This post was originally published on ZS’s medtech blog, The Pacemaker.
For many medtech companies, the end of the calendar year is also the end of the fiscal year—a critical period of transition as management teams prepare organizational design strategies for the following year.
Organizations in the midst of integration mergers and other transitions can expect even bigger changes during this time than in “normal” years. They need to thread the needle between over-communicating and under-communicating during this period of uncertainty while balancing the inherent challenges of creating a combined organization with unified values, processes and goals. With that in mind, management teams face a fundamental dilemma: How best to communicate what sales teams can expect in the next year without disrupting necessary end-of-year activities.
On one hand, managers want employees to “put their heads down and finish the year strong,” avoiding distractions in the current fiscal year. However, it’s human nature for employees to be concerned about the future, and the absence of official communication often leads to rumors. As the fiscal year approaches its close, sales teams generally have a few questions on their minds, including: Will I have a role in the new organization? What’s my new territory? What are my metrics and how will I be compensated?
Being prepared to answer these questions with the appropriate level of detail will help the team refocus and prepare for the transition. Of course, those who learn that they don’t have a role in the new organization may leave or mentally check out prior to the year’s end. The alternative—keeping the whole team in the dark with a lack of communication—leaves the medium and high performers guessing about outcomes and may lead to self-preservation tactics such as preparing résumés and reaching out to recruiters.
Of the questions on the sales teams’ minds, the compensation question is often the most challenging to prepare a satisfactory response for. Organizations typically face multiple competing priorities when designing an appropriate post-merger compensation plan. To help ease the transition, company leaders need to start thinking about compensation impact early in the M&A process, even prior to closing the deal. As soon as the new management team is named, begin engaging them in the process to define the new field compensation plans.
With a bit of planning and strategizing, here’s how one post-merger company handled five competing priorities:
- Harmonize across legacy compensation plans. This becomes challenging when two legacy companies have different pay levels, salary/incentive mixes, metrics and pay practices. One solution is for the newly formed company to harmonize its approach under one fundamental plan design, recognizing differences in the knowledge base of the respective legacy organizations. The process and outcomes help to crystalize the strategy of the combined entity, and to build a new sense of community within the organization.
- Realign compensation plans to reflect the new organization’s strategies and priorities. A merger is a great opportunity for companies to recalibrate many elements of their compensation plans. One proven approach is to use external benchmarking data and industry best practices to align the new company’s go-forward compensation plan. In particular, external input and the legacy organizations’ historical plans can be used to determine the total at-plan compensation and mix (fraction of salary versus incentives). Scenario planning techniques also can be used to replace imperfect information when modeling likely future payouts.
- Provide short-term incentives to encourage product education. A new organization means that the sales force needs to learn about and get comfortable with new (to them) products and to become effective at selling them. Managers need to carefully consider not only the initial training required for the basics, but also the ongoing apprenticeship necessary to promote the new portfolio. One successful strategy is to design the compensation plans to encourage the sales force to step outside of their comfort zone to learn the “other” legacy products. This can be accomplished by creating a payout curve, which is a bit more forgiving of the company’s “non-legacy” products than its legacy products. Also, the ramp-up time required for new products should be taken into account when allocating quotas.
- Design transition components for salespeople whose accounts are changing hands. To ensure that customers assigned to new salespeople have a positive experience, the combined entity needs to establish appropriate account hand-off mechanisms and incentives. One way to encourage appropriate account hand-offs is by establishing partial payouts on both “old” and “new” territories for a period of time. That way, it’s in everyone’s best interest to provide an excellent customer experience and to reduce or eliminate unnecessary customer disruption.
- Implement performance-based retention incentives. This priority is listed last because companies tend to waste a lot of time, effort and money on employee retention efforts. However, when the first four priorities are handled well, retention is typically not an issue. The best approach is to establish a link between retention efforts and the elements mentioned above, and to ensure that they’re performance-based rather than solely time-based. One way is to inform employees of new roles more than a month before the end of the year and offer fair and generous temporary retention packages for those who will be separating from the organization. Additionally, the company should consider implementing a special incentive program to motivate appropriate behaviors, such as strong performance-based payouts throughout the remainder of the current year.
For post-merger organizations, designing and calibrating a world-class compensation plan is critical to enabling sales team success. But balancing the organization’s new—and combined—priorities is no easy feat. There’s both an art and a science to successfully threading that needle. By establishing and following the above framework, medtech organizations can turn the challenge of combining entities into an opportunity to prepare for both short- and long-term success.
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