Sales Force Optimization – "Sales Team Compensation"
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Sales Force Optimization – "Sales Team Compensation"

Many small business owners after reading the title of this article will assume it will be a short rant. After all (as noted in a previous article), everyone knows that all you have to do to attract a great sales force is simply hang a big bucket of money in their face. Good? MISTAKEN!

In that previous article, we covered how to attract and retain a high-performing sales team. In addition, we mentioned the importance of structuring a target role profile and an effective recruiting engine in the attraction process. Additionally, the role of education and career path were identified as two essential drivers of retention.

So what about the sales compensation plan? How do you compensate and motivate them? An effective compensation plan is not the only factor, but it is clearly a linchpin. If a winning sales team is a NASCAR driver, then an effective compensation plan is its engine and motivation is its fuel. Remember, sellers are highly (but not solely) motivated by financial gain. Getting the compensation plan right for your business is essential to success in the marketplace. For the purposes of our discussion, we’ll wave our magic wands and assume you’ve found and have a great sales team. Now your challenge is to create a sales compensation plan that is the right mix of the three “M’s” of compensation plans: motivation, money, and measurement.

Before we dive into the compensation plan structure, a few notes, guidelines, and beliefs:

1. There is no “one size fits all” sales plan. There are a myriad of compensation plan permutations. Plans must take many factors into account, such as:

-TO. Product/Service Complexity: Data storage is typically more difficult and time consuming to move than pens.

-b. The sales cycle (how long it takes from first contact to signed order) can be minutes or years. Generally speaking, the longer the sales cycle, the stronger the requirement to have higher base salaries to “plug in” the salesperson’s income until the sales commission is made.

-vs. Price may be a factor. If the product/service is a high value item that has a higher/elastic margin, the commission is likely to be higher (data warehouses). Products and services that operate on very thin (pencil) margins may have less elastic margins and therefore a large sales payout can only be realized through volume.

2. As a general rule, you should strive to have no commission caps. Commission limits are anathema to a sales team. Telling a sales team that there is a limit to the commission they can earn destroys morale. Rightly or wrongly, they believe that as long as they generate income, they should get paid. In the abstract, it’s hard to argue with this simple logic. Sellers would say that no limit represents a win-win situation for both the company and the seller: if the company makes more money, the seller should make more money. There are a myriad of justifications that I have personally seen behind closed doors over the years with expansive rants rationalizing why business owners are reluctant to pay large commissions to top sellers. When you look under the covers, most of the arguments don’t hold up. Too often, if you peel the onion, the real reason is jealousy and greed. After all, a sales person should never be able to earn more than his manager, and certainly never more than the CEO! I say trash! Logic dictates that if the entire sales team exceeds its targets, when you add it up, the company exceeds its targets and everyone is celebrating.

3. As much as possible, you want to use the “KISS” (Keep It Stupid Simple or Simple Stupid) philosophy. When the plan is straightforward, it is easy to explain, understand, and manage/measure. I’ve seen too many compensation plans that read like a novella. Trying to get too fancy will only fuel the fires of potential ambiguity and controversy. You have to remember the poor people in the back office (HR, sales ops, etc.) who try to track, report, and pay commissions on these plans.

4. Make it a goal to have a plan against which all sales people are measured.

5. You should never change a sales compensation plan in the middle of the year. Only in the case of an extreme emergency (changes in the business itself, eg merger/acquisition, etc.) should a compensation plan be changed mid-year. Otherwise, the business owner should strive to keep the normal (annual) sales plan review cycle sacred.

6. Use “SPIFFS” to encourage special behavior. Spiffs are like a mini incentive plan focused outside the boundaries of the main plan. They can take the form of:

-TO. start of sales year quick start programs/incentives

-b. end the year with “bang” programs

-vs. specific product/service incentives to drive sales of newly launched solutions

-d. create/update interest on an existing line

While the primary sales compensation plan tends to be largely cash based, spiffs can take the form of non-monetary incentives such as trips, prizes, gift certificates, etc. Spiffs are not a substitute for the regular compensation plan, rather they are an addition, like one more layer on a cake. Perhaps most importantly, they maintain the integrity of the core compensation plan.

7. Understand how the industry competition aligns: what are the “best practice” sales motions?

8. There are always exceptions to the plan, but they should be minimal and manageable. For example, people enter and leave the organization through; transfers, additions, deletions, reorganizations, etc. occur. They can also change customer profiles (mergers and acquisitions, bankruptcies, changes in the level of financing, etc.)

Keeping in mind that sales plans can/should differ in construction and emphasis based on factors like the ones mentioned above, what are the main sales compensation plan drivers of a good plan and how do they work together to get the desired results? Take a look at the graphic below. The total compensation line has a funny shape. Why isn’t it a straight line from bottom left to top right (as a salesperson would argue)? Why isn’t this a standard bell curve (as a financial compensation plan administrator would argue)? Let’s break down what we are looking at, as there is a lot going on on this chart.

First of all, why the pretty color bars? They represent “bands” of total achievement of quotas. By most standards, a salesperson who has achieved less than 75% of their quota is in trouble. It is not our goal to explain why sellers succeed or fail. Suffice it to say that, as a general rule of thumb, at the end of the year, a seller who has achieved less than 75% of their annual quota is generally in some level of trouble or at least under scrutiny (barring extenuating circumstances). Hence we have the RED zone.

As we move from left to right, the colored bars become greener (the color of money) and each bar represents a higher level of quota compliance.

Now, the two curves. What do they mean? One, the black line that looks like a hill or mountain is the commission acceleration curve and the other is the total compensation curve.

The commission acceleration curve represents the commission earned per dollar of sales based on the sales multiplier. If, for example, the seller earns $1 for every $1,000 sold, then this is the base multiplier (a multiplier of 1 as seen in the red zone). In the blue band, you see that the multiplier has been doubled. This means that the seller is making money at double the red zone rate. It follows that the slope of the curve is steeper in this range, reflecting the accelerating rate of profit. Clearly sellers are motivated to enter this range as they are making more money for every dollar they sell. Continuing this pattern in the range up to 100% achievement, the more you sell, the more you earn. This is great alignment between metrics and rewards, between company goals and individual salesperson goals.

But wait a minute. The curve continues UP between 100% and 125% in our example. Why is that? Remember, the company’s goal should be to get each salesperson to exceed their quota. If all members of the sales team exceed their quota, then the company has reached its annual sales targets. Therefore, it is incumbent on the company to incentivize sellers to exceed 100% return. Therefore, the multiplier goes up to 3 in our example. The seller is eager to be in this range, as he is earning lots of commissions in this range. Life is good. It should be a commission plan goal for each salesperson to be above 100% achievement and the pay plan should incentivize this behavior.

Wait one more minute. Then the curve turns downward after 125% achievement. Why is that? While I don’t believe in commission caps (discussed above), and some industries and situations lend themselves to “sky’s the limit commission” scenarios, it’s often prudent from a full commission cost plan scenario to control or reduce unlimited commission. In any sales year, some salespeople will either shoot out of the park or get a “bluebird” (sales talk about having a monster order fall into your lap out of nowhere). Especially in the case of the blue bird, there is no point in paying a lot of money for little or no work: pure luck. Also, the world is not running out of sellers who know how to manipulate a quota setting exercise when (for example) they know they already have a large order essentially in the bag, but they hide that fact until after the quotas are set. In fact, the balance of the sales team can turn sour and demotivated if they perceive that another team member is getting paid a lot for little work.

So the key above 125% (in or example) is to continue to make it possible for the sales team to make more and more money (no limit), but after a certain point (125% in our example) they do so at a decreasing rate. That is, the multiplier goes down again. In this way, we have put the goal of not capping commissions: a salesperson can always make more money, but keeps commission plan expenses in perspective (I just pleased our friends in Finance).

You will now understand the reason for the blue dotted line on the chart. This total commission curve continues to rise forever. That is, the sales compensation will always increase for the seller. Acceleration slows down past a certain point (125% in our example), but it ALWAYS goes up.

This is just one example of a commission structure. The point of this example is not the chart itself, but the discussion and points presented are elements to keep in mind as you build a plan to motivate the sales team. Some compensation plan reality as a reminder and takeaway:

There is no such thing as a perfect plan.

Concern when salespeople stop complaining about the compensation plan

It is imperative to match the compensation plan (behavioral incentives) to how our leads/customers in the industry traditionally/typically make buying decisions

We hope that you now feel better equipped to meet the challenge of creating a sales compensation plan that is the right combination of the three “M’s” of compensation plans: motivation, money, and measurement.

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