I just finished reading an article in the April 2015 issue of the Harvard Business Review titled “What Really Motivates Sales People” as well as severa l other articles on Sales Compensation. There is so much written on this subject and yet, I do not know of anyone that is using the perfect sales compensation system. In fact, I read in HBR Magazine that 85% of companies will change their sales compensation plans. I do not know how many times I have been asked, “How should I compensate my Salespeople?”
Paying commissions just on revenue generated is ludicrous given today’s market. It may seem to be the simplest method but for the most part it does a disservice to both the company and to the sales rep. It encourages reps to sell at lower prices in order to generate revenue, and it does not take into account the value of your services.
I have personally developed systems for both large companies like ConAgra, and for small 3-person sales organizations. Every situation is different, and I have found that most compensation packages should be based on the stage of growth of your company.
Common Mistakes To Avoid
- Compensation that is not aligned with the goals of the company or its culture. This most frequently occurs when salespeople are only compensated for revenue and not for profit. In this scenario, sales reps have to care only about generating revenue.
- Commissions that are all the same no matter what they sell. The compensation plan does not emphasize and pay for the key products or services that the company makes the most money on. Sales reps will naturally sell what is easiest to sell, not what makes the company the most money.
- Salespeople are being overpaid and underpaid because they have a good or bad territory and not based on their talent.
- Sales Reps are being paid on appointments and number of calls. Trying to manage them through compensation only brings quantity not quality. To state it another way, “garbage in and garbage out.”
- Using a quota based system with caps on commissions. In this case you are welcoming your top performers to stop working once they have reached their quota and commission cap. “Why should I keep working if I’m not going to make any more money?” You are paying people to grow the company. As long as the company and you make more money why should you worry that a salesperson is making too much money?
- Paying for “free sales” or residual income. That is sales from the past where salespeople continue to get a high commission for a sale that happened in the distant past, which requires little to no effort from the sales person. If the salesperson is not affecting the sales why should they be compensated? I give you permission to reduce their commission over time and as their participation lessons. I have seen this scenario where the rep becomes very comfortable in what they are making because of previous victories.
- The compensation system is so complicated and has so many variables that the salespeople do not understand how it is done. In my experience anything beyond 3 variables to be compensated loses emphasis and direction. Ideally the compensation plan should help in your managing and direction of the sales force.
What To Think About When Developing A Compensation Plan
- First and foremost, determine what your company goals are and how to compensate the sales reps in order to further those goals.
- What products and services give us the most bang for the buck?
- Where do you want your sales representatives to spend the most time? Customer acquisition, customer retention or selling new products to existing accounts?
- What is your sales cycle? Does it take a couple of weeks to develop new sales, or is it months or even years?
Some Ideas That May Help
- Align the culture of the company and the most important goal with the sales compensation system. Nothing will succeed until this is determined and aligned.
- If you are presently only compensating on revenue generated, develop a hybrid system involving gross profit. This will require you to become transparent regarding some information, but it is well worth it. Instead of your sales reps asking for a better price they will be pushing the customer to buy at a higher price.
- Find out on an individual basis whether people seem more incentivized if they are paid bonuses on a monthly, quarterly, or yearly basis. This can greatly affect their performance and activities.
- Base part of the compensation plan on “Self Improvement”. This has to be an area where both management and representative agree can be improved for the betterment of the company and themselves. Make sure it is measurable.
- Award the sales people for being effective “Captains of the Interaction”. Throughout my career I see a constant fight between the sales department and the internal support people. Many businesses require a team approach. More and more salespeople have learned to steer the ship, while managing the expectations of both prospects and clients.
- Your salespeople are in direct contact with your customers so they can be great resources for innovative ideas. Find a way to compensate them for the information that they gather and the ideas generated.