Dea(r)th of a Salesman, Part 2.

(With apologies again to Arthur Miller)

In last week's post, I wrote about the death of sales training initiatives. This week, I will focus on how sales compensation programs often don't provide the motivation that they should.

Three compensation strategies in common use are:

• The100% monthly commission program.
• The “extra bonus when you hit your target” strategy.
• The geographic quota plan.

Each of these plans can work, but they also have pitfalls. And, too often, I find them used in place of active sales management.

The 100% Monthly Commission Solution

Managers like simple plans. Simple to understand, simple to forecast, simple to implement.

An obvious strategy is to pay a commission on every sale. Period. No salary, no bonus, no SPIFFs, just a straight commission. This is easy to administer. No budgets, quotas, or targets are required. And it has a good cost control mechanism built in: if sales fall, so does compensation.

So, what's not to like?

In this scheme, the salesman very quickly sees that his ability to put food on the table this month is directly related to the number of deals he closes this month. And so, predictably, he focuses all of his attention on those “high-potential” prospects that are likely to buy this month. Those that need some extra attention, or aren't quite ready to sign, will (maybe) get looked at later.

Ironically, the common sign of a problem with this approach is the management complaint that sales people won't spend time on long-term relationship building activities.

If you want your sales staff to spend time working on long-term projects, you need to think beyond the 100% commission program. Options could include:

• A base salary with a lower commission rate on top.
• A bonus program that includes incentives for completing non-sales objectives (cold calls, relationship building meetings, competitive analysis, new account recruiting, etc.)
• A multiple rate commission plan that puts special reward on certain types of accounts.

Each of these can help shift the salesman's focus into different time frames and activities. Unfortunately, they also require a higher level of active management on the part of the Boss.

The “Extra pay when you hit your Target” Program.

This approach ties commissions and bonuses to annual targets or quotas. Again, this has a cost control benefit: those that hit the higher sales numbers get the extra amounts. It can be very effective, but you should be aware of the downsides.

First, targets set exclusively by senior management are often viewed sceptically by the sales staff. They are perceived as a strategy for Not Paying Commissions, which obviously decreases their motivational impact.

Second, they really only motivate the sales people that believe their normal performance will get them close to the goal. Those that believe they are very unlikely to hit their targets are not motivated to work harder. Similarly, those that think their normal efforts will put them well beyond the targets aren't motivated either. Consequently, only the staff in the middle of the pack will think of this extra money as a reason to put forth extra effort.

The Geographic Quota Plan

This common strategy bases sales quotas on population stats. It is certainly convenient, and takes the appearance of arbitrary decision-making out of the equation. It is also easy to sell to senior management, who may not know much about the sales staff, but can read a map and population tables.

Unfortunately, I have rarely seen a population-only quota system that actually works. Too many other factors can come into play:

• Different economic activity levels in the regions, for reasons other than population.
• Different competitive positions in the regions.
• Different strategic account penetrations among the regions, etc.

All of these factors can produce good and bad sales performances among the regions, not directly tied to the skill and efforts of the sales staff. As a consequence, motivation suffers.

I once worked in partnership with a company in Canada that had 7 sales reps across the country. Each rep had an annual sale quota based on population but, because of outside economic issues, one region significantly outperformed year after year (and one rep significantly out-earned all of the others.) In order to keep the plan “simple” and still keep it “fair”, the company took the expedient of capping that one rep's annual compensation. He responded by only working 3 days a week every summer, giving him more time to spend on his boat.

The point I would like to end with is this:

• It is easy to come up with a sales compensation plan that is simple to implement and manage.
  
• It is hard to come up with one that actually keeps all of your sales staff motivated, unless you add some significant sales management effort.

Keeping your sales staff motivated takes a lot more than just a simple commission plan.