For any business, creativity is a vital part of a sales and marketing program. Developing effective concepts and strategies that help market and sell a product or service are an essential part of generating sales. However, the compensation plan for sales teams is often an overlooked, uninspired part of a sales and marketing strategy that is too frequently delegated to the payroll or accounting department.
With increasing pressure from competitors and an emphasis on recruiting and retaining the best sales talent, it is simply a mistake for a business to stick to an "old school" method of sales compensation out of inflexibility and unwillingness to consider more creative options. An effective compensation plan should do more than "pay" the sales team members. It serves a multitude of functions and can literally make or break a sales team's effectiveness and therefore, the business as a whole.
When considering the effectiveness of your company's current sales team compensation plan, you should ask yourself the following questions:
1. Is the plan motivating the sales team?
2. Is the plan reducing attrition?
3. Is it rewarding the performance that we need/want the sales reps to focus on?
4. Is the sales team enthusiastic and satisfied?
5. Is the company attracting and retaining top sales talent?
6. Is the current plan going aligned with the desired corporate revenue growth?
If you answered no (or even maybe) to any of these questions, you probably need to explore other, more creative options to your company's sales compensation plan.
To begin, let's look at the four traditional approaches to sales compensation that most businesses have utilized with varying degrees of success:
The "straight salary" plan that doesn't pay commission promotes attention to the customer and a degree of sales rep loyalty, as long as the salary is competitive. However, it neglects those reps who thrive on competition and individual achievement. Often times, the most successful approach to using the "straight salary" plan is to combine it with an effective and aggressive corporate bonus program based upon corporate profits that are distributed to the employees.
"Salary plus commission" is another common compensation strategy that offers sales reps a guaranteed base salary and commission. Generally, businesses only offer relatively high base salaries to seasoned reps that they feel can "hit the ground running" and quickly make enough commission to "earn their keep." Commission percentages will vary based on a number of factors including gross profit, cost of sale, sales cycle, and the complexity of the sale.
Similar to the "salary plus commission," the third commonly practiced method of sales compensation is the "salary plus draw." This plan advances a predetermined amount of commission to a rep each month with the hopes that the rep sells enough to reimburse the company. There are two distinct types of "salary plus draw" methods. The recoverable draw is where a rep is responsible for paying for shortfalls in commissions out of the next month's commissions. Non-recoverable draw doesn't require a rep to reimburse the company for shortfalls. Recoverable draws offer less financial exposure to a company, but non-recoverable draws are more attractive to reps who will have increased stability in their earnings during their first months on the job.
Finally, the "sink or swim" sales compensation plan, also known as "pay for performance" is the fourth traditional approach. Most companies realize that although there is no financial exposure (however, the lost opportunities cost should not be discounted), it may be extremely difficult to attract qualified or seasoned reps without offering any salary. As well, by not having any financial "leash" on reps, it is difficult to direct sales efforts and productivity.
Although all four of these approaches are widely used by companies, there are also highly effective, creative alternatives that can drive your sales team to new heights of success and greatly improve sales in the process. Before sitting down and simply drawing up a new compensation plan, you will need to take a good, hard look at the current compensation plan and sales team, as well as establish a new strategy for moving forward with any creative changes.
It is critical to remember that sales reps are generally unhappy about having their sales compensation plan changed without ample notice and participation. Keep the lines of communication open during this process. Ask for input and, if possible, make this a group process.
Step 1:
Now that you're ready to consider a new, creative approach to your company's sales compensation plan, let's identify the four goals that every plan should be achieving. Your plan should:
1. Motivate the sales reps.
2. Help you to recruit well-qualified, experienced sales reps.
3. Decrease attrition that will reduce recruiting and hiring expenses, and lower training costs.
4. Continuously improve the company's competitiveness.
Step 2:
Next you must evaluate the following factors before designing a new compensation plan. Once again, remember that changing someone's compensation induces anxiety and concern. You want to make certain that you take the following factors into account before making changes.
1. Review the complexity of the sale as well as the length of the sales cycle. Do your reps have the opportunity to earn results-driven compensation within a "reasonable" time frame or is the sales cycle extremely lengthy?
2. What is the tenure of the current sales team? Are they a mature, well-trained and seasoned group of veterans or are they more junior and require more "hand-holding and training?
3. Evaluate your company's "compensation competitiveness" in the industry / market. Do you attract the "best and the brightest" or do you find it difficult to recruit sales talent.
4. Do you suffer from a high rate of turnover in your sales department, therefore causing you to invest in continual "new hired" training and orientation?
5. When was the last time the company made a change in the compensation plan? Has your business changed yet your compensation remained the same?
6. What percentage of gross profit does the sales force cost the company?
7. Does the company reward the sales team in a way that supports the corporate vision/growth plan? (For instance if sales reps are incented to grow their existing account base then they will endeavor to cross-sell and introduce new products and services. If this effort is not rewarded they might be more prone to become "order-takers" vs "order-makers").
It is understood that the primary goal of any sales compensation plan is to reward the sales reps while allowing the company to generate a desired profit. Certainly it is unfair and a strong disincentive to have the company rolling in profits yet provide minimal returns to the reps that generated the business. Of course, on the flip side, a company that develops a compensation plan that does not take into account the required margin and desired profit undermines its ultimate growth and stability.
Of critical importance is understanding your firm's operating expenses and required margin so that your sales compensation does not get your company into financial hardship.
It is also important that your sales reps have easy access to their sales data so that they know where they stand in terms of their compensation and incentives.
Once these things are in place you can now look to getting creative with your sales compensation.
Creative Options:
Compensation Cafeteria Plan: Many companies have adopted a cafeteria plan for their health care and employee benefits. This type of plan can also be configured for compensation, and it allows your reps to select their compensation package based upon their lifestyle and financial circumstances. For instance, not all of your sales reps may need to have their commission paid monthly. They can afford to live on their salary and would prefer to earn an additional percent and get their commission checks on a quarterly or semi annual basis. Other sales reps would prefer to substitute a company car for some of their commission earnings or perhaps apply some of their commission dollars to some other perk (travel voucher, etc).
Adjustable Commission: In this scenario the sales reps receive no commission or very low commission at the beginning of the company's fiscal year. This lets the company cover their fixed expenses as early in the year as possible and once this has been accomplished the sales reps can start to earn their commission at a higher rate since the company is not financially exposed.
Monthly Payments: This is particularly effective when there is a lengthy sales cycle. This plan takes a positive approach and "assumes" that your sales reps will meet their annual quota and therefore, you distribute the commission that would be paid on this quota in a monthly payment. If a rep does not meet their quota at the end of the year they are responsible for "paying back" the shortfall.
Corporate Profitability Bonus": Sales reps that successfully reach a pre-established revenue target can become eligible for corporate bonuses that are based upon their contribution to the overall profitability of the firm. This allows your sales reps to profit when the company does and helps to facilitate corporate growth.
Ensuring Sales Rep Satisfaction:
Consider incorporating other incentives and recognition devices into your compensation model and make sure that your incentives are suitable for the individual rep.
An excellent approach is to survey your reps to find out what they would consider exciting and worthwhile. It's a great way to get your sales reps to buy-into the plan and will encourage the behaviors that are mutually rewarding.
Bottom-line, your sales compensation plan should be a win-win situation whereby your company accomplishes its desired profit and at the same time, motivates and rewards your reps.
Adrian Miller is President and Founder of Adrian Miller Sales Training, a sales consultancy that she launched in 1989. Adrian is also the author of "The Blatant Truth: 50 Ways to Sales Success" and is a well-known and highly regarded speaker and consultant. Always entertaining and rigorously practical, Adrian can energize and motivate your sales force to reach new heights. She also works with solopreneurs and professional services providers to help them grow their business using high-impact sales process.
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