Sales Force Optimization – "Sales Team Compensation"

Many small business owners after reading the title of this article will assume that it will be a short tirade. After all (as noted in a previous article), everyone knows that all you have to do to attract a great sales force is simply hang a big bucket of money in their face. Right? WRONG!

In that previous article, we covered how to attract and retain a high-performing sales team. In addition, we mention the importance of structuring an objective role profile and an effective recruitment engine in the attraction process. Additionally, the role of education and career path were identified as two essential drivers of retention.

So what about the sales compensation plan? How do you compensate and motivate them? An effective compensation plan is not the only factor, but it is clearly a linchpin. If a winning sales team is a NASCAR driver, then an effective compensation plan is its engine and motivation is its fuel. Remember, sellers are highly motivated (although not solely) by financial gain. Getting the right compensation plan for your business is essential to being successful in the marketplace. For the purposes of our discussion, we will wave our magic wands and assume that you have found and have a great sales team. Now your challenge is to create a sales compensation plan that is the right mix of the three “M’s” of compensation plans: Motivation, Money, and Measurement.

Before diving into the compensation plan structure, a few notes, guidelines, and beliefs:

1. There is no “one size fits all” sales plan. There are myriad permutations of compensation plans. Plans must take into account many factors, such as:

-has. Product/Service Complexity: It is generally more difficult and time consuming to move data storage than pens.

-b. The sales cycle (how long it takes from first contact to signed order) can be minutes or years. Generally speaking, the longer the sales cycle, the stronger the requirement to have higher base salaries to “plug in” the salesperson’s income until the sales commission is made.

-vs. Price can be a factor. If the product/service is a high value item that has a higher/elastic margin, the commission is likely to be higher (data warehouses). Products and services that operate on very thin margins (pencils) may have less elastic margins and therefore a large sales payout can only be made through volume.

2. As a general rule, you should strive to have no caps on commission. Commission caps are anathema to a sales team. Telling a sales team that there is a limit to the commission they can earn destroys morale. Rightly or wrongly, they believe that as long as they generate income, they should get paid. In the abstract, it’s hard to argue with this simple logic. Sellers would say that no limits represent a win-win situation for both the company and the seller: if the company makes more money, the seller should make more money. There are a plethora of justifications that I have personally seen behind closed doors over the years with expansive tirades rationalizing why business owners are reluctant to pay big commissions to the most successful salespeople. When you look under the covers, most arguments don’t hold up. Too often, if you peel the onion, the real reason is jealousy and greed. After all, a sales person should never be able to earn more than their manager, and certainly never more than the CEO! I say rubbish! Logic dictates that if the entire sales team exceeds their goals, when added together, the company exceeds its goals and everyone is celebrating.

3. As much as possible, you want to use the “KISS” (Keep It Stupid Simple or Simple Stupid) philosophy. When the plan is uncomplicated, it is easy to explain, understand and manage/measure. I’ve seen too many compensation plans that read like a novella. Trying to get too fancy will only fuel the fires of potential ambiguity and controversy. You have to remind the poor folks in the back office (HR, sales ops, etc.) trying to track, report, and pay commissions on these plans.

4. Make it a goal to have a plan against which all sales people are measured.

5. Never change a sales compensation plan in the middle of the year. Only in the case of an extreme emergency (changes in the business itself, eg, merger/acquisition, etc.) should a compensation plan be changed mid-year. Otherwise, the business owner must strive to keep the normal (annual) sales plan review cycle sacred.

6. Use “SPIFFS” to encourage special behavior. Spiffs are like a mini incentive plan focused outside the limits of the main plan. They can take the form of:

-has. start of the sales year fast start programs/incentives

-b. end the year with “bang” programs

-vs. specific product/service incentives to drive the sale of newly launched solutions

-d. create/update interest on an existing line

While the main sales compensation plan tends to be largely cash-based, spiffs can take the form of non-monetary incentives such as trips, prizes, gift certificates, etc. Spiffs are not a substitute for the regular compensation plan, but rather an addition, like one more layer on a cake. Perhaps most importantly, they maintain the integrity of the primary compensation plan.

7. Understand how the industry competition lines up: What are the “best in practice” sales motions?

8. There are always exceptions to the plan, but they should be minimal and manageable. For example, people enter and leave the organization through; transfers, additions, deletions, reorganizations, etc. Customer profiles may also change (mergers and acquisitions, bankruptcies, changes in funding level, etc.)

Keeping in mind that sales plans can/should differ in construction and emphasis based on factors like those mentioned above, what are the main drivers of a good sales compensation plan and how do they work together to get the desired results? ? Take a look at the graph below. The total compensation line has a funny shape. Why isn’t it a straight line from bottom left to top right (as a salesperson would argue)? Why is it not a standard bell curve (as a financial compensation plan manager would argue)? Let’s break down what we’re seeing, as there’s a lot going on in this chart.

Why the pretty color bars in the first place? They represent “bands” of total achievement of quotas. By most standards, a seller who has achieved less than 75% of their quota is in trouble. It is not our goal to explain why salespeople succeed or fail. Suffice to say, as a general rule of thumb, at the end of the year, a seller who has achieved less than 75% of their annual quota is usually in some level of trouble or at least under scrutiny (barring extenuating circumstances). Hence we have the RED zone.

As we go from left to right, the colored bars become more green (the color of money) and each bar represents a higher level of quota compliance.

Now, the two curves. What do they mean? One, the black line that looks like a hill or mountain is the commission acceleration curve and the other is the total compensation curve.

The commission acceleration curve represents the commission earned per dollar of sales based on the sales multiplier. If, for example, the seller earns $1 for every $1,000 sold, then this is the base multiplier (a multiplier of 1 as seen in the red zone). In the blue band, you see that the multiplier has doubled. This means that the seller is making money at double the red zone rate. It follows that the slope of the curve is steeper in this range, reflecting the accelerating rate of profit. Clearly sellers are motivated to enter this range as they are making more money for every dollar they sell. Continuing this pattern on the rank up to 100% achievement, the more you sell, the more you earn. This is a great alignment between metrics and rewards, between company goals and individual seller goals.

But wait a minute. The curve continues UP between 100% and 125% in our example. Why is that? Remember, the company’s goal should be for each salesperson to exceed their quota. If all members of the sales team exceed their quota, then the company has met its annual sales goals. Therefore, it is up to the company to incentivize sellers to exceed 100% performance. Therefore, the multiplier goes up to 3 in our example. The seller is eager to be in this range as he is earning lots of commissions in this range. Life is good. It should be a goal of the commission plan for each salesperson to be above 100% achievement and the pay plan should incentivize this behavior.

Wait one more minute. Then the curve turns down after 125% achievement. Why is that? While I am not a fan of commission caps (previous discussion), and some industries and situations lend themselves to “the sky is the limit on commission” scenarios, it is often wise to start with a full cost plan scenario. commissions to control or reduce the unlimited commission. In any sales year, some vendors will either hit the park or get a “blue bird” (sales talk about having a monstrous order drop into their lap out of nowhere). Especially in the case of the blue bird, there is no point in paying a lot of money for little or no work: pure luck. Also, the world is not running out of vendors who know how to manipulate a quota setting exercise when (for example) they know they already have a large order essentially in the bag, but hide that fact until after the quotas are set. In fact, the balance of the sales team can turn sour and demotivated if they perceive that another team member is getting paid big for little work.

So the key above 125% (in our example) is to continue to make it possible for the sales team to make more and more money (no cap), but after some point (125% in our example) they make it to a decreasing rate. That is, the multiplier goes down again. In this way, we have set the goal of not limiting commissions: a seller can always make more money, but it keeps commission plan expenses in perspective (I just pleased our friends in the Finance Department).

You will now understand the reason for the blue dotted line on the graph. This total commission curve continues to rise forever. That is, the compensation for sales will always increase for the seller. The acceleration slows down beyond a certain point (125% in our example), but it ALWAYS goes up.

This is just one example of a commission structure. The point of this example is not the chart itself, but rather that the discussion and points presented are things to keep in mind as you build a plan to motivate your sales team. Some compensation plan reality as a reminder and takeaway:

There is no such thing as a perfect plan

Concern when salespeople stop complaining about the compensation plan

It is imperative to match the compensation plan (behavioral incentives) to how our prospects/customers in the industry traditionally/typically make purchasing decisions

We hope you now feel better equipped to take on the challenge of creating a sales compensation plan that is the right combination of the three “M’s” of compensation plans: Motivation, Money, and Measurement.