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Sales Compensation Tips

April 29, 2015

I just finished reading an article in the April 2015 issue of the Harvard Business Review titled “What Really Motivates Sales People” as well as several other articles on Sales Compensation. There is so much written on this subject and yet, I do not know of anyone that is using the perfect sales compensation system. In fact, I read in HBR Magazine that 85% of companies will change their sales compensation plans. I do not know how many times I have been asked “How should I compensate my Sales People”? Paying commissions just on revenue generated is ludicrous given today’s market. It may seem to be the simplest method but for the most part it does a disservice to both the company and to the sales rep. It encourages reps to sell at lower prices in order to generate revenue, and it does not take into account the value of your services.

I have personally developed systems for both large companies like ConAgra, and for small 3-person sales organizations. Every situation is different, and I have found that the most compensation packages should be based on what stage of growth your company is.

COMMON MISTAKES TO AVOID

  • Compensation that is not aligned either with the goals of the company nor its culture. This most frequently occurs when sales people are only compensated for revenue, and not for profit. In this scenario sales reps have to care only about generating revenue.
  • All commissions are the same no matter what they sell. The compensation plan does not emphasize and pay for the key products or services that the company makes the most money on. Sales reps will naturally sell what is easiest to sell, not what makes the company the most money.
  • Salespeople are being overpaid and underpaid because they have a good or bad territory and not based on their talent.
  • Sales Reps are being paid on appointments and number of calls. Trying to manage them through compensation only brings quantity not quality. Too state it another way, “garbage in and garbage out.”
  • Putting caps on commissions and constantly increasing quotas. In this case you are welcoming your top performers to start dogging it or playing the system. You are paying people to grow the company. As long as the company and you make more money why should you worry that a salesperson is making to much money.
  • Paying for “free sales”. That is sales from the past where sales people continue to get a high commission for a sale that happened in the distant past, which requires little or no effort from the sales person. If the salesperson is not affecting the sales why should they be compensated? I give you permission to reduce their commission over time and as their participation lessons. I have seen this scenario where the rep becomes very comfortable in what they are making because of previous victories.
  • The compensation system is so complicated that and has so many variables that the salespeople do not understand how it is done. In my experience anything beyond 3 variables to be compensated loses emphasis and direction. Ideally the compensation plan should help in your managing and direction of the sales force.

WHAT TO THINK ABOUT WHEN DEVELOPING A COMPENSATION PLAN

  • First and foremost is to determine what are your company goals and how can we compensate the sales reps to push the company goals.
  • What products and services give us the most bang for the buck?
  • Where do you want your sales representatives spending the most time- customer acquisition, customer retention, or selling new products to existing accounts?
  • What is your Sales Cycle?
    • Does it take a couple of weeks to develop new sales or is it months or even years?

 

SOME IDEAS WHICH MAY HELP

  1. Number 1 is aligning what is the most important goal and the culture for of the company is with sales compensation. Nothing will succeed until this is determined and aligned.
  2. If you are presently only compensating on revenue generated develop a hybrid system involving gross profit. This will require you to become transparent regarding some information, but it is well worth it. Instead of your sales reps asking for a better price they will be pushing the customer to buy at a higher price.
  3. Find out on an individual basis whether people seem more incentivized if they are paid bonuses on a monthly, quarterly, or yearly basis. This can greatly affect their performance and activities.
  4. Base part of the compensation plan on “Self Improvement”. This has to be an area where both management and representative agree can be improved for the betterment of the company and themselves.  Make sure it is measurable.  For example have them take a course and teach it to the rest of the troops.
  5. Award the sales people for being effective Captains of the Interaction. Throughout my career I see a constant fight between the sales department and the internal support people. Many businesses require a team approach. More and more Sales people have learned to steer the ship while managing the expectations of both prospects and clients.
  6. Your salespeople are great resources for innovative ideas, because they are in direct contact with your customers. Find a way to compensate them for the information that they gather and the ideas generated.

CONCLUSIONS

To develop highly motivated sales people and an effective sales compensation package is a daunting task. If you need more free information before moving forward I suggest going to the websites of Harvard Business Review, Obero, or Cornerstone Software to get you started. If you would like to give me a call or write me an e-mail, please contact me at 480-656-3565 or allan@salescoachaz.com. Till next time.

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