Sales Comp and Unintended Consequences

For example:

• If salespeople don’t view your program as competitive, your best salespeople will seek greener pastures.
• If salespeople don’t view your program as fair, there will be morale issues. (For example, if plans aren’t carefully thought through, some territories may experience a high volume of easy sales, while other territories have little opportunity to cash in.)
• If quotas are set too high, people won’t try.
• If quotas are too low, people may earn exorbitant amounts with little effort.
• If you haven’t been very careful in focusing efforts (with extra bonuses, SPIFFs, etc.) you may find bread-and-butter sales falling as salespeople go exclusively after the special awards.

Start with Organization Goals

In establishing your program, first determine what the organization’s goals are and then design a program that will support those goals. One of the worst things you can do is to set your salespeople off in the wrong direction. For example, are you looking for new customers or do you want to focus on knock-your-socks-off service to existing customers?

As you design your program, here are some considerations to keep in mind:

• Do you want to emphasize new products or legacy products?
• Do you want to focus sales attention on more profitable products that might be a harder sell?
• Will incentives be based solely on sales amounts, or will there be a factor that measures profit? Basing purely on sales often incents salespeople to offer unwanted discounts or other special deals that wind up making the sale unprofitable for all (except the salesperson).
• Will the focus be on new customers or old customers?
• Is the program rational? For example, does it have conflicting goals, or is it far too generous?
• How will you structure the plan for your best performers? Will there be some different elements?
• Is the program easy to understand? Everyone involved should be clear about how the plan works, how commissions and bonuses are calculated, and so on
• Will the salespeople view it as fair, both in its structure and in how different territories are treated?

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• Do you have an effective way to track sales and/or profits?
• Will all concerned be able to see how calculations were made?
• Does the design of the program encourage dysfunctional behavior? For example:
• A program that overemphasizing new sales may cause reps to ignore existing customers
• Reps may treat customers poorly or aggressively, making a sale, but not gaining a lasting customer
• Is there a level playing field so that rewards are linked to sales territory potential?
• If desirable, do the goals support team efforts in any way, since rewards are individual?
• Does the mix of base pay and incentive pay produce the right combination, given the servicing requirements of the business and the need to retain satisfied customers?
• Should some salespeople be integrated into other management incentive or profit-sharing programs, reducing the emphasis on their individual product line, territory, or customer sales and focusing more on overall business performance?
• Might end-of-period sales create huge challenges for production and warehouse/shipping personnel?
• Will incentives encourage reps to offer unreasonable discounts or other incentives that cut into or eliminate profits?
• Will the program cause experienced reps to pay little attention to non-sales functions like training new reps?

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Tips to Evaluate Your Sales Compensation Program

Do you?

• Clearly define a sales strategy by focusing on specific goals and the competitive realities of the marketplace?
• Carefully identify and communicate each individual’s particular role in the overall sales effort?
• Ensure selling roles fit the sales force’s distinctive capabilities and skills?
• Develop accurate techniques to measure performance?
• Create tangible rewards plans based on these elements?
• Communicate the strategy, along with performance expectations and reward opportunities, to the sales force?
• Provide clear-cut feedback and guidance consistently and frequently?
• Monitor reward systems to ensure their continuing effectiveness?

In tomorrow’s Advisor, more on setting sales compensation plus good news about a program specifically directed at smaller—or even one-person—HR departments.