even as revenue decreased from $15 billion to $14.4 billion.

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