If you’re paying your sales reps straight commission, you’re using an obsolete formula.
If you’re paying your sales reps a straight salary, you’re also using an obsolete formula.
Both of those formulas are vestiges of an earlier, simpler time.
You may be like thousands of other companies who are using compensation plans that served them well in the past. In the last few years, however, a number of changes in the economic environment have combined to render some of those compensation plans ineffective.
Even though the last couple of years have been good for many companies, most will admit to a general uneasiness about the demand for their products. Markets are leveling off, and customers are much more conservative than they used to be. Constant change, growing competitors, and ever-increasing expectations on the part of customers have combined to wreak major changes in the business
environment.
Another significant change that is often overlooked, but which has tremendous implications for salesforce compensation, is the growing sophistication of your computer software. This gives you the ability to easily measure performance more and more precisely. For example, a few years ago you could probably easily measure sales and gross profits per territory. Anything much beyond that may have
been very difficult to get at.
Now, however, many companies have the ability to easily measure things like gross profits per line of billing, profitability per customer, profitability per product line, and sales costs as a percentage of gross profit per territory.
This increase in information sophistication should be viewed as an opportunity for increases in sales productivity. With this newly acquired ability to measure the results of sales behavior more finely comes the corresponding ability to reward sales behavior more precisely.
All of these changes combine to create a climate where smart companies should take a close look at their current compensation plan to decide if it really is meeting their needs.
Benefits of a Revised Sales Compensation Plan
1. Increase productivity — and therefore the bottom line.
Pressures on margins are not going to go away. It’s likely that you’ll be averaging a couple of points less a few years from now than you do today. If you’re going to survive, much less prosper, in that kind of environment, you’ll need to become more productive, to do more with less margin.
Until recently, you have probably reacted to the need to become more productive by concentrating on internal costs. You’ve reduced your inventory, streamlined the warehouse, and are probably on your third generation of computer software. But during all this time that you’ve focused internally, you’ve kept hands off the sales force. It is, in all likelihood, costing you the same percentage of
gross profit today that they did a few years ago.
Yet, the sales force is probably the single largest cost to your company. Look at your P&L statement. Isn’t sales force compensation the largest single line item? If you’re like most companies, your sales force costs range around 25 – 35% of gross profit. Doesn’t it make sense to at least investigate the potential of changing the compensation plan to make that group more
productive?
A couple of points change in the relative cost of your sales force, and therefore an improvement in its productivity will drop directly to your bottom line.
2. Implement a corporate strategy.
As business becomes more complex and more competitive, the smartest companies are working harder at creating effective strategies. The days of “Go out and sell a lot” are over. Yet most sales compensation programs work against effective corporate strategy because they encourage the salespeople to do what is easiest (sell the easiest item to sell, to the people who most like them) rather than what is
in the best interests of the company.
It’s often a classic case of the salespeople doing what the compensation program rewards them for (easiest sales) and not what is in the strategic plan.
Every sales compensation decision encourages and discourages certain behavior. For example, a straight commission plan encourages the quickest, easiest sales. But, it discourages strategic behavior that has a longer-term payoff — like acquiring new customers or emphasizing certain strategic product lines.
Straight salary, on the other hand, encourages loyalty, steadiness, and attention to service. However, a straight salary discourages individual initiative.
If you want to manage your company strategically, you’ll need to ask yourself if your compensation program directly supports your corporate strategy. If not, it’s time to review it.
