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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Goal Setting for Sales Managers Does it Work? She we have a go??
Goal setting does not seem to be quite the “in thing” it was a few years ago. Which really surprises me.
I was reading a recent blog post from a sales management site giving some top tips for sales people.
The rise of the film The Secret and the law of attraction may have something to do with it. Some clarification I think is needed. Goal setting is vital. It’s the goal achievement where the law of attaction comes into play. More of that in another post.
Let me explain a little more. Many years ago I “got into” personal development and the science of success through Earl Nightingale. Well actually Nightingale Conant to be exact. I purchased a whole host of tapes and books and started to appy many of the strategies to great effect.
One of the key things it suggested you do was to write down your list of goals that you wanted to achieve. It then suggested that this fact alone would put you in the top 3-4% of the population and that all good things where likely to happen to you.
Well I guess if you wrote down 10 or so reasonable goals at least one might happen?
A much better thing to do is actually look at your goals and take some tangible action towards them. This stands a much better chance of something realistic happening.
Earl also suggested another very nifty trick. Which was to phrase your goal in the form of a question. Then make a list of 20 possible things you could do to achieve it. Stated in a postive tense with an action step. No judgments and don’t stop till you have 20 things.
Let me give you an example. The question could be;
“How can my region/district increase market share by 3% by the end of November 2008?”
1. Analyse current cash revenue data and get a cash value for a 3% increase.
2. Break this down by week
3. Break this down by territory
4. Work out how many extra sales are needed
5. Review the teams call data and find any gaps
6. Run a fun incentive.
7. Send my team a survey and ask for ideas. ( Survey monkey is free and easy to use)
…………………etc etc.
Do you get the idea. Just take one of these ideas and implement it that day. Imagine when you do this for a number of goals what the outcome could be?
Lets say you did this 5 days a week and generated 100 ideas. If you implemented just one of them a day for a month what might happen?
This is something I have gone back to using in the last few weeks with some great success. When I managed my own sales team this is someting I would often do to raise the energy and get the creative juices flowing. It also never ceased to amaze me how many great ideas came out of it as well.
I am part of a mastermind group and we often have sessions where we work on each others business. Which leads me to a great idea. How about sending me a quick email with a goal you would like to achieve. You can be anonomous as well if you want to. I will post it on the blog and people can add in their suggestions.
Just send in your idea on the contact form and lets go for It
Take Care
Have a great week
Denise
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