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I was speaking at an executive conference last week. Several attendees asked me for guidance on how to best structure their compensation plans. I did not specifically address the question at the event, and I promised the audience that I would write about it in an article. Never wanting to be liar, here is my take on structuring compensation plans to reward results.
The attendees asked about a few topics:
- How should we recognize team participants who help to manage the account?
- How should we compensate non-salespeople?
- How do we account for discounting?
The Compensation Trap
Compensation plans work well for those individuals who are motivated by money. Recognize that not every person is motivated by money. Some merely want recognition.
Where many businesses get trapped is that they focus on the compensation itself instead of their business goals. The right incentives reward professionals for contributing to achieving strategic goals. Remember that not all business is “good business.”
Here are four areas that can help improve your compensation plan.
Tie incentives to individual, group, and company performance – especially for non-salespeople. At least half of the incentives should be tied to individual performance. However, smart companies encourage teamwork. Allow individuals to max-out the plan only if your group, the company, and the individual meet their goals.
This approach encourages top performers to help less experienced team members. Having a bonus pool to reward across teams can instill a sense of “What’s good for the company is good for me.”
Split the Pie
There are several key steps to capturing business. It all starts with identifying an opportunity. And, for professional services and technology companies, that step is often done by an on-site professional who may not be part of the business development team. Do not be afraid to split the revenue pie to provide a taste for those who play valuable roles in opening (and not just closing) business. I suggest that you split the pie into four segments – identification, buying vision, signed contract, and results – but be careful to clearly define the criteria to earn credit. Depending on your business, your relative percentages might vary.
Reward the entire team for those projects where the client can demonstrate their tangible results. Not only will this help the team see the value they delivered, but delivering value and results is the key to repeat and referral business.
How To Handle Discounting
Let’s assume that your target gross margin is 50%. If you pay your sales rep 3% of gross, that’s 6% of the profit. However, be aware of how discounting changes that calculation. On a $50,000 sale, 3% would be $1,500 (or 6%) of the $25,000 of net margin. If the rep sells at a 20% discount (assuming your base cost is still $25,000), you’d pay a commission of $1,200 on a profit of $15,000, representing 8% of the profit. Your profit would drop by 40%, since your costs remain the same.
To fix that problem, tie revenue recognition to discounting. Sell at full price, get 100% recognition. As they introduce discounts, the revenue recognition falls. So, at a 20% discount, they may only get credit for 70% of the revenue. In the above example, the rep would get credit for 70% of the $40,000 discounted sale, or $28,000. At 3%, they’d earn $840 or 5.6% of the margin. The goal is to ensure that reps battle to preserve margin.
If your professionals constantly say they need to reduce prices, then you have to consider if you have something of value that you are selling. If you do, then realize that being the low bidder is a selling skill issue. Do not penalize the reps, however, if you cannot demonstrate value that makes your product or service worth the extra investment of the full price.
Is the rep who nails their number quarter after quarter more valuable than the one who hits and misses in alternating periods? Of course. I encourage my clients to offer a kicker if the sales rep hits their number after having hit it in the previous quarter. It allows the reps to stay motivated, and to not play games with the comp plan. Most importantly, never put a cap on incentive-based compensation for sales professionals. Provided that they sell “good business,” we know that the incremental revenue above plan is more profitable than the first dollars.
Finally, be sure that your incentives are easy to calculate. The best incentives are the ones that your rep can calculate before they leave a meeting.
It’s Your Turn
What examples have you seen – good or bad – that reward results? Share your thoughts in the comments below, or on Twitter or LinkedIn.