Selling Power: Five Sales Compensation Problems that Need Urgent Attention
August 18, 2016
by Mark Donnolo, Managing Partner, SalesGlobe
After a day in the field with Tony from Philly, I knew something was terribly wrong. Tony had enjoyed introducing me to his clients, the guys in the warehouse, and the truck drivers in the parking lot. Tony was friendly and had fun spending time talking to everyone. He was relaxed about his job and had been successful for 20 years.
But, back at the home office, I got an earful. The head of sales leaned over his desk and complained relentlessly about the sales organization. “They’re a pack of lap dogs. They’re not out hunting down new business. They’re just taking orders. They’re overpaid service people. Why don’t they have the drive to get out and find some new volume?”
I had just witnessed it first hand – lots of talking, but not necessarily to the right people. The conversation Tony had with the buyer was just as the SVP had suspected – a check-in to see if he wanted to order more. When the buyer said he was ok for now, Tony went to visit his friends in the warehouse.
Tony wasn’t the problem; he was just doing what he was paid to do. After reading his sales compensation plan, I saw that Tony was paid on customer visits, which included all time spent on the customer’s property – even the time spent filling out the call report while we sat in the parking lot. The problem was the compensation plan, and it was a big enough problem to require immediate repair.
Salespeople do what they are paid to do – for better or for worse. It makes sense, then, that challenges with sales compensation can wreak havoc on a business. Below are five problems that require immediate attention.
Beginning with mechanics. The sales compensation design process has to start with the sales strategy. What does the business want to accomplish? Is the strategy to sell more products to its current customers or to enter a new market? Too many design teams begin with their calculators and discussions about pay mix and multipliers – which is the middle of the process. A sales compensation program that is not in line with the overall strategy for the business will, at best, have the sales reps running in circles and, at worst, make revenue goals impossible to achieve.
Paying a lap dog to do a Doberman’s job. Tony from Philly was a lap dog. He was capable of taking care of current customers, but he wasn’t ever going to get new business – from that customer or any other. If the SVP wants new customers, he needs a different type of salesperson, a more aggressive new business developer. And, of course, he needs to pay that role differently than he pays Tony. Dobermans need more pay at risk (50 percent base salary and 50 percent incentive is common) to feel hungry enough to go out and win new business. Lap dogs typically have a shallower pay mix (80 percent base salary and 20 percent incentive, or even 90/10) to keep the rep close to the customer.
Punishing top performers. I once had a VP of sales tell me, “We take last year’s quotas and add 10 percent. That’s sales 101, right?” Wrong. Adding 10 percent to the revenue a rep brought in last year – without any examination of the market – is essentially a penalty. If Sarah had a great year and brought in $1,000,000, she may or may not have the same potential in her market to bring in $1,100,000 this year. A better method to setting quotas is to take a top-down and bottom-up approach. Try to meet the number handed down by sales leadership with real opportunities in the market. By combining a bottom-up view with the top-down expectations, you can consider granular information from the field and reconcile it with a bird’s-eye view of how that opportunity looks across markets and overall trends for market growth.
Paying for everything. Another problem I see is the 100-page sales compensation plan. These are the plans that want to manage by proxy – the proxy being the sales comp plan. As businesses and solutions have become more complex, the temptation to put too much in the plan has increased as well. While the early pioneers of sales compensation may have paid only on revenue or units sold, modern plans may pay not only on revenue, units, or profit, but also on the type of revenue, the type of customer, the product and service mix, growth from protecting base revenue, growing current customers, winning new customers, and whether the sale was booked or billed. The possible combinations can make a rep’s head spin and lose direction. It doesn’t work.To create a clear message, an effective sales compensation plan will typically have three or fewer measures, and no measure will carry less than 15 percent weight of target incentive. By focusing the measures, the organization can increase the focus of the person in that sales role. Managers – by managing – will do the rest.
Over-over allocating quota. “Over-allocation” refers to padding the quota. It’s the tactic of taking the sales goal for the business overall and, as it is allocated down through the layers of management, each manager adds a little extra. For example, a company with a $1 billion corporate goal with a sum of all frontline quotas of $1.05 billion has over-allocated its goal by 5 percent. Most organizations over-allocate quotas by about 3 percent to 5 percent from top goal to front line. And that’s all good – that little extra allocation acts like an insurance policy. If the manager has a sales position that remains unfilled for a period of time, or if a rep falls short on his quota, the over-allocation also makes up for some of that performance shortfall.However, when the quota is over-allocated too much at too many levels, it can lead to distortion on the front line. It can quickly get to a point where the C level and the front line have two different realities. The sun may shine at the C level (because they’re on track for the company goal) while the front line sees only cloudy skies. Keep your quota allocation trim so executives and reps all participate in the company’s success.
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