New Year, New Sales Comp Plans

You can have high sales compensation and high profits, but the two areas must be in alignment. Here’s how to make it happen. By Mike Schmidtmann

Business owners don't like their sales compensation plans. Every year, companies look to tweak, adjust, or completely overhaul their comp plans. They search for new ideas, insights, and best practices to magically transform their plans into something more motivational, equitable, and profitable.

Why do they dislike their plans? Owners gladly pay for productivity, but can't stomach paying big money when salespeople:

  • Take orders
  • Don't expand their embedded base
  • Scream for special pricing and concessions
  • Take credit for team sales
  • Don't sell anything at all

Most compensation plans were originally created when products and sales processes were different and solutions simpler. Plans haven't evolved to reflect the times. And frankly, some salespeople have too much "checks appeal." They are overpaid for what they do.

Salespeople dislike their plans too. They know the company across the street pays higher commissions, charges less for service, and provides better leads. They also dislike their non-sales-related administrative work: Getting projects designed, pricing checked, orders handled. Making sure special bids and promotions are applied correctly. Dealing with mistakes and returns.

Salespeople spend too little time doing what they love: working with prospects and making sales. So they push for more administrative, design, engineering, and marketing support. All of these increase costs, which affects profitability.

That's when owners and CFOs take a hard look at profits and costs and try to find ways to reduce their cost of sale. Most companies use this three-step method to change their compensation plans:

  1. Introduce the idea that comp plans will change
  2. Stand back in shock as the salespeople go completely insane
  3. Postpone changes for another year

With that, you begin to see the "snowplow effect," as the mounting pile of compensation problems gets pushed down the road. Eventually, the cost/profit balance gets out of whack. Minor course corrections won't do the trick-major surgery is required.

It doesn't have to be that way. You can have high sales compensation and high profits, but the two areas must be in alignment. Sales comp needs to reward the activities that lead to high margins and profits. You can't pay for run-rate business and service contract renewals. You can't pay big commissions on low-margin, transactional sales.

Practical Ideas to Migrate Comp Plans
The best comp plans evolve as the business and marketplace change. Minor alterations every year enable the business to adapt. Here are some tips:

  • Try to structure your plans so salespeople will earn more for changing their behavior and selling in a more strategic way. You can do this with added commissions or bonuses for desired activities such as winning new accounts, more services, or monthly recurring revenue contracts.
  • Reduce your commissions correspondingly for low-margin sales or sales to existing accounts. Salespeople who don't adapt are worth less and should earn less.
  • Try to implement changes that are simple to understand for salespeople and easy to calculate for the company.

The best change you can make is to institute the concept of "on-target earnings." OTE is how much a person will make when he or she is at 100 percent of quota or expectation. By adjusting the sales expectation every year as well as OTE, you change compensation without reducing commissions. The salesperson will earn more money, but will need to sell more to do so.

The concept of OTE isn't disingenuous because salespeople really do make more money. Nearly 90 percent of salespeople increase sales year over year. The extra profit can be used to hire new subject matter experts, administrative support, or other key staff. These investments will help the salesperson sell even more in the years ahead.

Don't delay, don't procrastinate, and don't kick the can down the road. Figure out what needs to be done and start making changes that will help both you and your salespeople in the long run.

MIKE SCHMIDTMANN, a consultant with 4-Profit LLC, helps VARs and vendors improve margins and profitability by identifying what it takes to hire and retain talented salespeople.