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