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1. The only information you need to design a good sales
force compensation plan is what your competition is paying.
A. True
B. False Of course you want to take into account what your
competition is paying, but that's not the only factor to consider. To
properly design compensation plans, you also need to know your company's
expenses and revenue, the production level of each sales representative,
and how much profit you want to make.
2. If a company similar to yours is getting spectacular
results from a new commission plan, it makes sense for you to try it too.
A. True
B. False
While it is a good idea to consider new strategies, you
always want to do a what-if analysis before introducing new plans.
Something that works for one company can be disastrous for another.
Even if your company appears similar to the other firm, with comparable
revenue and number of employees, the underlying numbers may be quite
different. You might have a higher proportion of fixed expenses or a
different revenue distribution (perhaps all their sales representatives
sell about the same amount each year while you are growing faster and have
a combination of a few superstars, some average producers and a lot of new
people.)
3. It is better to set up compensation plans so sales
associates are paid when they make the sale, as opposed to paying them
when the company receives payment.
A. True
B. False
This is common practice at many companies because sales
managers want to tie the reward to making the sale. However, it is a risky
practice. Some commissions will have to be backed out, frustrating sales
reps and creating a more volatile environment. It can reward the wrong
behavior, encouraging reps to simply close without paying attention to
whether the account will pay. In a down market, it can cause serious cash
flow problems. It is far better to pay the commission when the company
receives payment and provide an incentive for when the contract is signed.
4. The biggest concern managers have about changing
compensation plans is that sales representatives will leave.
A. True
B. False
6% of the managers we surveyed at a recent trade show said
this was their biggest concern—with some justification, because 20% of
the sales reps we surveyed said they would expect to react negatively to
any proposed change.
To prepare sales representatives for a change in plans,
you should first analyze who will be adversely affected. Typically, some
reps will come out ahead, others will see virtually no change, and some
will receive less.
If you want to retain those who will be receiving less,
you may want to see if there are some inexpensive perquisites that would
keep them on board. In our experience, with a little analysis and advance
planning, most companies can retain 93-99% of their sales force.
5. The main reason sales people quit is that they find
a better-paying job.
A. True
B. False
Interestingly, while this is far and away the most popular
reason given for quitting, it isn't actually true. According to a study
Dr. Michael Abelson from Texas A&M did several years ago, about 50% of
the time sales associates leave because they feel management is not
meeting their needs—not providing enough support, not backing them up
with customers—or there is some kind of personality conflict. About 25%
of the time they leave for uncontrollable reasons like a spouse moving,
health or medical reasons, or retirement. Only about 25% of the time do
reps leave for a higher commission. However, he found that regardless of
the real reason, most associates said they were leaving for more money, so
as not to burn bridges by expressing dissatisfaction with management.
6. Most sales people would prefer to have a choice of
compensation plans.
A. True
B. False
This is common sense—everyone wants a choice. But we
have the numbers to back it up. Of the sales people we surveyed, 74% said
they would prefer to have a choice of compensation plans.
7. The benefits of offering sales people a choice of
compensation plans include a lowering of the company's breakeven point and
an increase in the number of people who will be interested in working for
the company.
A. True
B. False
While the main reason to offer several compensation plans
is to allow sales people to choose the type of plan they find most
motivational, there are other benefits. One is that it expands the labor
force. There are only a certain number of people who are willing to be
paid 100% in commission, for example. If that's the only choice you offer,
you have to select employees from that group. However, if you offer 100%
commission and a base salary plus commission, you've just expanded your
labor pool.
Another benefit we have discovered is that it actually
lowers the company's breakeven point. That's a little harder to explain—if
you'd like to see it mathematically, we'd be happy to show it to you—but
the basic idea is that some people will choose plans that allow the
company to get to breakeven faster, thus lowering the breakeven point for
the company as a whole.
8. When managers are paid a bonus based on revenue, the
best revenue figure to use is total revenue.
A. True
B. False
The best figure to use is one that is closest to
profitability, because that rewards what is most important to the company
in the long run. Tying bonuses to total revenue can reward managers for
behaviors that will backfire—like bringing on high-producing sales reps
for whom they provided very expensive perks or cut deals that make the
company lose money on each sale. (That actually happens more often than
you might think, particularly in commission-based industries like real
estate.)
9. Firms that have invested heavily in technology to
make their sales force more productive often see an increase in revenue in
the first year and a decrease in profitability in the second year. This
problem can be fixed by revising the company's sales force compensation
plans.
A. True
B. False
We call this the "technology sinkhole," and our
estimate is that it affects over 90% of all real estate firms and a high
percentage of companies in other industries as well, particularly those
that are commission-based. The problem is that many firms are investing
heavily in technology without having any way to recover that expense.
Meanwhile, the improved productivity pushes sales reps to a higher
commission level (or allows them to reach quota faster), so the company is
paying out more on each sale—and has less money to pay for the
technology. For a more detailed explanation of the Technology Sinkhole,
click here.
10. It is possible to design compensation plans that
treat each member of the sales force as a separate profit center.
A. True
B. False
It sounds complicated, but with the software technology
available today, this is quite feasible. It allows you to create a
compensation plan for each person that motivates that person more
effectively than a standard plan, recovers the amount you spend on goods
and services for that person (training, perquisites, administrative
support, etc.)—and treats all sales reps consistently and fairly.
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