Sales Management Group

Sales Compensation – Pay For The Results You Want

Handing-Money-245x136We recently met Tom Hopkins (name disguised), the CEO of a successful industrial equipment distributor. When Tom bought the company a few years ago, he inherited a competent sales team.

But there was a problem. Tom’s sales reps were “farmers,” not “hunters.”

They were very comfortable selling the products they knew through the people they knew, primarily engineering firms and equipment installers. They focused on cultivating their existing relationships to get business.

They were extremely well compensated for staying in their comfort zones. They had no incentives to sell new products, find new accounts or break into new markets. In short, there was no reason to become a hunter when farming was so lucrative.

Tom recognized the problem when he bought the company. But he held off making changes for fear of disrupting the sales effort.

Time for Change

Now, Tom is ready to make some changes. He wants to grow the business, and his manufacturers are pressuring him to sell a broader range of products.

Tom, correctly, believes his compensation plan should pay his sales reps for achieving the results he wants, not the results they choose to deliver.

To accomplish this, we encouraged Tom to take three steps:

  • Adjust the existing compensation formula
  • Create new incentives for the sales team to meet his strategic objectives
  • Sell the new plan to the sales team

Adjust the Compensation Formula

Tom wants to send the sales team this message:

“I will pay you less for selling the same things through the same sales channels. But I will pay you more for selling strategically important products to strategically important accounts. If you meet my strategic objectives, you’ll make more that you did before.”

To make the old way of doing business less attractive, Tom plans to reduce the commission rate on a typical sale from 10% to 7%. That’s a 30% reduction.

Under the old plan, a sales rep who generated $1.5 million in revenue would earn a commission of $150,000. Under Tom’s new plan, a sales rep would earn $105,000 for generating the same amount of revenue, as summarized in the table below:

Table2

Create New Incentives

By solving one problem Tom created another.

His reps will not be happy about taking a 30% pay cut. At the very least, they will be seriously demoralized.

Tom thinks the old plan is so rich that even the new plan will be competitive in his marketplace. So he’s more concerned about keeping his sales reps motivated than he is about losing them.

Now Tom needs to create an incentive plan that achieves his strategic goals and keeps his sales reps motivated.

Tom has three strategic goals:

  1. Increase sales of strategic products, especially newer, higher margin products
  2. Increase sales to end-users, the companies that actually use his manufacturers’ equipment
  3. Increase sales to new accounts in both existing and new markets

We suggested that Tom create a special incentive aligned with each goal to get the sales reps focused on (and excited about) achieving his goals:

  1. 10% bonus (commission accelerator) for strategic product sales
  2. $5,000 bonus for each sale to an end-user
  3. $5,000 bonus for each sale to a new account in a designated new market

Sell The Plan

Tom’s next challenge is selling the plan to his sales team. He needs to show his sales reps how they can make even more money under the new plan. He could use the chart below to illustrate this:

Table

Using a model like this, Tom can show the reps that they can make more money. Now he needs to show the reps how to get there.

The first step is for Tom to work with each rep to develop a detailed territory plan with target accounts and tactics to close those accounts. This is the roadmap for achieving the goals.

The second step is harder. The reps need a new mindset, switching from farmer to hunter. This may require training as well as extended coaching (and prodding).

A Win-Win

The new plan can be a win-win all around. Tom’s company sells more products to more customers. The sales reps make more money by meeting Tom’s goals.

Tom is now paying for the results he wants!

 

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