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Prepare for the Unexpected! How to Manage Sales Compensation after a Natural Disaster

“The more you know about the past, the better prepared you are for the future,” Theodore Roosevelt famously said. One lesson the past year taught us, over and again, is that Mother Nature can turn against us in the blink of an eye. In 2017, Harvey and Irma hit the United States, seemingly determined to prove nature’s destructive power. In the clash, over one hundred lives were lost, hundreds of thousands of buildings were damaged or destroyed, and tens of thousands of people were left without a home.

As costs unfold, the magnitude of destruction is becoming increasingly clear. For the moment, Hurricanes Harvey and Irma are estimated to have caused between $42-65 billion in property damage alone — each.* And the ripple effect of these massive natural forces extends even further. When Harvey and Irma made landfall, they not only affected people’s homes, but also their jobs and work environments. 

How to Manage Sales Compensation after a Natural Disaster

For salespeople, Hurricanes Harvey and Irma led to lower sales and lower incentive compensation earnings. Predictions for an even more catastrophic 2018 hurricane season make it clear that any sales organization aiming to end this year on a good note needs to develop a damage control plan.

Coming up with solutions to fairly compensate salespeople is hard enough in the first place. Try doing it in the aftermath of a natural disaster, and the challenge may seem insurmountable. Proactive planning is important. As the new year unfolds, consider adjusting or adding clauses to your incentive comp plan that will help shield your company and employees from the financial setbacks that natural disasters so adeptly, and all too often, cause.

Inspired by the lessons that 2017 taught us, we’ve compiled a list of key tactics for effectively handling the negative impact natural disasters can have on your salespeople’s compensation.

a. Pay Guarantees

Create a safety valve in your incentive compensation plan – a guaranteed minimum – to protect salespeople from ever earning less than a certain floor or threshold value in any given sales period. There are a few formulas you can use, but traditionally, pay is calculated as a straightforward max value between a salesperson’s estimated earnings and the guaranteed floor value. The following example is based on projected earnings of $10,000 and $5,000:

SalespersonProjected EarningsSales Period  GuaranteeEarnings
A$10,000$8,000Max (10,000 vs. 8,000) = 10,000
B$5,000$8,000Max (5,000 vs. 8,000) = 8,000

b. Pay at Target

Many compensation plans include a target earnings value, which establishes the amount an average rep will earn upon achieving 100% quota attainment.

When disaster strikes, a company might decide to adjust the pay for those impacted so that their earnings default to the target earnings value (or higher if, despite hardship, they outperform the target).

c. Apply Quota or Baseline Adjustments

Another way to ensure that reps are compensated fairly in the wake of a national disaster: lowering quotas or baselines in proportion with selling time lost. For example, if selling opportunities are limited for four out of twenty-six weeks, a company might choose to reduce quotas – or the baseline sales used as a benchmark for that period – accordingly.

Best practices for the end of the year

A natural disaster creates waves that continue to hit sales organizations long after the last shock has passed. As you prepare your recovery, keep in mind that natural disasters don’t solely impact the current period’s payout – they can also affect next year’s sales goals. You may need to consider adjustments for end-of-year reporting and contests.

Here are some best practices for year-end plans and calculations:

a. Annual Sales Contests or other Long-Term Performance Reporting

If annual sales contests are your go-to tactic for growing revenue, take a) the type of adjustments made during the year of the natural disaster, b) the rules governing the annual contest, and c) the metrics used to measure performance into account.

Scenario 1: If no adjustments were made, but reps were paid the guarantee or at target, you may want to pool the affected participants in a separate contest. After all, they wouldn’t have a chance at winning if pitted against reps who worked unaffected areas. Alternatively, you could exclude the affected month or quarter from consideration.

Scenario 2: If salespeople are evaluated based on quota attainment values and you made adjustments to those values or earnings during the year, remember to use the adjusted (as opposed to original) values in the contest calculation.

Scenario 3: If HR uses reporting to track underperformers, remember not to hold the results achieved during a natural disaster against any rep on a performance action plan.

b. 2018 Quota/Baseline Adjustments for Impacted Geographies

In the third quarter of 2017, a percentage of sales reps in areas struck by Harvey and Irma showed sales data anomalies. These anomalies have compelled sales organization leaders to adjust quotas for 2018. But they need to be cautious. While they didn’t want to unfairly underpay their salespeople last year, they also don’t want to overpay them now due to quotas or baseline values drawn from last year’s abnormally low numbers.

Should you find yourself in this position, make sure your quota-setting process is flexible enough to account for such data anomalies. You should be able to adjust the calculation process as needed. Consider these approaches:

Option A: Exclude the affected time period from the calculation.

If your company has established a national number and your quota methodology is based on the previous year’s sales values, you should subtract the number of weeks that show data anomalies (due the natural disaster) from your baseline. For example, if three weeks of sales were impacted due to the disaster and recovery, and thirteen weeks is your baseline, adjust the baseline to ten weeks of sales for all geographies.

Option B: Substitute original sales values with trend sales values for the affected geographies during the affected time periods.

For example, if your quota methodology includes sales values for weeks one through three of the prior quarter, omit the lower-than-average values that show up for those same weeks during the current quarter. Instead base your calculations on what the trend would have been should conditions have remained stable. In the following graphics, which exhibit a 13-week quarter look-back period, trend values would be used in place of actual sales made during the hurricane weeks (weeks 7, 8, 9) in calculations.

Option C: Do nothing. Dedicate time to discussing the affected geographies with your sales managers and leave quota adjustments to them.

A natural disaster will disrupt your sales activities no matter what. While you can’t stop nature from unleashing its force, you do have the power to recover and thrive in its aftermath – and preparing your organization with these tactics will soften the blow.

*https://fas.org/sgp/crs/misc/IN10793.pdf

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