In October, Economist Christopher Thornburg gave his yearly address to the Sonoma County Economic Development Board. The man dubbed “Dr. Doom” for his notoriously pessimistic forecasts cited Wall Street’s failure to implement performance-based compensation as one reason for the mess. Most of us know about Wall Street’s failure to fairly tie compensation to performance. What about Main Street? With Thornburg predicting that the recovery is still two years away, what adjustments has your company made in its sales compensation plan to help it succeed?
Ask yourself these questions about your company’s sales compensation plan:
Is it in alignment with the company’s goals?
Does it motivate the salespeople to hustle and produce?
Has it changed to adapt to changes in the market?
Sales compensation plans run the gamut from 100% salary to 100% commission and everything in-between. Both extremes have drawbacks. The 100% salary problem is easy to indentify. It is does not motivate the salesperson to produce results. People work harder when they receive increased rewards for increased production. Under an all-salary plan, marginal salespeople work just enough to avoid getting fired and superstars grow frustrated and leave due to the inability to increase their income. So, why not 100% commission then? It can work once professional salespeople have built a steady flow of business, but it is hard for a new salesperson to get started. Many companies on 100% commission regularly churn through sales reps every 3-6 months. This is because salespeople give it a try then give up after a few months of low income. The problem is worse during slow times when unemployed salespeople are desperate for work. This costs the company money due to a constant stream of salespeople caught in a repeating hire-train-lose cycle. One other drawback of a 100% commission plan is that customer service can suffer since salespeople are not compensated for these activities.
The best results come from a balanced plan with some salary or a draw against commission. Components of a successful plan include:
Identify company goals and tie the variable income to these goals. Is the goal revenue or profit? Do you want to reward sales of a particular product or service more than another? Is a new customer dollar worth more to your company than an existing customer dollar?
Spell out the salesperson’s specific duties for both the salary portion and the commission portion. Are they expected to attend regular meetings? Do pipeline reports? Update customer information in the company CRM system?
Include incentives for reaching a stretch goal. Incentives could include cash bonuses, commission accelerators, and prizes. Studies show that prizes and trips are more effective motivators. Extra money goes to paying bills and is quickly forgotten. Cash does not create a powerful visual image or memory like a big screen TV or relaxing with a Mai Tai on Waikiki beach.
Make sure you have the system in place to measure what is being compensated and that salespeople can track it. Sales revenue is easy to measure. Activities take a little more work. Customer Satisfaction can be very difficult to quantify. Salespeople always want to know the “score”. The more real-time the tracking, the better motivator the program is.
The right compensation plan can make a huge difference. One company I worked with experienced a 27% increase in annual revenue due in large part to performance-based adjustments made to the sales compensation plan. As you prepare for your company’s success, take some time to analyze the sales compensation plan and adjust it for maximum results.