clearly defined its program goals and concluded that an effective sales organization is in place, it should consider the full range program types available in a modern compensation system.
If the company is focused on increasing revenue, adding a sales goal, with a higher commission payout above it and a lower one below is a simple way to improve alignment.
Companies that are interested in maintaining the positives associated with a commission program (motivation, variable pay, etc.) but are interested in improving margins can benefit from adding a load (fixed percent of sales subtracted from gross profit) to their program.
When trying to build a specific part of the business, e.g. product line/group or customer segment using a multiplier (measuring performance narrowly and applying the result broadly) can be very effective.
There is no reason to accept a sub-optimum sales compensation program. By ensuring that strategic issues are addressed first, considering all appropriate structures and avoiding the common implementation pitfalls, any company can leverage the power of a modern compensation system.
Michael Emerson (firstname.lastname@example.org) is a partner with Indian River Consulting Group, LLC and co-author of the National Association of Wholesaler-Distributors study, "What's Your Plan?: Smart Salesforce Compensation in Wholesale Distribution." IRCG is a firm specializing in distribution. Contact IRCG by calling 321-956-8617, or visit www.ircg.com.
currently doing or copying the competition when neither of these is well aligned with their strategy.
Don't be surprised. The saying "measure twice, cut once" applies here. The consequences of failing to consider different scenarios or not examining the personal impact on important individuals can be severe and irreparable. Make sure enough modeling is performed before making any changes. Adjustments after the fact will erode credibility, encourage ongoing lobbying for special consideration and may be too late to fix the damage.
Communicate. There are two messages that are important. One is how the program works. A well designed compensation program is one where the more program participants earn the happier the company is. Therefore, it is critical that program participants understand how they can maximize their incomes.
The second message is why a change was necessary. Rarely will a sales rep be more attentive than when his or her compensation is being discussed. Do not miss this opportunity to articulate to the troops the strategic direction and business objectives of the company and their role in achieving them.
Misdiagnosis: As for the second root cause, many companies attribute dissatisfaction to their sales compensation program when the reality is that other factors are the primary reason for substandard market execution.
Rarely will a sales force achieve its objectives if it is unclear as to what it is expected to achieve or does not have the necessary tools, training or inherent capabilities. If conditions such as these exist, efforts made to modify the sales compensation program will generate marginal, if any, improvements.
Sales compensation can be a powerful, tactical tool for driving market execution. Before attempting a change, however, ask your self if the following strategic issues have been addressed:
Are sales roles appropriate? For example, are sales "generalists" still the right approach, or would your company be better off with more focused sales roles such as hunters, harvesters and market specialists? Should you deemphasize the outside role and bulk up inside sales and/or Web site capabilities?
Do sales representatives have the tools they need to succeed? Having the right people is not the end of the sales manager's job. Good managers also ensure that sales reps receive continuous coaching and have appropriate sales, product and market knowledge.
Is there clarity and agreement on the key metrics that define performance for each sales role? What customers, products, markets, etc., is each one targeting?
When prepared sales representatives have clarity around sales roles and key performance metrics exist, a company is in a position where the desired performance improvements from a sales compensation change are likely to be realized. If a company does not have shared agreement that "yes" is the answers to these questions, you can continually change your sales compensation program and will find yourself still dissatisfied.
Lack of Awareness: I no longer find it surprising but I believe it's pretty insightful that when companies contact me they typically ask for assistance "fixing their commission program." Unfortunately, for many companies the best solution is to abandon their commission program and replace it with a different type of structure.
Most companies do not have in-house expertise in sales compensation design because they make changes so infrequently. Thus, modifications are investigated by someone in his or her "spare time," limiting the amount of time available to research alternatives outside the prevailing structure. This approach can lead to situations in which the new plan perpetuates the errors of the old one, is overly complex or misaligned with the company's evolving strategy or culture.
Ideally, once a company has
With the recent attention in this industry given to strategic pricing, distributors who change their pricing structures must consider developing new sales compensation plans that reward improved profits. Before attempting a change, consider all appropriate structures and take steps to avoid implementation pitfalls.
According to a recent study, U.S. companies are markedly more satisfied with their sales compensation programs today than they were two years ago." Having spent the last 10 years designing and implementing sales compensation programs for hundreds of firms, I found this intriguing.
Upon further reading, I discovered that "markedly more satisfied" meant that 59 percent of companies surveyed in 2006 were satisfied compared to 34 percent in 2004. In other words, about four out of 10 sales compensation systems in this country are failing to meet their objectives!
Why such high levels of dissatisfaction? The authors of the study provided descriptions of the disappointments, such as failure to achieve desired results, contributing activities from the sales force not meeting expectations, overcompensation of poor performers, under compensation of high performers, low program understanding, and excessive administration time.
While all these factors clearly lead to dissatisfaction, the question as to why the problem continues to go unsolved went unanswered. My experience is that the core issues leading to unresolved dissatisfaction around sales compensation programs are the result of three factors:
Fear. Today's dissatisfaction is tolerated because it's perceived to be better than what might happen if change were attempted.
Misdiagnosis. Sales compensation program changes do not produce the expected improvements they expect because the program itself is not the real problem.
Lack of awareness. Companies have a difficult time coming up with structural alternatives to the program that is currently in place.
Fear: Companies with long-tenured sales reps and compensation programs that haven't changed in several years are often very reluctant to change. Their executives may fear that changing the compensation program will irrevocably destroy the cultural dynamic that has served the company well over the years, threatening its long-term vitality.
They tolerate their dissatisfaction with the plan because they perceive that it is better than what might happen if they changed it.
Concerns about disrupting the company culture are very legitimate. Changing compensation programs is risky. If the programs are not well conceived, clearly communicated and properly implemented there is a high probability that an unintended, negative and permanent culture shift can occur. Sometimes, of course, cultural shifts are the whole point, but the law of unintended consequences should not be ignored.
To combat these unintended consequences follow these steps:
Don't do it yourself. Enlisting individuals from different functional areas of your company (accounting, IT, HR, etc.) will ensure that all angles that need to be considered are considered, i.e. it's affordable, the information needed is available in the computer systems, no employment laws are being broken, etc.).
Ensure that agreement and clarity exist on objectives. It is vital that a clear and detailed answer exists to the question, "How will results be different next year if we've done a good job?"
Be open-minded. Invest the time to become aware of the different compensation structures that exist (salary, bonus, commission, multipliers, thresholds, etc.). There are some compensation structures that are very poor matches for certain situations and others that fit very well. Many companies get into trouble trying to tweak what they are