Experts agree that the nation’s financial crisis was caused by a misguided incentive system and sales compensation plan. The effects are still being felt in Europe today. These compensation plans encouraged Wall Street’s most aggressive Wall Street individuals to sell the wrong products to the bad people and to make perfect money doing so.
Everywhere I go, CEOs complain about how their sales compensation plans aren’t working as well as they hoped. They either justify their compensation plans by blaming poor selling skills, unmotivated sellers, poor sales management, insufficient information systems, and the economy for the poor results.
Despite all the factors that can lead to poor sales performance, there is one thing that sinks motivation faster: poorly designed sales compensation plans. Here are some examples of what I have seen:
Straight commission plans: Here, the company pays a percentage commission on every dollar that is sold regardless of sales levels. This allows salespeople to choose how hard they work and does not provide any incentive to them to work harder if they need more profit.
Poorly designed commission plans. For example, sales compensation plans may pay the same commission rate for profitable items as they do for marginally or unprofitable ones. It is usually because the company isn’t able to keep track of the details or doesn’t know which one is.
Some incentive plans have a cap on salespeople’s earning potential. However, the profit margin of sales above the cap is often significantly higher than sales below it. Salespeople who are really good will want to believe that there is no limit to their potential, even though they have little chance of reaching it.
Incentive plans that do not provide incentives: Some companies offer bonus plans that require salespeople to wait until the quarter-end or even the year-end in order to receive financial recognition. The reward is so distant from the event that the incentive doesn’t exist in the mind of the salesperson.
I have also witnessed CEOs convert their entire sales team to straight salaries in order to better manage the process. However, they do not know that they will have a genuinely subpar sales force.
Complicating the Mistakes
Combining one or more of the infamous sales compensation plans mistakes with any of these non-compensation issues can result in a severely unproductive sales team.
An evil sales compensation plan effectively converts “pay-for-performance” into “pay-for-non-performance. Your sales incentive plan must be a win-win for you, the salesperson, and your customer.
Here are six key characteristics of a winning sales incentive plan:
It pays more for the products you want to make more sales of and less for the products you sell less of. It’s OK if that’s the case. Suppose that’s true, great.
Sales that generate more profit for your bottom line pay more. You need to know the margins of your products. This will help you identify both a cost accounting and sales compensation problem. Both of these issues will destroy your bottom line quicker than you can say, “money pit.”
Salespeople can earn unlimited amounts. Create powerful incentives to motivate them to continue selling even after they reach their income comfort level. Share the extra wealth from sales, such as a bonus, higher commission rates, Hawaii trips, or anything else that will motivate your salespeople to continue selling year after year.
Incentives are paid as close to the event as possible. This is done to reinforce the connection between the deeds and the reward. It doesn’t matter how closely they are related. However, if the tip comes later than expected and the salesperson has put more effort into other areas, the association is at best weak. It is best to pay commissions every month, monthly. If adjustments are required due to breakage, returns, or any other reason, you can deduct them from your current payments as they happen.
This includes commissions and bonuses. These bonuses are additional commissions and payments that reward exceptional performance. They do not replace sales-by-sales commissions.
Salespeople can easily understand it. Explain your sales compensation plan to them. They will assume that they are being taken advantage of by the company if they don’t get it. Change the plan. Make sure to explain to them the benefits and how they can most benefit from the changes. You’ll lose trust if you aren’t upfront with them.
Don’t Forget Strong Sales Management.
Okay, now I want to talk about another critical issue, sales management. You’ve probably heard that money cannot compensate for poor management. Your salesperson who isn’t a great sales manager won’t be able to motivate, follow up, train, or hold their subordinates accountable. No sales compensation plan design can make up the difference.
A good sales manager will have a great sales compensation plan and a product line, and the results will be excellent. You will quickly notice the difference between weak and strong salespeople, which will allow you to build a world-class organization that produces world-class results.