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.
Like this article? Share it with your friends
|
|
John Brennan
(Visit John's Website)
John 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 office.microsoft.com/e
n-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.
|
|
 |
|
|
|
|
![[Get Copyright Permissions]](http://license.icopyright.net/images/icopy-w.gif){kind=small}
