Friday, October 28, 2005

Create a compensation strategy

By Leon Frank

How clear is your compensation agreement for your sales force? Can you recite their commission structure from memory? Can your salespeople?

Too often, businesses create a complex legal document that makes their attorney happy, but does nothing to motivate salespeople because they simply don't understand it. One quick test of your current compensation program is to ask your salespeople to calculate what their commission would be for three different sales scenarios. Compare their calculations to yours. If they can't do it from memory, or there is any discrepancy between their calculations and yours, you have a problem.

And more important, not only is your compensation agreement not functioning as a motivating program — it is guaranteed to cause problems when the salespeople get their paychecks.

Six steps to a stronger compensation program
Here are six steps to creating a compensation program that will effectively motivate your sales force.

  1. Put it in writing — Is your sales force compensation agreement in writing and current, or have you amended it as you've gone along and hoped everyone has the same memory? If you don't put it in writing with a copy for each person, I guarantee you will have disagreements when it's time to pay the commissions. Write it down and keep it handy. Your compensation agreement is the ongoing motivational force you are using to improve sales, and your salespeople should have it at the ready to refer to often.

  2. Make it simple and clear — Simplicity is the key to effective sales compensation packages. Be sure all elements of your compensation package are so straightforward that any three people calculating a commission will come up with the same number. If your salespeople are spending their time calculating their commissions, that's less time that they are out selling your products. To keep it simple, don't try to accomplish every element of their work objectives through the compensation plan. Identify three or four elements that are key and base commissions on them. For example, don't attempt to motivate people to make phone calls, do follow-up and send out letters through the compensation program. These do not bring in revenues to the company and, as such, should not be directly compensated. Compensate salespeople for sales made, with provisions for bonuses when certain goals are met.

  3. Make it consistent — Will all of your salespeople receive the same compensation for the same performance? This is critical to overall accomplishment, teamwork and turnover. Salespeople expect fairness from you. If you are not compensating them equally for the same performance, you'd better have a reason they can understand and accept. Of course, this doesn't mean that all salespeople will receive the same salary. You may pay different people different base salaries based on experience and performance. And different sales successes will yield different individual paychecks. But overall, there should be consistency in your compensation plans for people doing like jobs with like skills. If you are not doing this and believe that the differences are justified, create different job titles so you can match the varied compensation levels with truly different jobs.

  4. Make compensation unlimited — Do you have limits to how much your salespeople can earn? If so, you have limits on how much revenue they will bring in. Your objective should be to help your salespeople earn enormous amounts of money for themselves. If your compensation plan creates resentment for their accomplishments, something is wrong — either with the plan or with your employees' understanding of the value of the sales force. Salespeople bring in the stuff that allows everyone else to have a job. Compensate them for their performance and structure their compensation so when they do well, everyone in the company is happy for the increased revenues.

  5. Align salespeoples' compensation with company goals — Your sales compensation plan is the implementation program for your company's goals. Outline your goals right in the compensation package and then design commissions and bonuses around meeting and exceeding those goals. Put work objectives in the agreement as well, even though salespeople won't be directly compensated for them. Make the list as detailed as possible. Do you want them to call on new customers, answer phone inquiries or help design marketing strategies? Do you want them to increase sales by 10 percent, gain 25 new customers or increase retention by 20 percent? Make a complete list of their work requirements and your accomplishment goals and outline all this in their written compensation agreement.

  6. Get help from others — The primary success element to designing any compensation program — especially a commission-based structure — is to not do it all by yourself. This is the kind of project that deserves a committee, which should include outsiders who are familiar with the industry, people from your management team (including your sales manager), and at least one of the salespeople who will be compensated by the program. Did you just yell "No Way!" when you read that part about a salesperson helping decide his own commission? Sounds a bit like letting the fox help design the lock for the hen house, doesn't it? But who better to understand the challenges facing your sales team? Who better to point out flaws or holes in your program? Who better to provide the insight necessary to create a plan that will actually motivate the sales team to better performance? Assuming you pick someone with a history with your company and who is objective and articulate, a salesperson on your compensation committee will be invaluable. Once you have a committee in place, hold several meetings with the goal of structuring a sales compensation program that will motivate the sales force to reach your corporate goals. Make a huge poster of these and post it in the meeting room. As you try each element of a commission package, test it against reaching the goals.

Elements of compensation
Each salesperson's compensation should consist of three elements: base salary or draw, commission for sales made, and bonuses for goals met. The last is typically a group effort and likely will result in each salesperson splitting an amount of money. These bonuses are frequently key to getting salespeople to work together to help each other's customers. The right commission structure can make a huge difference in your revenues during the next year. Take the time to structure it correctly and then work with your sales force to make sure it is a motivating tool. You'll pocket the results.