Converting Your Legacy Sales-Commission Plan to the New and Improved Growth Model

Converting Your Legacy Sales-Commission Plan to the New and Improved Growth Model

We have evaluated and designed nearly 100 sales-force and sales manager compensation plans over the last 25 years or so. I have found that the most common complaint a prospective or new client states for wanting a pay-plan redesign is that their sales force is being paid a lot of money while failing to grow the business (through either new clients or selling new products to current clients). Sales stagnation has set in and everyone seems to have noticed but the sales force.

Sales stagnation is caused by a number of factors. For example—

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The company does not have a growth strategy or plan (…or any plan);
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The sales force is not making the required sales calls to its current or prospective customer base;
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The current sales force is mismatched to the sales challenges at hand;
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The company is asking the sales force to do the wrong things—and wasting their time; or
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The sales force is complacent and/or undirected by management or company practices.

Clearly the current sales-force compensation plan is never the whole reason for stagnation, but it can create a reward environment that makes stagnation possible. The compensation plan we most often see being used with a stagnant sales force is a commission plan—or a plan that pays a percentage of all sales dollars to the rep. Companies in a maturing market space are particularly susceptible to this problem. Why?

Commission plans are very interesting pay devices and have proved to be very effective in an emerging market as both a high-motivation and cost management tool. But when a market or product class begins to mature, a commission plan can become merely an annuity or salary. It will reward a sales representative whether their business portfolio grows or not and can pay handsomely ($100,000+)—even when sales are flat or dropping. By the way, your sales force will tell you that they are at great risk because of their commission plan. That is great rhetoric but in fact is often BS when you understand the actual calculus of commission-based compensation.

I think everyone has experienced the frustration of paying the sales force well for sub-standard results. If you have not yet had that experience, believe me, it is not pleasant—at least for management and ownership. What do you do? First, try these three steps.

  1. Set your expectations. Every business I know has to grow to thrive and create value. Establish a reasoned business-development goal for the coming year and tell your sales force how much they must grow their portfolio. Keep it simple. [e.g.:”We need to grow the business by 10% next year.”] If you do not ask, it will not happen!
  2. Measure and share results. Be sure that you are measuring performance every month to assure that you know that the expected growth is occurring. Make sure your sales force is seeing the same numbers and reports that you see. Talking about why or why not goals are being achieved each month is a great opportunity to talk to your sales force and evaluate their abilities and commitment.
  3. Tie incentive pay to the achievement of annual goals and expectations (most commonly, sales growth). There are 4-6 pay-plan models that can be used to do this but I believe the mechanics of any selected plan should obey the following principles:
    1. Any plan must be simple in design and intent;
    2. The sales rep must reach your goal to get”the right” or market-fair payout for the year;
    3. There is a penalty for the sales rep not making their goal and there is a level of performance below which serious pay and other ramifications occur;
    4. The company is quite pleased with those sales reps who exceed their goal—and shows its appreciation through premium compensation;
    5. The company will not tolerate a sales rep that hides sales or “sand bags” results for their own financial gain at the expense of the company.

We will spend time in future editions of E-Notes discussing the best types of pay models to use in these circumstances. They are generally called “goal-based” pay plans.

In closing, recognize that when you convert legacy commission-based plans to a goal-based plan you will increase the compensation-risk of your current sales reps to levels well above those to which they are currently accustomed. It is important that you recognize this reality. Consider……

  • Who amongst your sales reps cannot emotionally take such a change?
  • Who will thrive?
  • Who is scared to death of the new goals and doesn’t know how to grow their portfolio?

You should be well out in front of these issues. We will talk more on goal-based incentives after the holidays. If your concerns are more immediate, please call or contact us at www.wilkeningco.com or 847-823-5090.

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