In addition to the people in your company who deliver services and keep operations running, how much do you value the folks who bring in the most revenue, i.e. the top sales performers? Answering this question directly should be part of your overall business plan.
If your sales compensation program is based on anything other than a fair and equitable alignment with your corporate growth strategy, it might be like a shallow foundation built on sand. Shifts in the market can send undervalued people running to new and seemingly more solid ground where better opportunity is perceived.
Sales compensation mistakes are among the costliest to sales organizations and they can be difficult to recover from. Just ask the small business owner who’s suddenly losing customers to his competitor across town or worse, his former employee’s new company!
The Stakes are High
Teanna Spence, owner of Sales Compensation Strategies in Amherst, NH and nationally respected consultant, notes in her blog, “Today it is really hard to find top sales performers. With the nationwide unemployment rate at 4.3% and my home state of New Hampshire at 2.7%, to find qualified employees most employers are enticing prospective employees away from their current employers. Retaining your top sales performers is critical to the success of your company.” She also notes that according to one study, “‘A’ players generate 5x more revenue than ‘B’ players and 10x more than ‘C’ players.” Just to be clear, ‘A’ player refers to top producers in the market, not necessarily your company.
Four Areas of Focus
There are generally four major areas where owners & managers make critical mistakes in determining sales compensation plans. Let’s examine how to avoid them.
1. Compensation plans must align with corporate strategy.
The number one problem found in sales comp plans is misalignment with corporate growth and profitability goals. If you get your salespeople to think more like owners and realize they have P&L impact and therefore, responsibility, they will tend to focus on more effective and measurable activities. As sales manager, you need to adequately incentivize the desired sales behaviors. A common mistake here is to either over- or under-emphasize the importance of finding NEW business rather than renewing or growing existing accounts. Too much emphasis (commission/reward) will cause salespeople to stop calling on existing customers, but a lack of new account incentives will lead some salespeople to make little or no effort to identify and close deals with new customers.
2. Sales job description and roles must be clear.
Who gets credit for the sale? It might sound simple enough but the gray areas in sales originations run the gamut. For example, new customer referrals to other employees and owner relationships with companies that a salesperson has previously called on can blur who should get credit for the inbound lead. The roles for influencing prospect and customer behavior need to be clear so that incentives match both the salesperson’s and company’s expectations.
3. Are you paying too much or too little?
According to Teanna Spence, on average about 14% of total business revenues are used to pay sales compensation. This makes the sales/commission expense the second largest variable expense in most companies. She also maintains, “If you make a mistake, a bad sales commission plan will cost you more than money. Incentive compensation fuels the motivation that keeps your sales organization and your business successfully running and growing.”
4. Use quotas properly.
Quotas are important, no matter how distasteful to some they can be. A quota is like a measuring stick with a “carrot” attached. Good quotas work by setting an acceptable professional standard for your sales team which gives each member a clear mark for goal setting. Signs that may indicate the wrong quota level include nobody on the team achieving it and everybody (including low producers) exceeding it on a consistent basis. Rule of thumb: Set quotes aggressively yet realistically, based on history and market knowledge.
Supporting the New Hires
New sales hires present additional compensation challenges depending on individual experience and background factors. How can someone with no customer base immediately cover the kind of income level that most quality salespeople demand? Usually they can’t so you’ll need to carry them at least several months as they ramp up and eventually start producing. Look into graduated salary/commission transitions, draws against future commissions or guaranteed minimum income until a benchmark or quota is reached.
Remember the value of a strong and disciplined sales force and the revenue leverage that even one or two “A players” can mean to your company. Make sure to offer strategic compensation plans that pay your people right, so you’ll keep them on your team!