Oftentimes, employers build compensation plans to incent their employees to sell their product or service to obtain better sales results. What they often omit is ensuring that there is a balance between new sales and retention, both of which we will discuss. If you have a variety of products/services, and offer an incentive for a designated dollar amount of sales, then your salesperson can sell any level of product as long as they get to or exceed that designated dollar amount.
It is a more profitable system to determine, in advance, what is your highest margined product/service and be sure that there is enough goal to ensure that the salesperson focuses the right amount of attention on that segment. An example would be:
Product A: 55% gross profit
Product B: 45% gross profit
Product C: 35% gross profit
If Product C is “easier” to sell and your salesperson only has to reach that dollar goal, they will naturally lean towards selling Product C. However, if they have to have a minimum dollar sales of Product A, they will be encouraged to sell more of this product in order to qualify for their commission.
Along with this, it is critical that retention be built in whenever possible. This could be accomplished by paying the salesperson a residual incentive for retaining clients they brought in. This could also be managed by profitability goals. This would show that the company’s net profitability for this salesperson’s portfolio is growing. It doesn’t benefit a company to have a “super” salesperson who doesn’t retain clients because sales are probably their major focus; and therefore the new sales only marginally cover lost business.
Net/net, the company loses money in this scenario because they are paying a salesperson when the net profitability doesn’t increase enough to even cover the commission. The average cost to replace an existing client with a new one is 3 times the cost of retaining one!
Finally, it’s okay and even advisable to have qualifiers in your plan. Your sales staff have to adhere to things like representing the company’s vision and mission. They have to be a team player, closing a sale generally involves working with others in the company. If you have someone that loves to go out and bring in the business but can’t work well with those that actually have to get the backshop part of the process done, the system breaks down. You may think of other qualifiers that will ensure that you have an all around star employee, internally and externally.
Commission sales can propel your company forward, hopefully this will help you hire the right sales people to ensure the overall success for them and for you.
You make some great points in your post Ellen – it is critical that an organization’s commission plans not only provide motiviation for sales people to make sales, but to make the rights sales that will best benefit their organization’s bottom line.
I chose your post for inclusion in my weekly Rainmaker ‘Fab Five’ blog picks of the week which can be found here: http://www.maximizepossibility.com/employee_retention/2008/10/the-rainmaker-2.html
Be well Ellen!
Chris Young
Interesting post Ellen. Depending on the type and size of organisation it may be worth splitting your salesforce into “hunters” (for new business) and “farmers” (for existing accounts). The hunters are then incentivised only to win new business, at which stage the accounts are handled by the “farmers”. The “farmers” are incentivised to keep accounts on board, and grow their business over time.
The article is right on. Incentive compensation should drive behavior. For that to work in the real world, however, you need two things to be true.
First, your reps have to understand their plan. If it never changes and simply sits on a shelf, then reps are not really motivated by it. Secondly, the plan needs to be visible to the reps. If they can’t see where they are in relation to the levers of the plan, or if the payouts are long delayed then it loses it’s ability to incent behavior.