Many small business owners after reading the title of this article will assume this will be a short diatribe. After all (as noted in an earlier article), everyone knows that all you have to do to attract a great sales force is simply dangle a large bucket of money in their faces. Right? WRONG!
In that earlier article we covered how to attract and retain a high performing sales team. Also, we touched on the importance of structuring an on-target role profile and effective recruiting 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 both compensate and motivate them? An effective compensation plan is not the only factor, but clearly, it is a lynchpin. If a winning sales team is a NASCAR racer then an effective compensation plan is its engine and motivation is the fuel. Remember, salespeople are highly motivated (albeit not solely) by economic gain. Getting the comp plan correct for your business is essential to success in the marketplace. For the purposes of our discussion, we’ll wave our magic wands and assume you have found and have in place a great sales team. Now your challenge is to create a sales compensation plan that will be the right mix of the three “M’s” of comp plans – motivation, money, and measurement.
Before diving into comp plan structure a few notes, guidelines, and beliefs:
1. There exists no “one size fits all” sales plan. There are a myriad of permutations of comp plans. Plans must take into accounts many factors such as:
-a. Complexity of product/service – it’s generically a harder and longer sell to move data warehousing than it is pencils
-b. The sales cycle (how long from first contact to signed order) can be minutes or years. Generally speaking, the longer the sales cycle, the stronger the requirement to have larger base salaries to “bridge” the sales person income until sales commission is realized.
-c. Pricing can be a factor. If the product/service is a large ticket item that has a more elastic/higher margin, then the commission is likely to be larger (data warehouses). Products and services which operate on razor thin margins (pencils) may have less elastic margins and therefore a large sales payout can only be realized via volume.
2. As a general rule, you should strive not to have caps on commission. Caps on commission are an anathema to a sales team. Telling a sales team that there is a limit to how much commission they can make destroys morale. Rightly or wrongly, they believe that as long as they bring in revenue, they should get paid. In the abstract, it’s difficult to argue with this simple logic. Sales people would say no caps represents a win-win for the company and the sales person – if the company makes more money, the sales person should make more money. There are a myriad of justifications that I’ve personally sat through behind closed doors over the years with expansive diatribes rationalizing why business owners are reluctant to pay big commissions to sales overachievers. When you look under the covers, most of the arguments do not hold water. All too often, if you peel back the onion, the real reason is jealousy and greed. After all, a sales person should never be able to make more than their manager and certainly never more than the CEO! I say garbage! Logic dictates that if the sales team is all exceeding their goals, when aggregated, the company is exceeding its targets and everyone is celebrating.
3. As much as possible you want to use “KISS” philosophy (Keep It Stupid Simple or Simple Stupid). When the plan is uncomplicated it’s easy to explain, understand, and administer/ measure. I’ve seen far too many comp plans that read like a novelette. Trying to get too fancy will only feed the fires of potential ambiguity and controversy. You need to remember the poor people in the back office (HR, Sales Operations, etc.) who are trying to track, report, and pay commission on these plans.
4. Make it a goal to have one plan against which all sales people are measured.
5. A sales compensation plan should never be changed mid-year. Only in the case of extreme emergency (changes to the business itself, ex. merger/acquisition, etc.) should a comp plan be changed mid-year. Otherwise, the business owner should strive to keep sacred the normal (annual) sales plan revision cycle.
6. Use “SPIFFS” to incent special behavior. Spiffs are like a focused mini-incentive plan outside the confines of the main plan. They can take the form of:
-a. beginning of the sales year fast start programs/incentives
-b. end the year with a “bang” programs
-c. product/service specific incentives to drive the sale of newly launched solutions
-d. create/refresh interest in an existing line
Whereas the main sales compensation plan tends to be largely cash based, spiffs can take the form of non-cash incentives such as trips, prizes, gift certificates, etc. Spiffs are not a substitute for the regular comp plan but are an addition to, much like another layer on a cake. Perhaps most importantly, they maintain the integrity of the main comp plan.
7. Comprehend how industry competition is aligned – what are “best in practice” sales motions?
8. There are always exceptions to the plan – but should be minimal and manageable. For example, people enter and depart the organization via; transfer, additions, eliminations, reorganizations occur, etc. Also customer profiles can change (M&A, bankruptcies, funding level changes, etc.)
Keeping in mind that sales plans can/should differ in construction and emphasis depending on factors such as the ones noted above, what are key sales comp plan drivers of a good plan and how do they work together to garner the desired results? Take a look at the graph below. The total compensation line has a funny looking shape to it. Why is it not a straight line from bottom left to top right (as a sales person would argue)? Why is it not a standard bell curve (as a financial comp plan administrator would argue)? Let’s decompose what we are seeing as there is a lot going on in this chart.
First and foremost why the pretty colored bars? They represent “bands” of total quota attainment. By most standards, a sales person who has achieved less than 75% of their quota is having problems. It is not our goal to get into why sales people succeed or fail. Suffice it to say as a general rule, at year end, a sales person who has achieved less than 75% of their annual quota typically is in some level of trouble or under scrutiny at least (barring extenuating circumstances). Hence we have the RED zone.
As we progress from left to right the color bars become more green (the color of money) with each bar representing a higher level of quota achievement.
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 for each sales dollar as a function of the sales multiplier. If, for example, the sales person earns $1 for each $1000 sold, then this is the base multiplier (a multiplier of 1 as seen in the red zone). In the blue band, you see the multiplier has doubled. This means that the sales person is making money at twice the rate as the red zone. It follows that the slope of the curve is steeper in this range reflecting the accelerated earning rate. Clearly sales people are motivated to get into this range as they are earning more money for each dollar they sell. Continuing this pattern in the range up to 100% attainment, the more you sell, the more you earn. This is great alignment between metrics and rewards, between company goals and individual sales person goals.
But wait a minute. The curve continues UP between 100% and 125% in our example. Why is that? Remember, the company goal should be to have every sales person exceeding their quota. If all sales team members exceed their quota, then the company has achieved its annual sales goals. Therefore, it behooves the company to incent sales people to get above 100% achievement. Therefore the multiplier goes up to 3 in our example. The sales person is drooling to be in this range as they are making buckets of commission in this range. Life is good. It should be a goal of the commission plan that every sales person is above 100% attainment and the payout plan should incent this behavior.
Hold on another minute. The curve then turns down after 125% attainment. Why is that? Although I’m not a believer in caps on commission (above discussion), and some industries and situations do lend themselves to a “the sky is the limit on commission” scenarios, it is often prudent from a total cost of commission plan scenario to control or curtail boundless commission. In any sales year, a few sales people will hit it out of the park or get a “bluebird” (sales speak for having a monster order drop in your lap from out of nowhere). Especially in the case of the bluebird, it is nonsensical to pay a large bucket of money for little or no work – pure luck. Also, the world is not running short of sales people who know how to manipulate a quota setting exercise when (for instance) they know they already have a large order essentially in the bag but hide that fact until after quotas are set. Indeed, the balance of the sales team can get bitter and unmotivated if they perceive that another member of the team is getting a large payout for little work.
Therefore, the key above 125% (in or 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 do so at a decreasing rate. That is, the multiplier goes back down. This way, we’ve met the goal of not capping commission – a sales person can always make more money, but keep commission plan expense in perspective (I’ve just pleased our friends in the Financial Department).
Now you will understand the reason for the dotted blue line in the chart. This total commission curve continues to rise forever. That is, sales compensation will always rise for the sales person. The acceleration slows past a certain point (125% in our example), but ALWAYS goes up.
This is but one example of a commission structure. The take away from this example is not the chart per se, but the discussion and points made are food for consideration as you construct a plan to motivate the sales team. Some compensation plan reality as reminder and take-away:
· There is no such thing as a perfect plan
· Worry when sales people stop complaining about the comp plan
· It is imperative to match comp plan (behavior incentives) with how our prospects/customers in industry traditionally/typically make purchase decisions
Hopefully you now feel better equipped to face the challenge of creating a sales compensation plan that will be the right mix of the three “M’s” of comp plans – motivation, money, and measurement.