Design Effective Sales Compensation Plans
By Clive Miller
Why do people choose a sales career? Some non-sales people reply “because they can’t do anything else.”
The most common answer from sales people is “the money.” Most professions require years of study just to earn the title, Architect, Chartered Accountant, Civil Engineer, Solicitor, Barrister or Doctor. Once qualified these professionals still have to build their experience and reputation before they can command the high remuneration associated with their occupation.
Sales people have no such barriers to entry yet those who succeed often earn similar incomes. Some can favourably compare their pay with top Barristers. Earnings in excess of 250,000 pounds sterling are not uncommon in fast growing industries.
Why do sales people get paid so much? Presumably, because companies find that sales people generate business more efficiently than other means. Most employers reward sales success with commission payments because it works. Do the commission earners deserve it?
Sales people, on average, support the jobs of 27 other people, according to one study. If you take into account those working for suppliers, this statistic holds some credibility. It’s not suggesting sales professionals could do their jobs without those 27 people, just that if their sales weren’t made, the jobs couldn’t exist.
Commission plans invariably attract criticism, from both those who benefit and those who don’t. Jeffrey Pfeffer of Stanford University’s Graduate School of Business extols the wisdom of not tampering with pay systems. On the whole this is sound advice. In the case of commission plans, it is seldom possible to follow.
Most schemes are initially based on simple principles, and then suffer continuous modification, as circumstance change or unwanted side effects are discovered. Hurried or ill-considered plans need more changes.
Let’s consider the options from a management perspective. Commission based motivation gives sales people what they want – a sense of control over their own destiny and non-judgmental performance feedback. Should we be surprised when they act in accordance with their compensation plan and personal needs, rather than in response to management directives?
Changing strategic objectives prompt changes to commission schemes. Instructing sales people to focus on services has little effect if most of their income depends on product sales. Quick fixes in the form of special incentive payments can make the situation worse, as they did at one company I worked for.
The extra incentives intended to increase sales force attention on low-end high volume products, pushed payroll costs over budget, without having the desired effect.
Many variables effect sales behaviour and motivation. The mix of base salary and performance pay, the measurement period, when commission is paid, the method of measurement, accelerators, how high the ‘on target’ bar is set, and capping all play a part. Inconsistent levels of payment for different products and services ads a further layer of complexity. Commission plan design warrants a great deal more attention than it usually gets.
Mix of base salary to performance pay
Attention swings towards winning immediate business as the ratio of commission to salary increases. Aggressive accelerators accentuate the urgency of meeting or exceeding every sales target. Just like water, sales people motivated this way will always find the quickest root down the hill. Opportunity for gain concentrates the mind. Longer-term considerations such as new market development, and even new products, may be ignored unless they generate clear upside earning potential. Advocating team behaviour under these circumstances is like trying to push water up hill.
High base salaries with small commission elements encourage long-term focus and good corporate citizen behaviour. Relationships and reputation are better maintained. Strategic sales opportunities receive more attention. In my first sales position bonus payments based on company performance and individual salary provided team oriented motivation. Sales people were more inclined to visit customers who had no immediate business to place. In larger companies, this approach can direct focus away from profit and revenue milestones towards being seen to do the right thing.
The measurement period
Orders tend to bunch up at the end of measurement periods. Sales people naturally focus on the business at hand and neglect prospecting. Pressure to close business in time for measurement period end dates, pushes pipeline work into second place. Countering this with monthly or weekly sales targets leads to lower value orders as sales people increasingly attend to opportunities with shorter sales cycles.
Quarterly, half-yearly or annual measurement periods tend to result in long famines and larger orders. Activity targets, that are designed to improve order flow, but are left subordinate to the compensation plan, are largely ignored or receive lip service. Attaching payments to activity targets may encourage manipulation.
When they get their commission
Paying commission against orders causes sales people to move quickly on to their next opportunity and reduces their interest in delivery and implementation.
Deferring payment until the customer pays disconnects sales success from the reward, devaluing the commission scheme. With some schemes, sales people may not receive the commission associated with a sale for six months or more.
In my early days at Sun Microsystems, many of us spent a disproportionate amount of time checking indecipherable commission statements and querying pay cheques. We also became involved in the collection of debts.
As you might expect, such circumstances work against the purpose of commission plans. Happily, for the sales force, and for Sun, the scheme was improved.
The measurement method
Basing ‘performance pay’ on profit steers sales people to sell whatever products or services have the highest margin, regardless of management intent. For resellers and distributors this has the advantage of providing automatic feedback of market preferences and opportunities. It also helps control cost of sales.
For larger companies it frustrates marketing strategy. Paying commission on revenue reduces interest in the price paid and helps the pursuit of market share and strategic customers. On the down side, profit margins become more difficult to control.
Accelerators
Changing the value of commission according to performance spurs sales people on to greater effort when the effected number is perceived to be in reach or achieved. This may result in more price pressure from the sales person, so that he or she can buy business forward.
Accelerators can also encourage sandbagging. If a sales person thinks the target associated with the accelerated commission rate is out of reach, he or she is likely to sandbag to preserve orders for the next measurement period. Overall accelerators increase motivation, sales, and earnings. Accelerators are difficult to budget for If more than the expected proportion of a sales team achieve accelerated commission.
Clear goals, careful consideration, consultation, and testing are essential for designing all but the simplest commission schemes.
If the task falls to you, adopt a cynical mood and imagine you are a recipient. Think through how the planned scheme or changes will effect your earnings and actions. Ask peers to do the same. Get some of your sales people to give you feedback. Ask your accountant or financial director to pick holes in envisioned schemes before they are published.
Repairing mistakes after a compensation plan is issued is almost always expensive. Sales people will have made target commitments based on the published compensation plan. If adjustments could mean less money, they will have a de-motivating effect.
Effort invested in planning pays dividends in sales results and reduced need for management intervention. Whenever sales compensation needs revision, remember the 1 – 10 – 100 rule. Right first time costs once. Right second time costs ten times. Right third time costs one hundred times.
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What Makes Your Business Fit the Mold of a CRM Customer?
By Michael Kyprus
No matter the industry, the ultimate goal of any business is to build their profit margin. In business today, there are a plethora of tools that are available to streamline office management and enhance your bottom line. Marketing tools, sales tracking, and database management systems exist for the sole purpose of allowing your business to understand what processes are working, and which are not.
Customer Relationship Management, CRM, systems offer a combination of marketing, sales tracking and database management in one streamlined solution for your business, but how do you know if a CRM system would benefit your company? The following criteria fit every CRM customer:
* Does your business use any form of marketing tools to let clients know about your products, services, news, or enhancements? Any business that uses marketing tools, whether they be online or print, would benefit from the implementation of a CRM system. Using the powerful sales reporting systems available with CRM, they can better assess the behavior and goals of their target market, and adjust their marketing tactics to match.This type of targeted marketing shows much higher returns and is much more cost effective than randomly throwing marketing materials based on a bulk mailing list. Your potential clients will appreciate your researched approach and the money you save on marketing enhances your profit margin.
* Do you operate with a sales team that handles your leads? A CRM customer’s sales team has the advantage of real-time reports and customer behavior tracking, arming them with the in-depth information they need to bring a more personal touch to their sales pitch.
* Continuing this personal touch theme, a CRM system will allow your sales team to easily access and transfer specific customer details from phone numbers, birthdays, anniversaries, or any other little tidbit of information that comes up in a conversation that will enhance the customer-salesman relationship and allot your company a better chance of continued business with that client. Many times, clients are lost due to miscommunication or frustration due to misinformation. A CRM customer will rarely fall prey to this loss due to the cumulative, accessible and real-time reports and content that is available to their sales team at any time.
* If your business uses quotes and invoices for your clients, then your bottom line will benefit from the integrated invoicing, quote tracking system available in most CRM solutions. Not only does using an integrated solution save your staff time when attempting to get a full perspective on any given client’s account, but you will save money by using one solution to handle all your customer sales needs. Your business will run more efficiently and with each day of increased productivity, your bottom line will rise.
KarmaCRM is a web based CRM application that provides you with a simple way to streamline all of your sales contacts and tasks. It aims to keep your daily sales routine simple yet provides powerful functionality at the same time. Click on the link above to sign up for a free account.
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A Different View of Managing Sales Performance
By Michael Taplin
Salespeople love having their performance measured; Yeah Right!
Sales people love submitting sales reports. Right on!
Is your sales process measurement a reward system or a punishment system?
The number one motivator for salespeople is making a sale. Just look at their faces when they walk into your office waving an order or a cheque. They are on a real high at that moment. Then they go on to the next prospect and get a knock-back, then another. The spark dies and the target starts to look unachievable. Turning up to next sales meeting to discuss results starts to look like volunteering for a flagellation session.
So the question is “Does your sales measurement system help your people make more sales?”
The answer depends on whether you are measuring results, the number or value of the orders won, or whether you are measuring achievement of milestones on the path to the sale.
The critical issue here is the realization that as a sales manager you cannot manage the result. What you can manage is the activity that produces the result. If your people are doing enough of the right things, and doing them well, they will achieve the result. The only way you can manage the result then is to make all the sales yourself.
If you measure progress along the path to the sale, best done at the critical milestones, then you are in a good place when it comes to guiding a salesperson.
An example may help.
One of your salespeople has had a busy week making calls on qualified prospects, and has generated a backlog of requests for quotation. There is not a single sale in his sales report. He is way behind on the quotes, and you know from experience that if they don’t go out in two or three days the prospects will cool off. He needs guidance from you.
You have a choice of actions.
1. Tell him to stop everything and get the all the quotes out.
2. Tell him he has had a great week. Well done and stick at it.
3. Ask him why he has not made a sale.
4. Show him how to balance up his sales activity so he moves every prospect along the path to the sale at the desired pace. Help him to prioritise his prospects to get the quotes out progressively.
Set out like this, the answer is obvious, but it is time to be honest. What did you do the last time this happened? What is the likely response to these options?
Answer 1 This ensures that he runs out of steam in a week or two, and wonders what has gone wrong.
Answer 2 He cannot make a sale until he quotes.
Answer 3 This focus on the end result is a certain de-motivator.
Answer 4 This is the way to guide him to steady progress and a steady flow of orders.
What you need, to be able to do this, is a system that gives you a sales report on the activity of your sales people and the status of every prospect in the pipeline. Then you can guide them to the activity that will lead to a steady flow of orders. Your sales meeting will become motivational working sessions, rather than de-motivational exhortations to work harder to reach sales targets. Your people will become internally motivated by the certainty of success and their confidence will grow.
If your sales reporting system lists every sales prospect, and the latest milestone in the sales process that has been achieved, you have made a start. If your system assigns a probability value to the present status of each prospect, based on the established relationship between the milestone and the probability of banking the payment, you are way ahead. If your system calculates the expected future value of all the prospects in the pipeline, you know whether they have been working effectively by the change in the expected value, and what they have to do to increase it.
This approach to reporting sales activity and value gets you real information that is hard to fudge. Many sales managers treat sales reports as an advanced form of cheat sheets, with the main question being “How long before the boss finds out?” With a focus on measurable milestones, there is nowhere to hide; either the quote has gone out or it has not. With the probability of success assigned by the system, the guesswork about the quality of the prospect’s relationship with your business is taken out of the equation. The reliability of the information you receive from your team will skyrocket.
You will transform your relationship with your salespeople from boss to coach. Your sales will be easier to forecast because you have removed the peaks and troughs. Life will be so much more satisfying.
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