Improving Sales through Strategic Sales Compensation Planning
Improving Sales through Strategic Sales Compensation Planning
Dissatisfaction with sales results led Jimmy to review his sales compensation package. He took advantage of the opportunity available to him in a PEG to find out what his colleagues were doing that brought them good results.
The Function of Sales Compensation Plans
There are two kinds of influences that determine different sales compensation approaches. They can be functional i.e. productive, successful, effective or dysfunctional – unproductive, unsuccessful and ineffective.
Your most important functional influences are the sales strategy, tactics and goals that you determine. Your sales strategy, tactics and goals should be the biggest determinant of your sales compensation plan, and the best single way to operationalize your sales strategy! Commissions and incentives have one function only; to reward the sales behavior that helps you reach your goals.
Most sales organizations have a wide range of sales goals to choose from. Here are some standard goals;
* Increase gross sales
* Improve profit margins
* Open new accounts
* Penetrate existing accounts
* Penetrate new market segments
* Launch new products
* Revive old products
* Improve conquest sales
* Improve sales in specific territories
* Generate new leads from sales team
How important these goals are to you should determine how much commission you place on them. Change your sales comp plan every time you change your sales plan.
Other Factors Influencing Sales Compensation Planning
• The length of your sales cycle. Business to business (B2B) sales cycles can range from a few days to years. The US Army may order a new kind of tank only every ten years. Business to consumer sales cycle on the other hand can be as short as a few minutes. I walk into an electronics store to buy batteries, and walk out with a new wide-screen TV. When I spotted the TVs and fell in love with wide- screen, I only needed a few minutes to rationalize a purchase.
As a general rule, the longer the sales cycle the higher the base salary and the lower the commission. If you are selling a new kind of tank, you’ll have a difficult time finding a sales rep willing to wait ten years for a commission, even if it is a very large one. On the other hand, if you are selling popular new TVs, sales reps won’t object to 100% commission for such a short sales cycle.
• Individual versus team sale. Complex, large ticket items in B2B often require a sales team to close the sale. Involved in the sale may be an inside sales rep, an outside rep, an engineer, a proposal writer, a senior manager and a sales rep from another territory, or even another country. Many companies recognize that to get the best performance from the team they need to reward all the team members, not just the sales rep. As in any other team, the team “manager” (i.e. the sales rep) should make the most money.
• The perceived value added by sales reps. If your customers perceive your product offerings as commodities, then your sales people are probably not adding any value to the sale. And if they are not adding any value, why do you need them, or at least, why pay them a commission?
The best sales people add value by showing the customer how the product solves a problem for them. They position then product not as a commodity but as a solution to a problem or as an opportunity for the customer to make more money. In highly competitive markets where customers do not perceive much difference among competitors’ offerings, you might reward the sales people who take the time to understand how customers might use their product to save money or make money.
Dysfunctional Influences
• Local conditions - e.g. competitors' compensation creates pressures to match or better other packages; lack of competition gives a company more leeway.
• Industry practices. In advertising sales, the glamour sales jobs are in selling TV spots, and definitely not in selling newspaper classified ads. TV sales reps often make twice as much as a newspaper sales rep and even more than a classified sales rep. They all compete for the same ad dollars, and the classified ad sales people often out sell their outside counterparts, but earn less money!
• Consistent company policy - with measurements to determine when changes are necessary
• Company culture - e.g. teamwork determines that sales people are paid the same as other employees or competitive culture where incentives drive productivity.
• Owner/CEOs who sell effectively and expect that their sales people have the same drive.
• Candidates who are good bargainers and sellers of themselves and demand comfortable compensation packages.
Components of Sales Compensation
* Base Salary
* Commission
* Draw against future commission
* Tools - sales equipment, transporta
* Incentives
* Bonuses
* Sales contests
Choosing the Right Sales Compensation Plan
There are no right or wrong sales comp plans; only effective or ineffective ones. Effective sales comp plans help drive you to your sales goals. Since your sales goals usually change from year to year, then your sales compensation plans follow suit. Remember that sales commissions, incentives and bonuses are rewards for sales behavior. Use your sales comp plan to reward the sales behavior that will get you to your goals.
Let’s say a new competitor enters your marketplace.
One of your sales goals might be to collect competitive intelligence on them and monitor and influence your customers’ perceptions of them. Your sales people are well positioned to do this so you adjust the sales comp plan to provide an incentive for intelligence gathering.
The following year you introduce a new product to compete with the new player. You align your sales comp plan with your strategy by dropping the incentive for competitive intelligence and replacing it with an incentive to sell your new product. The new product is wildly successful in segment A of your market.
Six months later, though, you are concerned that you are not selling much in segment B, and in fact your competitor seems to be getting a foothold there. So you boost the incentive for sales to customers in segment B, while reducing it for segment A. And so on.
As you constantly adjust your tactics to achieve your goals, you must ensure that your comp plan rewards the sales behavior that supports the change.
Negotiate the Base, But Not the Commission.
If you negotiate commission or incentives with your best sales person, you are reducing the number of tools you have to impact your sales goals. Acknowledge their value to you by raising their base salary, but maintain control of the commission.
Successful companies choose a sales compensation package for sales people which produces profit for the company, supports sales strategy and goals, reflects the realities of the local market, treats sales people fairly in the context, incorporates measures, and encourages productive activity of the sales people. Reviewing the measures on a regular basis to see if company goals are being achieved makes or breaks the compensation plan.
Summary
At the end of the day, sales compensation planning is an art not a science. It requires endless tinkering, hopefully it will make most of your people happy, but there will always be some who gripe about the plan. The top third of your reps will understand and embrace a plan that is tied to a clear sales strategy. And if it is a weak plan, they will make it work anyway. The middle third will live and die by how good your sales plan and comp plan are. And the bottom third probably won’t perform well for any plan.
Improving Sales through Strategic Sales Compensation Planning - To learn more about this author, visit John Brennan's Website.
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Recently Jimmy Adams of Adams Transfer in Atlanta, took these questions a step further. He asked all of the members of his Performance Enhancement Group (PEG) to share their sales compensation packages, "I want to be sure we are offering an attractive, competitive plan however not overpaying our sales staff. The market is dynamic, always changing; and if we want the best sales people in Atlanta on our team, we need to be sure we modify these agreements as the market dictates."
Dissatisfaction with sales results led Jimmy to review his sales compensation package. He took advantage of the opportunity available to him in a PEG to find out what his colleagues were doing that brought them good results.
The Function of Sales Compensation Plans
There are two kinds of influences that determine different sales compensation approaches. They can be functional i.e. productive, successful, effective or dysfunctional – unproductive, unsuccessful and ineffective.
Your most important functional influences are the sales strategy, tactics and goals that you determine. Your sales strategy, tactics and goals should be the biggest determinant of your sales compensation plan, and the best single way to operationalize your sales strategy! Commissions and incentives have one function only; to reward the sales behavior that helps you reach your goals.
Most sales organizations have a wide range of sales goals to choose from. Here are some standard goals;
* Increase gross sales
* Improve profit margins
* Open new accounts
* Penetrate existing accounts
* Penetrate new market segments
* Launch new products
* Revive old products
* Improve conquest sales
* Improve sales in specific territories
* Generate new leads from sales team
How important these goals are to you should determine how much commission you place on them. Change your sales comp plan every time you change your sales plan.
Other Factors Influencing Sales Compensation Planning
• The length of your sales cycle. Business to business (B2B) sales cycles can range from a few days to years. The US Army may order a new kind of tank only every ten years. Business to consumer sales cycle on the other hand can be as short as a few minutes. I walk into an electronics store to buy batteries, and walk out with a new wide-screen TV. When I spotted the TVs and fell in love with wide- screen, I only needed a few minutes to rationalize a purchase.
As a general rule, the longer the sales cycle the higher the base salary and the lower the commission. If you are selling a new kind of tank, you’ll have a difficult time finding a sales rep willing to wait ten years for a commission, even if it is a very large one. On the other hand, if you are selling popular new TVs, sales reps won’t object to 100% commission for such a short sales cycle.
• Individual versus team sale. Complex, large ticket items in B2B often require a sales team to close the sale. Involved in the sale may be an inside sales rep, an outside rep, an engineer, a proposal writer, a senior manager and a sales rep from another territory, or even another country. Many companies recognize that to get the best performance from the team they need to reward all the team members, not just the sales rep. As in any other team, the team “manager” (i.e. the sales rep) should make the most money.
• The perceived value added by sales reps. If your customers perceive your product offerings as commodities, then your sales people are probably not adding any value to the sale. And if they are not adding any value, why do you need them, or at least, why pay them a commission?
The best sales people add value by showing the customer how the product solves a problem for them. They position then product not as a commodity but as a solution to a problem or as an opportunity for the customer to make more money. In highly competitive markets where customers do not perceive much difference among competitors’ offerings, you might reward the sales people who take the time to understand how customers might use their product to save money or make money.
Dysfunctional Influences
• Local conditions - e.g. competitors' compensation creates pressures to match or better other packages; lack of competition gives a company more leeway.
• Industry practices. In advertising sales, the glamour sales jobs are in selling TV spots, and definitely not in selling newspaper classified ads. TV sales reps often make twice as much as a newspaper sales rep and even more than a classified sales rep. They all compete for the same ad dollars, and the classified ad sales people often out sell their outside counterparts, but earn less money!
• Consistent company policy - with measurements to determine when changes are necessary
• Company culture - e.g. teamwork determines that sales people are paid the same as other employees or competitive culture where incentives drive productivity.
• Owner/CEOs who sell effectively and expect that their sales people have the same drive.
• Candidates who are good bargainers and sellers of themselves and demand comfortable compensation packages.
Components of Sales Compensation
* Base Salary
* Commission
* Draw against future commission
* Tools - sales equipment, transporta
* Incentives
* Bonuses
* Sales contests
Choosing the Right Sales Compensation Plan
There are no right or wrong sales comp plans; only effective or ineffective ones. Effective sales comp plans help drive you to your sales goals. Since your sales goals usually change from year to year, then your sales compensation plans follow suit. Remember that sales commissions, incentives and bonuses are rewards for sales behavior. Use your sales comp plan to reward the sales behavior that will get you to your goals.
Let’s say a new competitor enters your marketplace.
One of your sales goals might be to collect competitive intelligence on them and monitor and influence your customers’ perceptions of them. Your sales people are well positioned to do this so you adjust the sales comp plan to provide an incentive for intelligence gathering.
The following year you introduce a new product to compete with the new player. You align your sales comp plan with your strategy by dropping the incentive for competitive intelligence and replacing it with an incentive to sell your new product. The new product is wildly successful in segment A of your market.
Six months later, though, you are concerned that you are not selling much in segment B, and in fact your competitor seems to be getting a foothold there. So you boost the incentive for sales to customers in segment B, while reducing it for segment A. And so on.
As you constantly adjust your tactics to achieve your goals, you must ensure that your comp plan rewards the sales behavior that supports the change.
Negotiate the Base, But Not the Commission.
If you negotiate commission or incentives with your best sales person, you are reducing the number of tools you have to impact your sales goals. Acknowledge their value to you by raising their base salary, but maintain control of the commission.
Successful companies choose a sales compensation package for sales people which produces profit for the company, supports sales strategy and goals, reflects the realities of the local market, treats sales people fairly in the context, incorporates measures, and encourages productive activity of the sales people. Reviewing the measures on a regular basis to see if company goals are being achieved makes or breaks the compensation plan.
Summary
At the end of the day, sales compensation planning is an art not a science. It requires endless tinkering, hopefully it will make most of your people happy, but there will always be some who gripe about the plan. The top third of your reps will understand and embrace a plan that is tied to a clear sales strategy. And if it is a weak plan, they will make it work anyway. The middle third will live and die by how good your sales plan and comp plan are. And the bottom third probably won’t perform well for any plan.
Improving Sales through Strategic Sales Compensation Planning - To learn more about this author, visit John Brennan's Website.
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Leanne Hoagland-SmithAre your sales where you want them to be? Will you be one of the few who achieves sales or business success or one of the many who have failed to change? Are you tired of being told you are like everyone else? Then you may find my first book on sales of interest. Be the Red Jacket in the Sea of Gray Suits, The Keys to Unlocking Sales available at Amazon or at http://www.processspecialist.com/red-jacket.htm. This book is a reflection of my no-nonsense approach to improving sales to overall business results. If you are truly committed to making sustainable changes, then I can help you secure a positive return on your investment because I focus on executable solutions not telling you the problems you already know you have. From training to corporate (group) coaching to executive one on one coaching, my approach is to assess, create awareness, build a goal driven action plan and then execute. The bottom line question is "Not do you or your employees know it, but do you or they want to do it?" Please call for a free strategy session at 219.759.5601. - Visit Leanne Hoagland-Smith's Website |
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David AchesonDavid Acheson is the founder of DCJA Consultancy. DCJA Consultancy is a management consultancy business specialising in B2B sales consultancy. They offer bespoke and packaged sales consultancy including Sales Optimisation Review, Interim Sales Management, Sales & Marketing Review, 1:1 Sales & Management Staff Analysis, Management Training, Solution Sales Training, Creation of New Pay Plan, KPI's, run Customer Feedback Campaigns, assist with Recruitment, Coaching, Appraisals and set up Strategic Marketing Campaigns. David spent his early career in accountancy and then moved into sales in 1982, working in Office Equipment, IT, Advertising, Training, Outsourcing and Consultancy. He has held many Senior Positions in SMBs and Global Organisations including Head of Sales Operations & Head of Business Development. His knowledge, skills and great experience of the Sales Industry has led to David making keynote speeches and running educational sessions to key businesses through organisations including The Chamber of Commerce and Business Link. - Visit David Acheson's Website |
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Dave KurlanDave Kurlan is the founder and CEO of Objective Management Group, Inc., the industry leader in sales assessments and sales force evaluations, and the CEO of David Kurlan & Associates, Inc., a consulting firm specializing in sales force development. Dave has been a top rated speaker at Inc. Magazine's Conference on Growing the Company, the Sales & Marketing Management Conference and the Gazelles Sales & Marketing Summit. He has been featured on radio and TV, including World Business Review with General Norman Schwarzkopf, in Inc. Magazine, Selling Power Magazine, Sales & Marketing Management Magazine and Incentive Magazine. He is the author of Mindless Selling and Baseline Selling – How to Become a Sales Superstar by Using What You Already Know about the Game of Baseball. He created and wrote STAR, a proprietary recruiting process for hiring great salespeople, and he writes Understanding the Sales Force, a popular business Blog and is a contributing author to The Death of 20th Century Selling and 101 Great Ways to Improve Your Life, Volume 2. - Visit Dave Kurlan's Website |
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Linda RichardsonLinda Richardson is the Founder and Executive Chairwoman of Richardson, a global sales training and performance improvement company. As a recognized leader in the industry, she has won the coveted Stevie Award for Lifetime Achievement in Sales Excellence and she was identified by Training Industry, Inc. as one of the “Top 20 Most Influential Training Professionals.” Ms. Richardson is credited with the movement to Consultative Selling and is the author of ten books on selling and sales management, including Sales Coaching — Making the Great Leap from Sales Manager to Sales Coach, and Stop Telling, Start Selling. She teaches sales and management at the Wharton Graduate School of the University of Pennsylvania and the Wharton Executive Development Center. Linda is a frequent speaker at industry and client conferences, has been published extensively in industry and training journals, and has been featured in numerous publications, including The Wall Street Journal, Forbes, Nation’s Business, Selling Power, Success, and The Conference Board Magazine. Learn more about Richardson's sales training and performance improvement solutions at http://www.richardson.com web - Visit Linda Richardson's Website |
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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George LudwigGeorge Ludwig is a recognized authority on sales strategy and peak performance psychology. An international speaker, trainer, and corporate consultant, he helps clients like Johnson & Johnson, Abbott Laboratories, Northwestern Mutual, CIGNA, and numerous others improve sales force effectiveness and performance. Though it's George's strategies and processes that help corporations increase productivity and performance, it's his tremendous energy and dynamism that spark the transformation. Again and again, clients remark on his amazing ability to unleash human capacity and inspire men and women to break out of their comfort zones. The result is a whole new type of salesperson. His customized presentations teach achievers to make stunning advances in their lives. From helping salespeople realize cherished dreams to helping corporations exponentially accelerate revenue streams, George Ludwig leaves audiences and individuals empowered, emboldened, and clamoring for more. George is the best-selling author of Power Selling: Seven Strategies for Cracking the Sales Code and Wise Moves: 60 Quick Tips to Improve Your Position in Life & Business. - Visit George Ludwig's Website |
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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