When it comes to the sales compensation plan, the average sales manager is like a child with a loose tooth that’s ready to come out—they just can’t help but play around with it. This isn’t necessarily a bad thing, either. New approaches to compensation and incentives can fire up a sales team, minimize turnover and improve profitability. But as high-performance management expert Bruce Merrifield (www.Merrifield.com) points out, when constructing a new plan managers need to be careful to avoid repeating the mistakes embedded in the old plan.
One particular problem Merrifield identifies is the increasing challenge of paying for performance. Integrated team efforts are common today, while customers frequently make buying decisions based on a variety of factors and less on a key individual’s efforts. As a result, rewarding reps by the sale may no longer reflect the truth behind the effort and achievement that led to the signed contract.
With these factors in mind, Merrifield suggests a few key tips for developing an incentive compensation plan that will drive business, while genuinely rewarding reps for helping to achieve corporate goals.
1. Make the sky the limit.
There should be no limit on how much sales reps can earn. If the comp plan is properly designed, every additional dollar paid out to reps in commissions should bring in much more in profitability. Don’t let managerial envy get in the way of the company’s success.
2. Protect rookies from the wolves.
New salespeople should not be put on commission only. Instead, pay new reps a competitive fixed wage during the 3 to 6 months it takes to get them up to speed. Then put them into a territory and give them a lower guaranteed salary and a monthly commission program that should increase their overall take-home pay.
3. Offer merit-based raises.
When you review salaries, rather than offering automatic cost-of-living increases, rank the salespeople and give those who deserve them big pay increases. Cut the pay of low achievers and let them know why.
4. Don’t reward farmers.
Stop paying out high commissions to reps for nurturing existing accounts that require little coaxing to keep buying from you. To encourage new business, triple or quadruple the commissions given for new growth over the commissions given for account maintenance.
5. Stiffen reps’ resolve.
Offer incentives to salespeople for holding firm on prices, special charges and terms. Attach disincentives to discounted deals and reps will think twice about offering easy price cuts just to close the sale.
6. Recognize bigger as better.
At most companies small orders offer only minimal returns, and may even be unprofitable. Build incentives into the comp plan that only kick in with orders of a certain dollar value. Increase the incentives as the size of the order grows.