Alex touches the contentious third rail of sales, with some advice on compensation plans.
Compensation is a sensitive topic, as you are dealing with people’s livelihoods, and everyone from the founder(s)/CEO to the newbie salesperson gets nervous when there is a discussion about it - but we need to touch this third rail.
(For anyone who is not a trainspotter, the third rail carries power to the line, and there’s enough voltage passing through it to light up a small country or, in this case, combust a salesperson).
As an employee who has experienced several compensation plans, I recognize the sensitivity regarding how the team, and more importantly, top performers, view a plan.
Let’s start with two truths:
That said, I have two issues with sales compensation:
I won't try to do this discussion justice here, because there are entire books, papers, and practices devoted to compensation.
However, my main point is that if a disproportionately large portion of total sales compensation is fixed (or base), there is insufficient discrepancy between what top performers and bottom performers earn.
Studies consistently show that top performers are motivated by competition, return on effort, and the opportunity to earn more money.
In my opinion, the total compensation ought to be more variable the more potentially different the outcomes are.
The plan should be less variable and have a higher percentage of base pay if the business is stable and has little chance of growing or shrinking. However, if there are potentially significant fluctuations in the results, there should also be significant fluctuations in the compensation.
All too often, underachievers are overpaid, while top performers are underpaid. Most compensation plans do the opposite of what we want: retain the underperformer and cause the overachiever to look elsewhere, where their compensation will be more equitable to the results they are achieving.
My second bone of contention is that often all sales are treated equally.
In businesses where people maintain a book of business, very often, commission is calculated based on a salesperson’s total sales (X sales at Y commission rate = total commission). It sort of makes sense from a finance/CFO’s perspective – a Pound of sales produces a certain percentage of profit, and there is money allocated to pay the salesperson as a selling expense.
A Pound is a Pound.
But I firmly believe that a pound is not a pound when it comes to trying to get new accounts.
If my existing client base is essentially a commission annuity that will pay me the same amount every year as long as I retain it, my first priority will be to keep those clients happy – why bother chasing after new business, which takes considerably more time and energy?
The compensation plan should mirror the actions and objectives that the company wishes to accomplish if it wants to genuinely encourage salespeople to seek and close net new business. Plans should decrease the commission payment on existing business over time and bonus commission for new business that is closed.
In simple terms, not all sales are equal, and make sure you align the pay plan with the business goals.