A business owner sits at his desk and wonders why his year-to-date sales are well below forecast, his cash flow is suffering and he can't seem to motivate his sales team to sell the new product. Everyone had bought into the targets at the beginning of the year; but now, the frustrated manager would be happy to hit 60% of plan. Is this a sales-management problem? Should he fire his team? What, exactly, has gone wrong?
Scenarios like this aren't uncommon among small and mid-sized companies. But in many cases, the problem isn't the product or the people. It's the sales compensation plan.
Salespeople are your company's frontline champions for the products and services you sell. They're the connection between your company and its customers. They find revenue, and they make a primary contribution to top-line growth. More than anyone else, your salespeople influence how the marketplace perceives your firm and values its products.
But the way they do those things is largely a product of how they're paid. And as most business owners and sales managers know, formulating the right compensation plan can be a bit like solving a Rubik's cube. How do you know whether your plan is designed properly? An effective sales compensation plan does the following:
Attracts and retains top talent by being market-competitive
Every CEO or sales VP will tell you that they want to hire the top salespeople in their industry. But from my experience, companies give little thought to how their sales compensation plan is perceived by potential employees. Ask yourself these questions:
-Is our base salary competitive?
-Is our commission structure in line with that of our competitors?
-Is there a cap on commission at a competitor?
-How frequently are salespeople at the competition paid?
-Do salespeople at the competition get paid based on revenue or margin?
Only with these benchmarks can you build a plan that's as good or better than the competition's. Find the information in industry research reports, online guides such as Payscale and even by interviewing your competitors' sales reps. Use competitive information as a starting point, and make adjustments that fit your business based on the next three points.
Aligns employee interests with the company's business objectives
The DNA of salespeople forces them to spend more time and energy on the activities that earn them more money, so it's important to define your business objectives clearly and ensure your sales compensation plan communicates those objectives to your sales team. For example, if an organization wants its sales team to focus on developing new business, the sales compensation plan should be designed to pay out more commission for acquiring new accounts than for renewals.
Admittedly, guiding behaviour through compensation is not always simple. One company I worked with had a suite of highand low-margin products and a commission plan based solely on the gross margin of the products they sold. But that was not enough to encourage the sale of the highermargin products. The lower-margin products were much easier to sell and could be moved in higher quantities, so that's what the sales reps sold; high volumes with low commissions trumped low volumes with high commissions.
Your sales plan should deal with such complexities. Salespeople are driven by money, so when compensation is attached to certain activities and results, it adds weight and gets their attention.
Encourages desired behaviours—not just outcomes
People who choose to be in sales are driven by the money they can make. Within your compensation plan, you should clearly define your expectations for performance and the associated commissions, bonuses or other incentives, such as trips or car allowances. But note that a smart plan encourages desired behaviours, and not just financial results.
Consider one former client of mine, whose plan did not align payouts with the sales cycle; the company's reps achieved 0% of plan in the first 11 months of the year but 600% by the end of it—not good for cash fl ow. So, for instance, you might tie compensation to the performance of certain tasks within a designated time frame.
For a long sales cycle, you could offer a bonus to those who make certain number of sales presentations in a quarter; if the cycle is less than 30 days, you might tie a perk to booking revenue early in the month instead of at month-end.
Rewards salespeople for overachieving with accelerated commissions, trips or other rewards
A common argument I hear from business owners is that they feel their salespeople make too much money as a percentage of the revenue they bring in. On the other hand, salespeople want to feel that their contributions to growing revenue are rewarded appropriately. The best designed compensation plans align the interests of both parties. Here are some tips for doing so:
-Except in unusual circumstances, total compensation should not exceed 20% of gross profit generated by the sales rep in a year.
-Compensate more for higher-margin products/services sold and less for lowermargin items, factoring in ease of sale and potential volumes.
-Pay out commissions only after the client has paid you.
By putting these elements in place, you ensure that you are not overpaying your reps, that they are focused on profitable sales activity and that you are protecting cash flow.
Developing a sales compensation structure that addresses all of these issues is a challenging process. However, once your plan is in place, it will help drive your sales objectives and support your recruitment goal of attracting the best possible talent.
Back to our frustrated business owner, who had to change several variables of his compensation plan. First, he delayed commission payments by 30 days, freeing up cash fl ow for other investments. Next, he instituted a draw against commission whereby sales reps were not paid commission until they generated a minimum amount of revenue equal to their monthly allocated overhead. This motivated the reps to make sure they generated revenue as soon as possible, and led to increased prospecting activity. Most important, the owner took time to explain why the changes were needed, avoiding any unhappiness or turnover.
A change to your compensation plan might not be necessary. But review your plan each year to make sure you have a plan that rewards your reps fairly and maximizes profit for your company.
Matthew Cook has 17 years of sales and sales management experience, primarily in the financial services and staffing industries. He is founder of SalesForce Search Ltd., which was No. 4 on the PROFIT HOT 50 ranking of Canada's Top New Growth Companies in 2010, and No. 19 in 2011.
More columns by Matthew Cook