Is your sales comp plan an entitlement
program or an incentive for growth?

by Brian Reynolds and Norm Clarke,
Industrial Distribution Program, Texas A&M University

The old adage, “you get what you pay for,” isn’t necessarily true when it comes to sales force compensation plans. Too often, comp plans are not designed to align the organization’s goals with the activities and results management expects salespeople to produce.

Some relatively simple sales compensation plans reward top-line revenue growth with little regard for gross margin dollar contribution. At the other extreme, some plans are so complex salespeople don’t understand them. The goal with any sales compensation plan should be to strike a balance between the organization’s strategic goals and the financial motivations of salespeople.

While managers struggle to keep up with the challenges of running their businesses, it’s easy to lose sight of the sales comp plans that are (or were) intended to sustain profitable growth. In the absence of a well-defined comp plan, it is easy to focus on driving top-line sales in the hope that revenues will sustain the organization and provide financial resources for continued growth.

Where to begin
Clearly, the first component of an effective sales compensation plan is for the organization to develop and articulate the goals and objectives of the firm. These should be derived from the firm’s short-term and long-term business plan, and should consider issues such as which markets to serve, which products to promote and sell, and which customers have growth potential for the distributor. After developing a business plan, it is much easier to define the role the sales force should play, what’s expected of them, how to measure these expectations, and what compensation plan structure will drive and sustain the desired outcome.

Not so long ago, straight commission plans alone were common and reasonably effective. Gross margins were high enough that a straight commission plan sufficiently provided salespeople with  incentive to sell as much as possible to as many customers as possible. Gross margin dollars easily covered the firm’s operating expenses, leaving the owners with an adequate return on investment.

Under this type of compensation plan, salespeople were masters of their own destiny. They could call on whomever they chose, sell whatever they chose and, in essence, were self-managing. If they wanted to make more money, they alone would determine how best to accomplish the organization’s sales volume goals and their individual income goals.

While it could be argued that straight commission plans should provide sufficient incentive for salespeople to sell more, simply selling as much as possible of the easiest products to sell is not a viable business plan for today’s marketplace.

There has been a considerable migration from straight commission plans to comp plans made up of a combination of base salary plus a commission based on a percentage of gross margin dollars the salesperson generates. These plans provide more focus on profitable sales growth and also offer the opportunity for sales management to direct activity of salespeople.

The base salary provides more management control over where and how salespeople invest their time. It also provides more management direction into which products salespeople sell. The gross margin-based commission portion provides an incentive for the salesperson to focus on profitable sales, not just top-line volume.

The next step
These plans clearly moved sales compensation in the right direction, but more can and should be done. Commissions based on a percentage of gross margin dollars focus salespeople’s time and attention on the dollars that fuel an organization’s growth. The questions distributors should ask themselves include, “Which customers or prospective customers have the potential for growth?” “Which products offer the greatest opportunity for growth?” and “How can we put the two together?”

In his book “Animal Farm,” George Orwell said, “all animals are created equal; some are more equal than others.” Some customers have more sales growth potential than others, some offer no growth potential over what they currently generate, and some customers assigned to a salesperson should not be called on at all.

A well-thought out customer needs analysis process can identify sales opportunities that exist among current customers. Analyzing this information will yield the available potential, or the untapped customer share opportunities, on which distributors can capitalize.

Unrealized sales opportunities should be part of a tactical plan to support the organization’s strategy. Measurable tactical activities should also be part of an overall sales compensation plan. Each salesperson should understand what management expects of them and should also be held accountable for these activities.

The basic elements of an effective sales compensation plan include:
• Clearly defined expectations
• Mutually agreed upon and easy-to-understand objectives
• Measurement
• Evaluation of effectiveness
• Easily understood relationship between objectives and compensation
• Consequences, both positive and negative

Clearly defined objectives adhere to the “S.M.A.R.T.” standard. In other words, the objectives are Specific, Measurable, Attainable, Realistic and Time-based. The objectives should relate to activities identified as most likely to drive sales growth. These can be tied to sales call activity, not simply the number of calls on a call report (which often resemble great works of fiction), but specific activities that a salesperson should engage in that result in additional sales opportunities.

They may also include other objectives or activities that are less tangible than those tied to new product sales or new account development. Such activities might include documented customer cost reductions, product trial orders and plant safety surveys.

You could argue that salespeople are paid to do these kinds of activities. But how many companies measure and evaluate such activities? Business owners should manage the sales process, not simply a set of objectives. When managers understand the sales process and clearly articulate it to salespeople, they can measure and compensate the sales force for its effectiveness.

Expect resistance to change
Changing a salesperson’s compensation plan typically meets with much resistance. Many salespeople equate a change in their compensation plan with “more work for less money.” Seasoned salespeople who accumulate an enviable account base over the years, and who also inherit accounts from salespeople who were promoted or left the company, see no need to change. They earn a comfortable living running their “milk routes” and making the easy sales to people they like spending time with. This is great for the salesperson but may not be great for the overall good of the company.

In this type of situation, changing to a system of paying bonuses or commissions for certain activities, selling specific products or sales targeting specific markets won’t likely happen over night. However, gradually implementing such a plan may work, particularly if the bonuses or commissions are significant enough to get the attention of the sales organization. A salesperson earning $100,000 a year won’t likely be motivated by an additional $100, $500 or even a $1,000 bonus. However, three times the normal commission rate for a specific group of products or sales made to targeted markets may be worthwhile.

Once salespeople become comfortable with the idea that selling specific products to targeted markets can also put additional dollars in their pockets, management may begin to implement compensation plans that reward sales or activities to accomplish specific objectives.

Brian Reynolds is associate director of the Thomas and Joan Read Center for Distribution Research and Education and the Texas A&M University Industrial Distribution Program. Reach him at . 

Norm Clark is a lecturer at Texas A&M University. He has taught personal and professional selling and sales management courses through the business schools at Texas A&M University and the University of Houston. Reach him at . 

This article originally appeared in the ISMA/I.D.A. Spring Convention 2003 issue of Progressive Distributor. Copyright 2003.

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