The Ten Commandments of Sales Compensation
Few things are more critical to recruiting and retaining a productive sales force than a compensation plan that rewards your top performers. But as most sales executives will tell you, devising a fair, accurate compensation structure can be harder than it sounds. Here are some do’s and don’ts recommended by Michael Carrillo, president of CPGjobs:
- Be Transparent. This doesn’t mean telling Joe what Mary is earning, it means telling everyone what the rules are and how they apply. This simple practice can quash destructive resentments before they start, Carrillo says.
- Respect the Rep. Forcing sales representatives up or out can weaken your sales staff and your sales management. “Reward sales reps commensurate with their experience and seniority, not by automatically promoting them to management,” Carrillo says. “Remember that not everyone wants to – or should be – promoted to sales management.”
- Reward Often. Infrequent commissions produce infrequent results. Pay your commissions quarterly or even monthly to keep your reps motivated.
- Know Your Sales Cycle. It some cases it takes longer than 12 months to complete a sale. But most commission plans reward much shorter selling cycles, Carrillo says. The answer: Higher base salaries to maintain the reps’ cash flow; shifting incentives to reward stated intermediate sales goals; and recognizing your reps’ responsibilities as asset managers as well as salespersons.
- Don’t Punish the Winners. “Commission caps are self-defeating,” Carrillo says. “Reps working on commission stop working when their commissions do.” To prevent widely divergent payouts, Carrillo recommends reducing – but not eliminating – the rate of incentives for very large orders or volume. Another type of plan that can backfire is one that rewards growth from period to period (i.e., percent increase from last year to this year). In many cases this type of plan simply rewards “sandbagging.”
- Use the Proper Mix. A rep’s compensation should include a higher proportion of commission when sales cycles are short, profit margins are high and sales are heavily influenced by personal selling skills, Carrillo says. Pay should include a lower proportion of commission when sales cycles are longer, profit margins are lower and sales depend heavily on technical knowledge.
- Don’t Delay the Pay. Recognize sales achievement as close to the order as possible. “A commission delayed feels like a commission denied,” Carrillo says.
- Virtual Commissions. There is no reason to credit salespeople with online sales they haven’t generated, but what about that online orders a rep did help close? Experts recommend setting up two e-commerce sites (a simple URL change can do the trick) to separate sales rep-directed orders from those generated by advertising or the site itself.
- “Sales Out” Solutions. Assigning credit for a sale becomes increasingly more difficult as layers of middlemen and resellers are added to your distribution chain, experts say. End-user sales reps resent spending time to verify orders to these once-removed buyers. Solutions to sales-out crediting for end-user salespeople include team incentive plans, rewarding channel partners for providing sales data for each end customer, and aligning sales reps around channel partners instead of end-users.
- Relationship Building. “A client relationship is priceless to an organization, but it can’t always be measured in short-term sales,” Carrillo says. “That is why it is important to look past commissions to long-term quality in your sales team. Every turnover in a sales position is costly – which means it is important to get the right team in place and keep them in place for as long as they are effective. When a valued salesperson leaves, they take a lot of experience – and sometimes a lot of sales – with them as they go.”
Carrillo adds, “An effective, fair and transparent sales compensation plan doesn’t just motivate sales reps, it pays dividends to the bottom line through higher sales, lower sales costs and priceless client relationships.”
Michael Carrillo is president of CPGjobs, the CPG industry’s leading candidate recruiting service for HR professionals and employers. You may contact him at Michael@CPGjobs.com or call (626) 535-0143.