Creative Compensation

As the nation’s sales force continues to move toward performance-based pay, does that mean a simple shift for salespeople from salary only or salary/commission mix to straight commissions? In a few cases, yes. But the whole story is more complex.

First, from the company’s point of view, what is performance? Is it the same today as it was yesterday? How do managers measure performance? Does performance mean reaching quota? Going over quota with discounted prices? Increasing number of calls? Punching up the closing ratio? Doing more repeat business? Or does performance come down to some combination of sales closed and a base level of customer satisfaction?

On the salespeople’s side, incentives should directly affect things that matter to them and their families. These can differ by age, personality and career goals. A salesperson just starting out may want the stability of a regular paycheck before establishing a territory and predictable sales. Someone who has been selling for five to ten years already knows the market and what to expect. Such an individual may want the added incentive of commissions to make more sales. A salesperson who has been selling for 20 years may want deferred payments as part of a retirement package to take advantage of tax laws.

For the company to succeed, the compensation plan must satisfy both the company’s and the salespeople’s objectives. So, in practice, performance pay is not always simple. Fortunately, managers are developing some creative solutions. And managers are even tweaking successful compensation plans to improve performance compensation.

Pay for Profits If You Want Them

IBM is putting its 40,000 U. S. salespeople on a new bonus plan, tied to customer satisfaction and profits. The old compensation was a “box approach,” says IBM’s Peter Thonis. It rewarded salespeople for machines and software sold. Starting this year, that will change when IBM institutes a dual performance compensation measurement tool.

The sales bonus will be 40 percent based on customer satisfaction and 60 percent on the profitability of each sales transaction. Why not just pay on profits, the “bottom line,” and let the salesperson worry about keeping the customer happy? Thonis notes that IBM is no longer happy simply with the maximum profit on each sale but wants satisfied customers for future sales as well.

Well, what business doesn’t want profits and continuing relationships? The trick is in making this type of performance incentive measurable and workable. How does IBM plan to cut such a deal? Local IBM managers will survey customers frequently to measure “satisfaction” and will ask customers not just how happy they are with what they have bought, but also, “How well does IBM’s rep know your agenda?” In other words, are IBM salespeople keeping up to date with what’s going on at each customer’s site? Are they aware of each customer’s changing hardware and software needs? Since the customer’s agenda will affect IBM’s future, salespeople must keep a vigilant eye not only on the profitability of each sale but also on future trends at each customer’s shop. In other words, salespeople must think strategically if IBM is to stay viable in the market.

For this more sophisticated approach to sales force compensation, IBM must measure the profit per transaction. Estimating how much profit a corporation makes on total sales is easy, if it is done once per quarter. It’s called “accounting.” But for IBM’s system to work, the salesperson should know profits when negotiating the deal. That provides motivation – and builds confidence. So IBM developed a special software tool that takes into account such indirect costs as development. It gives each salesperson a complete corporate picture at the point of sale.

Many customers are also interested in IBM’s profits, and for very intelligent reasons. As Thonis explains, nobody in the computer business wants to buy from a company that’s losing money – “They may not be around for service, or they’ll get you in other ways.”

IBM expects its new plan to provide about half of the average salesperson’s

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compensation, and possibly up to 80 percent for the top of the force. However, the key is not fractions, but focus: “We want salespeople to think from the customer’s perspective,” emphasizes Thonis. And that’s just what IBM has found it must do as a corporation.

Dell Computer Corporation is one of the “clone” manufacturers that shaved PC prices by selling direct to users. Dell’s Roger Rydell credits the tried-and-true sales-based commissions with tripling Dell’s sales over the past two years. But, he notes, “When you’re going that fast, you can weather-strip the vehicle.”

Currently Dell is more concerned with profits and liquidity. The company has shifted its sales compensation to reflect financial priorities, not sales growth. A simple commission scale, based 100 percent on profits, has been in place for about six months. Dell’s 700 salespeople (80 percent sell over the phone) get an estimate of the profit margin on each machine sale, just like IBM’s bigger force. And they get a daily estimate of total commissions earned.

Results? “We’ve seen an immediate shift in selling focus, with salespeople walking away from deals that weren’t profitable,” comments Rydell.

Pay Salespeople What

They Want Most

Another new compensation approach starts with the sales force. In many businesses the best salespeople are older, experienced hands. They know the product, territory and have many familiar customers. But some are thinking more and more of Florida, right? The business needs not just veteran bodies. It needs their best efforts until it’s their time to flock south. Why not offer them a bigger piece of Florida?

That is what deferred compensation attempts to do. Paid – and taxed – only after retirement, salespeople earn deferred compensation now. That means the company can tie it to performance now, when it counts and it’s measurable. And performance may not be just sales. A business may most need help from experienced salespeople in training new people, in transferring knowledge of the territory and other “human capital investments.” If that’s what the business needs, that is, at least partly, what performance compensation should reward.

Deferred compensation is also called “Super Comp” for another reason. Paying taxes on a retirement income is a lot cheaper than being taxed on your best commission years. And the deferred account may also earn interest, just like any retirement provision.

But deferred compensation may not be suitable for all firms. It is usually designed for unincorporated businesses, or Chapter C and Chapter S corporations.

Commissions Can Help Cautious Companies Expand Fast

Some companies start with a distinctive product. Then they develop a distinctive compensation plan to sell the product. National Safety Associates, of Memphis, Tennessee, made a small home water filtration unit. No “high tech” or fancy appearance, the moderately priced unit looks like a chubby thermos jug. But NSA knew it was ideal for turning tap water into the softer, tastier liquid – just like spring water – people were grabbing off shelves in fancy bottles during the 1980s. NSA saw a big and booming potential market. What were the risks? The company had been privately held and debt free for most of its history.

NSA went to a multi-level sales force, most of which was on 100 percent commission. Salespeople demonstrated the filters directly to consumers and booked the sale. The company then shipped the product out of its Memphis warehouse direct to the customer. Some salespeople worked only part-time for modest incomes. Others, active and successful at full-time selling, moved up to be regional or national marketing directors. They got a commission on their own sales, plus a cut on their recruits’ sales. Unlike other such companies, this was a sales organization with products going directly from the company to the customer – no warehousing of stockpiles in down-the-line garages.

Sales of the chubby jugs – and other NSA air and water filtration systems – grew by 3000 percent, according to company spokespeople. In 1993 NSA went public and began broadening into Europe and Canada with a diversified line of environmental, safety and educational products. Commission-only sales helped take the company into the mainstream market and actually fed its growth.

Look At the Jobs That

Really Need Doing

Since salespeople are not lone eagles, what about compensating the sales support staff – all those fine folks who keep the home office fires burning? Some companies look at all the tasks needed to get and keep their products in the market and then motivate everybody involved in doing just that. ESP Software Services Inc. of Minneapolis sells jobs to people and vice versa. It places programmers, lawyers, accountants and others with firms that need them. The $5 million annual business involves matching some very sophisticated position requirements with specialized individuals.

But, like most selling, job placement also requires lots of market contacts and frequent re-contact. “Everybody on ESP’s ten-person office staff shares in performance or results compensation,” explains President Ray Davey. Administrative staff supporting marketing salespeople get a “dollar hit every time somebody is placed. The Human Resources person has to do orientation and W-4’s so they get a cash kicker, too.” Compensation of technical staff at ESP has been activity-based for two years.

The company measures and rewards daily calls to potential job candidates, visits to client companies, and developing new leads.

Because of its business, ESP can even “motivate the product.” Davey has 75 consultants, the specialists ESP places with firms. ESP offers them an opportunity to work for a straight annual salary – or a salary plus higher hourly rate, depending on how much they are used. Results? Davey says ESP kept its consultants working and earning 97 percent of 1993, versus an industry average of 88 percent.

Look At All the Salespeople

Ameritech, a ten-year-old spin-off from AT&T, has all 60,000 employees in its

performance incentive plan. The company heavily compensates its “pure sellers” by commissions, according to Human Resource Director Harry Malone. These are the consultative salespeople who work with big and ongoing accounts. But customer service salespeople also do a lot of selling.

They need to deal with the increasing variety of telephone services, and salespeople should be alert to a customer’s personal or business requirements and think creatively about how Ameritech can profitably serve them. So incentives reward these salespeople for results and profits.

To determine if the company as a whole is meeting or exceeding service expectations, Ameritech also surveys customers regularly in 12 key areas. That helps determine management pay in units close to the customer. Ameritech even has a performance element in its union contracts with service and technical staff.

All this is necessary, Harry Malone notes, because so many telephone employees come into contact with existing customers. These are mostly the people Ameritech will be trying to sell new services to in the future. It is an industry where almost all future prospects have been buying something from you for years. So everybody is a salesperson, to some degree.

Innovative compensation plans, like other changes, can start anywhere. But to make them work, managers must consider all the steps. In essence, a comprehensive compensation plan should tie the steps together in a way that works for the company and the sales force. That means: (1) matching sales rewards to company objectives; and (2) clearly focusing on the most important requirements for meeting those objectives. If you can check off both, you have instituted a dynamic, forward thinking and practical compensation program.