In reviewing a sales compensation program with a CEO recently, he described his salesforce as cockroaches: "I try to wipe them out but they always seem to survive and come back stronger than ever".
Leaving aside the precise accuracy of the simile, there is no doubt that CEOs and CFOs running their fingers down a list of major expenses will often zoom in on sales compensation as a particular irritant. Costs can run as high as 40% of revenue in some businesses. And, whether stated explicitly or not, leadership often convinces itself that the company's products/services are so unique that it does not need a lot of high-end sales talk to convince customers to buy them. Even in good times, there is the temptation to reduce incentive payouts to the sales force. With revenue and margins under particular pressure today, the target is even more inviting.
But, if you fall into this category, resist the temptation to go scorched earth on your sales force. Bad times can create great opportunities to grow market share as existing customer/supplier relationship come under financial stress and reconsideration. And while there are a myriad of strategic and tactical issues to consider when looking at how the sales force is managed and compensated - and the two are somewhat intertwined - I see the following as key issues to focus on.
Open up your wallet. Be prepared to pay your good sales people a lot. Admittedly, you might not want to hear this. But, your sales force is the sharp end of the spear and your front-line in the efforts to grow revenue. An effectively designed sales compensation program is a means of growing the pie not of dividing it up. Sure, the shareholders might take home a smaller slice in the end, but it will be from a much bigger pie (this is making me kind of hungry).
The key word here is, of course, "good". The problem with many sales compensation programs is not that they pay out loads of money to their best performers but they pay out too much for not-so-good results.
Look at how often sales people meet their targets. If the percentage is consistently over 75% your targets are too generous. Also, analyze the relationship between compensation and sales volume. If the relationship is not highly correlated, the odds are you are paying out too much for mediocre performance.
Build in extra-large incentives for adding new customers. I have heard about the 80/20 rule to death. Yes, in most cases, 20% of your customers create 80% of your revenue and more than 80% of your profitability. So the smart money focuses most of its attention on retaining and growing revenue from that 20%. The conventional wisdom is that the easiest and least expensive way to grow revenue is to sell to existing clients who evidence a propensity to buy. This is the siren song: sweet, logical, cheap and quick.
But, if you are not adding new customers your business will die. Focusing revenue growth efforts on existing customers gradually erodes the customer trust in the relationship as your sales force is inevitably put in the position of trying to sell anything in the pipeline as opposed to picking and choosing what makes most sense for the customer. Also, under the best of circumstances, you will loose customers each year. The pipeline needs to be replenished. Some of the new, seemingly marginal customers of today will turn into the Fortune-500 companies of tomorrow. Unfortunately, you can't figure out who the winners will be a head of time. Finally, new customers excite the workforce by adding "wins" and bringing in new learning and growth opportunities.
All that being said, bringing in new customers is the hardest sales job of all. The investment of time is great, the outcome uncertain and often the revenue is tiny up-front. A business needs to invest in incenting the salesforce to bring in the new customers the same way it invests in new products - with the idea of losses in the short-term and gains and a healthy business over the long-term.
Simplify. Make sure your sales force's compensation program and performance management is not weighted down with accumulated goals, hanger-ons and responsibilities. Only those people who actually deal with customers and significantly influence the buying decision should receive a sales compensation incentive. Sounds kind of obvious but it is amazing how many roles pile into the sales incentive plan including sales support staff, sales management and technical advisers.
Ensure that your sales force has clearly defined and relatively simple responsibilities. For example, in most cases, a sales individual should have responsibility for either selling new customers or growing revenue from existing accounts but not both. They should not have the added responsibilities of mentoring, managing people or providing significant post-sales support.
Finally, make sure your incentive compensation program is simple enough that your typical sales employee can calculate their commissions in their head as they walk into a sales meeting. If your sales compensation program takes up more than a page it is probably too complicated. For example, it should usually not include more than one or two multipliers for certain types of sales (e.g., new customers, new products) or more than two commission rates.
Tough times can mean some great opportunities to grow market share. This is when existing, long-term customer/supplier relationship are under stress and most likely to break. So, when it comes to your sales force now is the time spend the money, incent for new customers and simplify.
