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CompensationMaster Newsletter Article, October 2002 With the economy still in the doldrums, this is a good time to
talk about preparing your business to survive a sustained recession.
Eliminate Exceptions
The first step is to make sure your compensation plans are in order, and that
every member of your sales force is being paid according to plan.
Exceptions typically happen for three reasons. The first, and
most likely, is that someone approves it. Maybe Sally's having a bad year, but
she's a good employee and her manager wanted to give her a break. So he pays
her commissions at last year's sales level instead of this year's. Or he waives
some minor fees or gives her additional benefits.
It's easy to think that exceptions don't matter if the amount
of money is small. But those numbers add up, particularly with a large sales
force. If you have 400 sales representatives, and you make an exception for
each one of as little as $80 a month, you're looking at a total of $384,000
each year.
While there's always a good reason to make each exception, if
there's no consistency in how people are being paid you're going to have
problems. Even if the sales associate involved promises not to tell, sooner or
later the word gets out. Other associates are bound to feel that they haven't
been treated fairly. Over time, exceptions destroy your credibility and the
morale of your sales force.
The best solution is a policy of "no more
exceptions."
Exceptions can also happen by accident. There may have been a
data entry error that no one caught. Even the best accounting department isn't
going to realize that no one approved a certain commission level, particularly
if it's only slightly out of line.
It's important to sit down with your accounting staff and make
sure that the numbers they are using are correct.
Exceptions can also occur because the software has undetected
bugs. We saw one case where a company paid out $400,000 more in commissions
than they should have because of a flaw in their software.
They told the company developing their custom software to
calculate commissions on adjusted gross revenue. But the software developers
weren't familiar enough with the industry to understand the difference between
gross revenue and adjusted gross revenue. No one checked the calculations
thoroughly and the problem wasn't caught for years.
This is more of an issue with older, custom software than with
newer packages. But it's always a good idea to test your software thoroughly
and make sure that commissions are being calculated in the manner you
anticipated.
Keep Expenses in Line
Controlling expenses in a recession should be a no-brainer. But it's surprising
how many people don't really have a handle on their income and expenses. One
big mistake is to take sales revenue forecasts as factual.
If your company was in business during previous recessions,
pull out your income statements from that period as well as your old forecasts,
if you have them. See how far your revenue projections were off, then adjust
your current projections by a similar amount. Each recession is different, but
an adjusted revenue projection is likely to be more accurate than what you're
working off now.
Then budget for expenses based on that reduced revenue
forecast.
Avoid Corporate Anorexia
Expenses need to line up with projected revenue, but don't take cost-cutting
too far. We have seen too many companies try to survive a recession by reducing
staff, eliminating administrative support and doing away with services they
offer their employees.
If you don't have enough people available to handle your level
of business, you'll lose customers and sales associates to competitors. Your
company won't endure without good talent.
Focus on Sales Training
It's tempting to cut expenses for sales training when times are tight. But in a
recession, it's even more important to maximize the productivity of your sales
force. Your top people are always going to do well. But new or mid-level sales
people don't have the skill set needed to deliver results. Improving their
ability to handle calls or close will pay off.
Your goal is to get as many people as possible to reach the
breakeven point, where the company's fixed expenses are covered. Until you do
that, you're running on volume dollars, and volume dollars are what puts you at
risk when a downturn occurs.
Optimally, you should be structuring compensation so sales
representatives are allowed a choice of compensation structures, and are paid
in accordance with their ability to reach the breakeven point. Interestingly,
offering several different compensation plans lowers that breakeven point (more
on this in next month's article). Designing compensation plans this way lets
the company obtain the money needed to cover its fixed expenses up front;
volume dollars are used only for variable expenses, tied to production, and
profit.
Structuring your compensation plans like this typically allows
the company to withstand market downturns of about 30%, although we've seen
companies survive a 40% drop without going into the red. And the company is
positioned much more strongly for success when the recovery begins.
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