Sales compensation seems to be a mystery to the owners and managers of many businesses. I get calls and e-mails frequently asking about compensation standards, and the truth of the matter is there aren’t any. For every 100 companies, there are probably 120 compensation plans in place, with many individual salespeople operating on different plans within the same company. (That’s not necessarily a bad thing, but I’ll come back to that later.)
The fundamental problem is that most sales compensation plans don’t work well. They don’t motivate the performance and behavior that employers are looking for. That’s why I get all the calls and e-mails: “My salespeople aren’t performing. What are other people doing to that I’m not? Somebody must be doing this right, right?”
Some are certainly doing it better than others, but across a wide range of businesses and industries, I think there’s a lot of opportunity to improve sales performance by improving sales compensation strategy. So let’s start with the basics. The fundamental concept behind effective sales compensation is that money talks. In developing your compensation strategy, you need to ask yourself what you want it to say! Here are some possibilities:
- I want you to generate lots of sales dollars.
- I want you to generate lots of profit dollars.
- I want you to develop new customers.
- I want you to sell more of our product line to established customers.
- I want you to increase sales every year.
- I want you to work a full day every day.
- I want you to do a good job with administrative tasks, such as call reports, expense reports, and CRM maintenance.
- I want you to work well with the rest of the team.
You may not care about all of these things. There may be other things that you do care about. The bottom line here is that sales compensation – money– can be used to buy/motivate specific behavior. The more explicit you make a compensation plan, the more likely it is that your salespeople will hear what you’re trying to tell them.
Salary Plus Commission
I think it’s generally accepted that a straight salary is the wrong way to compensate a salesperson. Look back at the “I wants” above. A straight salary really only addresses the last three, and provides little incentive to work hard at the first five. Having said that, though, a straight commission plan addresses the first five, but doesn’t provide much incentive to work hard at the last three. By combining salary and commission, money’s “voice” is directing two specific behaviors.
Please don’t think it’s enough, though, to let money’s voice be the only one a salesperson is hearing. To put that another way, please don’t think compensation is a substitute for management. Think of it this way. Compensation works best as a reinforcement for management. As an example of that, one of my clients and I recently had this conversation with one of his salespeople, who could rightly be called lazy and sloppy: “Remember that you get paid a salary and commission. You could say that you earn the commission by working hard at convincing people to buy from you, but we pay you the salary to work hard at everything else!”
Salary Plus Commission Plus Bonus
To take money talks one step further, I like to add bonus opportunities to sales compensation plans. Again, take a look at the “I wants” above. It’s easy to think that developing new customers, selling more of the product line to established customers, and increasing sales year to year would all be sufficiently motivated by the opportunity to earn more through commissions, Unfortunately, it doesn’t usually work that way. Most salespeople need an extra push or pull to make those things happen, and again, this is a situation where management (the push) and compensation (the pull) work best together.
To address the issue of developing new customers, I might institute a short-term bonus program; for example, 30 to 60 days of intense prospecting activity. That might mean identifying 100 “suspects” and running each of them through a defined series of contact activities.
I would be happy to pay a bonus to stimulate that activity – and here’s a key point, the bonus is intended to reward the activity, in the expectation that the activity will lead to the objective. What I’m really talking about here is managing on the front end of the sales cycle, rather than on the back end. Let’s face it, most managers “manage” by looking at sales figures and then either congratulating or criticizing their salespeople. It’s a far better strategy to manage on the front end of the curve.
To address the issue of increasing sales year to year, I might suggest a full-year, quota-based bonus opportunity. I would be willing to pay a significant bonus in order to provide a full year’s worth of motivational pull, and many of my clients have been successful by making the reward something other than cash. “Tell me what you want,” one of them told her salesperson at the beginning of this year, “and I’ll tell you what your quota is.” (Key point: The performance has to pay for the reward!) In this particular case, the salesperson wanted a motorcycle, and cost-justifying that required a quota that reflected a 15% sales increase. Through the first four months of the year, the salesperson is tracking toward an 18% sales increase. I think it’s fair to say that he’s highly motivated!
In Part II of this article, I’ll explain how you put all of this together to create a highly effective compensation plan. We’ll discuss revenue sharing versus profit sharing, using a draw against future earnings to recruit top talent, and why different compensation programs within the same company isn’t necessarily a bad thing. Come back here March 21 for Part II.
David Fellman is the president of David Fellman & Associates, a sales and marketing consulting firm based in Cary, N.C., and the author of “Listen To The Dinosaur” (2010). Contact him by phone at 800-325-9634, or by e-mail at dmf@davefellman.com. You can also visit his websites at davefellman.com and dinosaurwisdom.com.
