July 31, 2016
The Case for a Chief Compensation Officer
by Kenny Rawlins
Over the past few decades, we’ve seen an increasing number of C-level titles. Traditionally, companies have had a Chief Executive Officer, a Chief Financial Officer and a Chief Operating Officer. Then Chief Information Officers and Chief Marketing Officers became more commonplace. Now there are dozens of unique C-level titles.
Why is that? Companies have realized that there are areas within their organization that are strategically important enough to warrant a C-level executive. Growing cyber-attacks and other risks created the need for a Chief Information Security Officer to secure a company’s physical and digital assets. An increasing number of companies have a Chief Sustainability Officer to oversee the corporation’s environmental impact. And because design is such an important aspect of their products, Apple has a Chief Design Officer. Apple’s CDO is not only responsible for the look and feel of Apple products, but also their packaging and retail stores.
In the direct selling industry, distributor compensation consumes an average of 40 percent of your revenue; it is the single largest expense for a company. Yet, in my experience, most companies do not have anyone who is directly responsible for ensuring that this expense is supporting the strategic goals of the company. I believe that it’s time to put someone in your C-suite in charge of your compensation strategy. It is time for a Chief Compensation Officer.
It’s true that all direct sales companies have teams or individuals who know the compensation plan and who audit and pay commissions. However, a CCO owns the compensation strategy. The CCO would be both architect and evangelist for your compensation plan. This executive would treat your compensation strategy and plan like the living thing it is, tailoring it to meet the changing needs of your organization.
But how can you justify bringing another C-level executive into your crowded C-suite? I believe there are six main areas where a CCO can bring extra value to your organization, saving you significantly in operating costs while giving you competitive advantage in your market space.
Creating a Comprehensive Compensation Strategy
There’s a reason why I call this CCO position a chief compensation officer and not a chief commissions officer. It’s because a compensation strategy includes much more than just commissions. Such as:
- Loyalty and incentive programs
- Promotions (such as shipping and product discounts; buy one, get one free, etc.)
- Leadership events (such as rallies, tours, conferences, fly-ins, etc.)
- Exemptions, waivers and business development agreements
It’s not easy to figure out all of these different elements and bring them together cohesively. A poorly constructed contest or promotion can undermine your compensation strategy and incentivize behaviors that can be very hard—if not impossible—to correct.
It’s also difficult to pair the different kinds of direct sellers in your organization with the compensation that will best motivate them. While sales leaders find motivation in large commission checks and leadership recognition, social enrollers and customers are excited by your product, not the dream, and are better served by loyalty programs and promotions.
There is so much focus in our industry on the top performers that we tend to build our compensation plans to cater primarily to them. Compensation plans do not always take into account the types of distributors in an organization, the reasons that the distributors joined, and the thank-yous that they are looking for in the compensation plan for referring customers to purchase product. A CCO can tailor your compensation strategy to appeal to all segments of your salesforce.
A good CCO works closely with other executives in the company to ensure that your compensation plan is supported by your marketing strategy, sales strategy and internal policies.
Qualities of an Effective Chief Compensation Officer
A CCO sits at the crossroads of IT, sales and marketing, business development, finance and compliance. This executive must work closely with these teams to ensure your compensation strategy is properly executed. Now that you’ve determined that you need a CCO, what qualities should this person have? Here are some key traits I would look for:
Keeping Your Plan Competitive
Compensation plans used to be simple (with two or three commission types) and not change for decades. Now, direct sales companies must stay relevant in an ever-evolving market. Because a CCO stays current on trends in the market, your CCO will know if the latest industry fad has a place in your compensation strategy or if the same behavior is already being incentivized elsewhere in your plan.
A CCO ensures that your plan stays competitive and is an advocate for your plan with your field leadership. A CCO works with the field development team to make sure your field understands the strengths of your plan.
Measuring Your Plan’s Effectiveness
Today’s information technology gives us the ability to pinpoint trends with metrics and data analytics. Compensation strategy needs to evolve to take advantage of this information.
Using data analytics, a smart CCO can track which components of a compensation strategy work and which don’t. For example, a CCO can track the measurable results that occur after a promotion, contest or leadership event. A CCO should have the ability to see which incentives are successful (both in the short term and long term) and which are not. If you do not see quantifiable results after a particular promotion, a CCO could work with the team to re-evaluate the effectiveness of these activities. You shouldn’t keep paying for ineffective incentives, and the CCO—with an eye on the data—can ensure that you don’t.
A CCO can use analytics to answer questions about your compensation strategy, such as:
- Which incentives lead to the best retention?
- What milestones are most important in creating successful leaders?
- What impact did a recent promotion have on the field?
A CCO also tracks customer and distributor growth, monitors shifts in organizational volume within leaders’ organizations, looks for leaders whose downline growth and retention outpace others, and reviews compensation to ensure that productive leaders are being rewarded appropriately.
Manage Legal and Compliance Issues
The legal landscape of the direct sales industry is constantly changing, and recent actions by the Federal Trade Commission have created compensation plan uncertainty. How is your compensation plan impacted by these actions? Who does your legal team work with to address concerns?
For example, in the preliminary injunction against Vemma, the court ordered that distributors only can earn commissions if a majority of the sales come from customers outside the compensation plan, not distributors. A savvy CCO would view this action and consider how the compensation plan provides appropriate incentive for selling products to new and existing customers.
|You have several key executives overseeing portions of your revenue. But who oversees compensation – your biggest portion of your revenue?|
In addition, you need someone who can anticipate and spot loopholes in your compensation plan. An unscrupulous distributor might exploit a loophole to earn commissions unfairly and stain the reputation of your organization. Even though distributors are independent contractors, they still represent your brand. You need someone who is fully invested in the details of your compensation plan to ensure that manipulation and “gaming” does not become the primary build strategy.
Adjust to Meet the Demands of Global Markets
In order to be successful in the global market, you depend on distributors who understand the culture of your local market. Compensation plans also need to be adjusted to work in tandem with the cultures, social norms and local regulations of the countries in which you do business.
Elements of your compensation plan that work well in one part of the world may not appeal to a distributor in another. The execution of your compensation strategy needs to be tailored to regional markets.
Avoid Costly Pitfalls
Over the years, I’ve known direct sales companies that have made very costly mistakes because they didn’t have an executive who understood the nuances of the compensation plan. Consider this hypothetical:
Suppose a company has a Platinum rank requirement of three personally sponsored Gold-qualified distributors, and the qualification for Gold is 10,000 monthly OV (Organization Volume). Now suppose that in updated literature the requirement for Platinum was inadvertently changed to “three personally sponsored Gold distributors who are qualified.”
Do you notice the subtle difference? Most plans allow distributors to be commission “qualified” with as little as 50 or 100 PV (Personal Volume). This subtle change could be interpreted as meaning that three title-rank Gold distributors with 100 PV each could fulfill the requirement for an upline Platinum distributor. If this misunderstanding goes uncorrected, it could have devastating consequences, drastically curb growth and devalue this company’s ranks.
This is a detail that would be caught by an effective CCO.
Most people realize that there are certain aspects of their business that demand the attention of a C-level position. Your compensation strategy demands the sort of attention that only a CCO can provide. Make sure that such a critical component of your organization is not neglected.
Kenny Rawlins is the Vice President of Commissions Operations for InfoTrax Systems and is passionate about helping companies define, implement and execute their compensation strategies.