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By
David J. Cocks and Dennis Gould "You can have any color you want, as long as it's black."
We chuckle at Henry Ford's famous quote now, but a hundred years
ago, people did have far fewer options than we have today. Think about all the
choices that were available the last time you bought a car: color, of course, CD
players, tilting and rotating seats, dual climate control, and so much more.
People love to have the power to select the options that are
right for them, and fit their lifestyle.
Today, businesses have learned the power of offering a choice—not just to consumers, but also to employees. Most companies offer a variety of
health plans; many let you set your own schedule; an increasing number let you
choose to work from home part of the time.
One new area choice is starting to touch is sales force
compensation. In the past, most companies offered one sales force compensation
plan—if you wanted a choice, you were free to choose to work for another
company.
However, more businesses are discovering that it makes sense to
offer employees the ability to choose their own compensation plan. Experienced
representatives who are confident in their own abilities appreciate the option
of maximizing income with a 100% commission plan. Representatives who are new to
the company or who have high fixed expenses, such as children in college, often
prefer to trade some of their commission potential for a higher level of
guaranteed income.
Companies that have started offering a variety of compensation
plans are finding that it brings powerful benefits:
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Improved motivation – when sales associates choose the compensation structure
they find most appealing, it motivates them more effectively and more
permanently than any kind of temporary incentive plan.
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Easier recruiting – offering a choice of compensation plans is a very
attractive benefit for potential recruits.
-
Expanded labor force – there are many people for whom the typical style of
sales compensation is not appropriate, yet who would make excellent sales
representatives. By offering different plans, you expand your potential pool of
recruits.
-
Competitive advantage – combining the recruiting and motivation benefits
results in a powerful competitive advantage.
Although the logistics of offering a variety of plans might seem
intimidating, it's actually much simpler than might be expected. Many companies
handle compensation the same way they do health insurance: once a year,
employees choose their plan for the following year. Typically, either there is
an open season or employees make their choice on the anniversary of the first
day they started with the company.
Advanced software provides assistance designing the compensation
plans, and simplifies ongoing management. In fact, some of the new compensation
software allows companies to safely design very aggressive compensation
structures.
The traditional approach to sales force compensation is to give
the salesperson a flat amount (salary), plus a percentage of each sale; the
company keeps the rest. With the right software, it is possible to turn this
concept on its head: the company keeps a flat amount (enough to cover the
representative's share of fixed expenses) plus a percentage of each sale (for
variable expenses—those associated with delivering the product or service—as
well as the desired level of profit); the salesperson keeps the rest. [An
in-depth explanation of this approach is available in an article published
earlier on www.saleslobby.com, "Profiting from a New Sales Force Compensation
Strategy".]
One way to implement this approach is to have the
representative's commission level start out at one level. The company holds back
money to pay both fixed and variable expenses. Once the company has taken out
enough money to cover the representative's share of fixed expenses, that
contribution stops. The money that was going to the company to pay fixed
expenses now comes directly to the sales representative. The sales
representative will now receive a substantially higher commission for the rest
of the year.
With this approach, there is no quota; neither are there any
disincentives to production at any level. The effect is to maximize income to
the sales representative—yet it is done within the constraints of making sure
that corporate expenses are paid and a reasonable profit is assured.
Using the same basic strategy, a number of innovative variations
are possible:
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No commission (or a very low commission) on sales at the
beginning of each year, then a high commission on the rest. This lets
representatives pay their contribution to fixed expenses quickly and then move
up to the higher commission level faster. This benefits the company as well,
since the firm receives its money up front.
-
Flat monthly payments. A sales representative's contribution
to fixed expenses can be divided up into twelve equal parts, with the
representative paying that amount to the company each month. This allows the
representative to receive a higher commission year round.
It is also possible to structure plans so the company recovers
the cost of maintaining each representative. For example, an experienced sales
associate who does not want a draw, is on the road most of the time and so works
out of a home office, and requires little in the way of support services costs
the company much less than a newer associate who does need a draw, plus
extensive training and other support. On the other hand, a top producer who
wants a big office, an expensive company car, and requires a great deal of
administrative support, may be very expensive to support. The point is that
compensation plans can be customized so that sales representatives receive—and
pay for—the support and services they need, without having to pay for things
they don't want.
The exact structure and variety of compensation plans depends on
the industry, the length and complexity of the sales cycle, and a number of
other factors. However, the bottom line is that when sales associates are able
to choose the type of compensation plan that best fits their needs, their
tolerance for risk, and their lifestyle, they are motivated far more effectively
than with any standard one-size-fits-all type of sales force compensation. The
result is a happier and more productive sales force.
David J. Cocks is the Managing Partner of CompensationMaster
LLC, a software and consulting firm that helps businesses develop and introduce
compensation plans. He is the co-author of "Compensation Planning: The Key to
Profitability" and regularly gives seminars on "Mastering the Art of Sales Force
Compensation".
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