Compensate to Motivate
July 14, 2008
Are you and your team really on the same page?
By Lee B. Salz
No question, channeling the energy of a sales team can be a challenging endeavor. But here's an incontestable fact: How you compensate your reps determines where they invest their time and the results you get.
The incongruence of sales compensation is one of the biggest disconnects in companies. Executives sit in a boardroom with strategic plans of grandeur, but the plan collapses when they don't address the compensation for the sales troops. This is a very simple equation. Your salespeople in-vest their time in activities that drive their compensation, plain and simple. Thinking they will actively and consistently perform activities that are not in their best financial interests is naive at best.
Further complicating matters, there are instances where salespeople are compensated for delivering certain results while their managers are compensated on a different set of results. Thus, the sales managers are driving their team consistently with their compensation message, but inconsistently with their sales team members. It creates the visual of the manager pushing a boulder up a hill, trying to get their team to focus on activities that contradict their income.
When structuring sales compensation plans, a company should strongly consider the goals for the company. Working backwards, the goals for the company drive the structure of the sales compensation plan. Thus, they should be directly aligned. If the company's goal is to gain adoption of a new product in the marketplace, the plan should reward salespeople for accomplishing this feat. If the goal is to increase revenue with their current clientele, the plan should reward for that.
The second consideration when structuring compensation plans is that sales managers and salespeople should have alignment with their respective results. If one is compensated for adding new clients and the other for selling a new product to existing clients, and it does matter which is compensated for which, the incongruence causes a paralysis of performance.
Making this more daunting is the fact that in complex sales environments (those with protracted buying cycles), the standard salary and commission model does not create enough of a framework to ensure that the sales team performs the right activities daily. How do you structure the plan so that the team is motivated to do the right things?
Employers also face the challenge of hiring salespeople who are concerned about the length of time of the buying cycle in contrast to their earnings. The standard solution is to bridge the gap with a draw. There are two types of these: The first, known as a recoverable variety draw, is essentially a loan against the salesperson's future commissions. Then there's the non-recoverable draw, which is money (free and clear) to the salesperson for some period of time.
Nothing good comes out of either of these. The recoverable draw almost always puts the salesperson in a financial hole. They wake up each morning knowing they owe the company money. The non-recoverable draw oftentimes creates an earnings cliff. Let's say that the draw is for three months at $2,000 per month. In month four, the salesperson probably experiences a significant fall-off in their earnings. The end result is relationship damage between the salesperson and the company and a poor corporate investment.
The challenge of motivating salespeople and bridging the sales earnings gap can be solved with a creative compensation approach. In the '80s and '90s, the big buzz term was MBO (aka, management by objective). Businesspeople were provided with a series of objectives, and following a performance review, were compensated for achievement of such. What if the MBO concept was applied to sales compensation? What if you created a sales behavioral objective, or SBO?
If you think this represents an additional sales cost, think again. What this actually proposes is a reallocation of the dollars paid to your sales team. A percentage of the funds normally budgeted for commissions would be allocated for an SBO bonus.
Consider this: A company has a typical buying process with its clientele that is six months long. They pay their salespeople a base salary of $60,000. At 100% of plan, the salesperson earns $90,000, or $30,000 over their base salary. But no commissions are earned in their first six months of employment due to the buying cycle. The company, as a means of managing sales behaviors and attracting strong sales talent, budgets $15,000 of the $30,000 of commissions for the SBO bonus. The salesperson is then eligible to earn a $3,500 bonus each quarter in year one.
At the beginning of each quarter, the salesperson has a formal review where the results of the prior quarter are shared and the mission for the second is presented. The SBO changes from quarter to quarter based on the tenure of the salesperson and the needs of the business. The SBO is also not a "gimme." Reaching 100% should be a stretch goal, but achievable.
In the first quarter, the overall mission is getting the salesperson assimilated into the company's environment. The measurements of success at the end of the quarter are a business/territory plan, the ability for the salesperson to call on prospects and knowledge of the products. As measurement of achievement, the company provides a written test on product knowledge, a scored mock sales call and presentation, and review of their business/territory plan. Based on the salesperson's accomplishments, they will receive a percentage of the $3,500 up to 100%.
In future quarters, a points system is put in place, making the SBO entirely objective and tied to performing the activities deemed critical for the success of the business. In each quarter, the goal is for the salesperson to achieve 100 points. The main objective in the second quarter for this company is to have face-to-face meetings with qualified prospects. They are looking for their salesperson to have 20 face-to-face meetings in the quarter as a way to jumpstart their sales pipeline. Thus, the SBO compensates five points for each meeting held.
At the end of the quarter, whatever percentage the salesperson delivers of the 100 points, with a minimum achievement of 75%, is paid as a bonus. This includes those who overperform. Why penalize them for doing more of the right things? What about quality? How do you know they are doing the right things in the prospect meeting? Hopefully, you measured their proficiency in doing those things in the first quarter.
In future quarters, the SBO program is designed by identifying key, measurable sales activities aligned with the needs of the business. Place weight on the activities that are commensurate with your expectations of the salesperson.
The SBO is not just for year one, since the challenge of managing sales behaviors is perpetual. One important key is to budget enough dollars for the SBO bonus that it gets the attention of the salespeople, but not so high that it overshadows commissions.
The bottom line is that results are a function of doing the right things each and every day—they aren't miraculous. If you have done your job of identifying the success metrics, and the salesperson achieves those, then the results take care of themselves. The SBO program gives you the toolkit to channel the energy of the sales team toward achieving that goal.
Lee B. Salz is president of Sales Dodo, author of Soar Despite Your Dodo Sales Manager and an online columnist for S&MM. He can be reached via e-mail at lsalz@salesdodo.com, online at www.SalesDodo.com or by phone at 763-416-4321.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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