How to Introduce New Sales Compensation Plans

[ read time: 3 minutes ]

By David J. Cocks, CEO

No matter how you introduce new compensation plans, expect your salespeople to move through several stages in their response:

Denial

Many salespeople will deny that a change is required and will want to keep their current commission program.

Rejection

Even after you've explained why the change is being made and discussed it with them, they will reject your reasoning.

Exploration

Sales reps will begin to explore their options, perhaps at a competitor's office.

Acceptance

Your salespeople come to grips with the reality that change is required and become ready to commit to the changes.

You need to be prepared for these stages, so you can help your sales force work through them. A consultative approach usually works best - share the rationale behind the change and help reps understand how both they and the company will benefit from the new plans.

Here are some more tips that can help ease the process:

1. Consult sales associates during the process of determining new plans. Although you may believe you know what your reps want, your ear may not be as close to the pavement as you think. Asking for input can provide useful information.

2. Explain why changes are needed. When reps understand the issues and are consulted, they are more likely to buy into the solution.

3. Analyze the impact of the changes. Typically, some salespeople will come out ahead, others will see little difference, and some will see at least a temporary decline in income. Focus on those who are negatively affected. How likely are they to jump ship? If you don't want to lose those reps, perhaps there are some low-cost perquisites you could offer to soften the impact.

4. Offer a choice. Allowing sales reps to choose among several compensation plans restores their feeling of being in control. It also lets them match their tolerance for risk to their compensation, and choose the plan that motivates them most effectively.

5. Don't make exceptions. It destroys the trust between you and your salespeople. You do run the risk of losing some reps, but you'll lose more if others see you making exceptions and feel they haven't been treated fairly.

6. Remember that salespeople leave a company mainly for personal reasons or lack of good management – not for compensation.

If you follow these steps, you'll ease the transition and make it much easier to successfully implement your new compensation plans.

Get Nimble Again

By David J. Cocks, CEO

When you first start a business, it's easy to turn on a dime when you perceive an unmet need in the market or encounter a new competitive threat. But as the business grows, it becomes increasingly difficult to respond as quickly.

How can you make an established firm nimble again?

Use a Contribution-based Approach

The first step is to design compensation structures that get everyone pulling in the same direction.

Normally, when you design sales force compensation plans, your goal is to maximize revenue. But as a manager or owner, that's not all that concerns you. You want expenses kept as low as possible, so profit can increase too. Right?

A contribution-based approach allows you motivate sales associates to increase revenue, reduce expenses, and increase profit – all at the same time. With a contribution-based approach, sales associates are responsible for contributing their fair share towards corporate expenses and profit. Once that contribution has been made, they are able to keep most of the rest of the revenue they bring in.

Sales associates are motivated to increase revenue; as they sell more, they make more. But with this system they can also increase their income by reducing expenses. When expenses drop, the amount they have to contribute decreases, so they keep more of the money they bring into the company.

You would naturally expect profit to increase when revenue improves and expenses are reduced, but a contribution-based approach provides a higher level of control – you define the percentage of profit you want to achieve. That amount is then built into the plan design. The result is a system that provides automatic incentives for sales associates to increase revenue, reduce expenses, and increase profit.

Meet the Needs of the Sales Force!

Now that you've aligned the goals of the sales force with yours, the next step is to reduce unnecessary expense so you can run a more efficient operation.

If you're in a service business, your biggest expenses are related to your staff – salaries, commissions, and benefits. You can mandate across-the-board expense

reductions, but the way to really save money is to find out what your sales associates don't value and stop spending money on those items. Normally, you can't simply ask what sales associates want; they want it all.

However, with a contribution-based approach, your sales associates learn that benefits, perquisites and support services come out of their pocket – not yours. We recommend that our clients design several compensation plans that offer different combinations of benefits and support services. Let the sales associates choose the plan they prefer. If no one chooses the plan with the most expensive health and life insurance, and many choose the plan with additional administrative support, you know where to spend your money.

We've had clients save hundreds of thousands of dollars, simply by adjusting their benefits packages to line up more effectively with what the sales force wanted.

By using a contribution-based system, you take a holistic approach to designing compensation. You can factor in the company's level of expense, the competitive situation, the desired level of profitability, and the needs of the sales force. The result is a more efficient operation that responds to the needs of the marketplace quickly – and stays nimble over time.

Best Practices: Adjusting Compensation Plans for Inflation

By David J. Cocks, CEO

When was the last time you adjusted your compensation plans for inflation?

Does that sound like a crazy question given today's economy? It's not. Adjusting your compensation plans each year to match inflation is one of the best practices we recommend.

Many companies set up a compensation plan and then leave it alone for years - we've seen companies that haven't changed their plans in 15 or 20 years!

Yet each year the cost of doing business increases. The sales price of your products and services typically rises too. But that's not enough to protect you.

What can happen, particularly in commission-driven industries like real estate, insurance or medical is that the higher sales price allows your sales force to reach higher commission levels faster.

At those levels, you pay them a higher percentage of each sale, which means you have less money available to cover corporate expenses. Meanwhile, those expenses are increasing.

It doesn't take long for those plans to become outdated, so they no longer recover the company's expenses and the profit margin erodes. Once this occurs, it's hard to get the money back.

You have to make such a large adjustment that it can't be done all at once - you risk losing too many members of your sales force. So you implement the change over two or three years, and by then you're behind again.

Meanwhile, you're leaving the door open for a competitor to introduce more aggressive styles of compensation and steal away your top people.

The best approach is to revisit your compensation plans every year, using the Consumer Price Index (CPI) to adjust for inflation. You can find the CPI at http://www.bls.gov/cpi/. 

How to Make Each Sales Associate a Profit Center

By David J. Cocks, CEO

Are some members of your sales force subsidizing others?

In some companies, the top producers carry the burden. In others, it's the mid-level or lowest producing members of the group.

Either way, it's not fair.

Consider treating each sales associate as a separate profit center.

View each sales associate as if he or she were an individual company. (Your firm as a whole is then like a big conglomerate.) Does each sales associate bring in more revenue than it costs to have him or her on board?

If not, what can you change to generate a profit?

You might want to create a commission structure designed specifically for new hires that allows you to provide the training and intensive support services they need to be successful – while ensuring that you recoup those costs. When associates are ready, they can move up to a commission structure designed for solid mid-level producers.

You can create another set of commissions for top-producing sales associates who don't need a lot of support and want to do things their own way.

When you set up commission structures like this, you can do a better job of meeting the needs of the sales associates. You can provide a higher level of support to those associates that want it, while offering independence to others.

You're also virtually guaranteeing corporate profitability. When you make a profit on each member of your sales force, it's hard not to make a profit on all of them put together – which makes your company more stable financially. But what's more important is that you are treating all members of your sales force in a fair and consistent manner. 

Test Your Sales Force Compensation IQ

By David J. Cocks, CEO

See how much you know about sales force compensation – take the following 10 question quiz. Answers are given at the end... if you have any questions please contact us!

1. The only information you need to design a good sales force compensation plan is what your competition is paying.
A. True
B. False

2. If a company similar to yours is getting spectacular results from a new commission plan it makes sense for you to try it too.
A. True
B. False

3. It is better to set up compensation plans so sales associates are paid when they make the sale, as opposed to paying them when the company receives payment.

A. True
B. False

4. The biggest concern managers have about changing compensation plans is that sales representatives will leave.
A. True
B. False

5. The main reason sales people quit is that they find a better-paying job.

A. True
B. False

6. Most sales people would prefer to have a choice of compensation plans.

A. True
B. False

7. The benefits of offering sales people a choice of compensation plans include a lowering of the company's breakeven point and an increase in the number of people who will be interested in working for the company.

A. True
B. False

8. When managers are paid a bonus based on revenue, the best revenue figure to use is total revenue.
A. True
B. False

9. Firms that have invested heavily in technology to make their sales force more productive often see an increase in revenue in the first year and a decrease in profitability in the second year. This problem can be fixed by revising the company's sales force compensation plans.

A. True

B. False

10. It is possible to design compensation plans that treat each member of the sales force as a separate profit center.
A. True
B. False

Answers: 1-B; 2-B; 3-B; 4-A; 5-B; 6-A; 7-A; 8-B; 9-A; 10-A 

Top 4 Ways to Supercharge Your Sales Recruiting

By David J. Cocks, CEO

Recruiting the right people is an essential component of your firm's success. Here are some strategies that can improve your ability to recruit and retain the sales force you need.

In the same way that you sell the advantages of your product or service when you talk to prospects, you have to sell your company to potential recruits.

1. You Need to Define a Value Proposition that articulates why sales representatives should work for you rather than the company down the street. What is different or unique about your firm? What do you do for your sales representatives that other companies don't do? Do you offer more support? Better training? A higher commission? Unique benefits? A more experienced management team?

Research what your competitors offer. Ask sales people what they want. Then get creative. What can you offer that no one else is currently providing?

Come up with a strong value proposition that sets you apart from the other companies in your market.

2. Provide a Career Path

Show recruits that they can grow with your firm. Don't just sell what you have to offer them now; explain what you provide when they reach the next level.

This is easy to do when you offer packages of support, training and other services that are appropriate for sales associates at different levels of experience.

For someone who is right out of college or new to the industry, you might offer a fullcomplement of training, marketing assistance, and administrative support – everything needed to ensure success. A senior associate might prefer more independence; she may want to do things her way, without relying on the company for everything.

You want to structure compensation differently at each level, creating commission plans that meet the needs of each group. If you do this properly, you can recover costs at each level, so no one group ends up subsidizing the others.

3. Offer Different Styles of Compensation Plans

Your industry has a standard way of compensating sales representatives. Real estate has traditionally used splits, manufacturer's reps are usually paid a straight commission, many industries use base plus commission.

But just because everyone else does things that way doesn't mean you have to.

When you limit yourself to one style of compensation, you are limiting the number of people who will work for you. Everyone has a different tolerance for risk. There are many people who would make excellent manufacturer's reps, for example, who simply aren't comfortable being paid 100% in commission.

If you can figure out a way to offer other styles of compensation, you expand the labor pool from which you can recruit.

4. Ready Your Presentation!

The more you know about your competition, the more effectively you can sell against them. Know what services they provide, and be prepared to compare commission plans.

Compensation these days is so complicated that it's easy for sales representatives to get confused. Many times you'll be able to show that a plan that sounds better really isn't. Use Excel or CompensationMaster's Recruiter to create a graph that shows the differences between the plans at different levels of revenue, as well as a chart that les them look up their production level from last year to see how much they would have made working for you.

Don't be intimidated if you pay less. Three-quarters of the time, sales associates leave a company for reasons other than money. Explain your value proposition; stress the services that you offer and the strengths of your firm.

When you take advantage of these four strategies and differentiate your business with a powerful value proposition, meet the needs of employees as they grow, expand the pool of potential recruits by offering different styles of compensation, and design an effective presentation for recruiting, you supercharge your recruiting and are able to acquire the kind of sales force your company needs to grow. 

Find out how we can assist your company by talking to a consultant now +1.704.541.9695

BIG Hat, NO Cattle? | Thriving in a Market Downturn

Thriving in a Market Downturn

By David J. Cocks, CEO

Is your business all hat and no cattle? In other words, are you focusing on increasing revenue at the expense of profit?

A lot of business owners focus primarily on top-line revenue growth, even though a business can't be run on revenue alone.

Here are some common misconceptions we see in the market:

Top Producers = Profit

Betting the farm on top producers might leave you without a farm. Big-name sales associates can negotiate high commissions and generous perquisites. Although their volume is impressive, it is not unusual to find companies losing money on their most productive sales associates.

Mergers and Acquisitions = Profit

One of the most popular ways to grow a business is by acquiring or merging with another company. But if the company was not properly valued, efficiencies don't materialize as expected, or compensation plans are not restructured to reflect the combined company's expense structure, the net result can be negative.

Cash Flow = Profit

In smaller companies, we often see owners who pay themselves with what's left over after expenses are covered. Although this helps ensure the company's cash flow, it's not an accurate accounting of profitability. Owners who sell need to pay themselves as if they were regular sales associates – and compensate themselves for the time they spend managing the business.

How Healthy is Your Business?

Even if your revenue is on a steady upward trend, your business may have hidden profitability problems. Now that you've paid your taxes and have all your year-end numbers, it's a good time to do a quick check to make sure your cattle are growing as fast as your hat.

You'll need a few statistics for the past three years to do the assessment:

• Total revenue;
• Total expenses;
• Operating profit;
• Sales representatives ranked by production.

First, look at the trends to make sure both revenue and profit are increasing, and then calculate the percentage increases. If revenue and profit aren't growing at the same rate, that's a red flag.

Now look at expenses. They should be growing at a slower rate than revenue. If not, that's a red flag.

Last, look at sales force production levels for the past couple years. If they're not stable, that's a red flag.

Did You Find Any Red Flags?

If you did, there's still time to make changes. Adjusting compensation plans can help solve some of the toughest profitability problems. We encourage you to discuss any red flags with your accountant, and of course, give us a call to see how we can help.

The bottom line: make sure you don't spend so much time focusing on your big hat that you don't have a place to hang it at the end of the day. 

Applying Strength-Based LEAN Six Sigma to Sales Compensation

By David J. Cocks

Can applying a strength-based LEAN Six Sigma methodology augment and improve sales force compensation plan development? In short; YES.

Traditional LEAN Six Sigma

The traditional application of the LEAN Six Sigma method for sales force compensation begins by defining the pain, conflict, and waste in a company’s sales compensation strategy. But focusing on problems saps motivation and has negative effects on sales staff retention.  

Instead of conducting a LEAN Six Sigma analysis with the hope of correcting a perceived problem and an ultimate return to the even-keel state of business mediocrity, a strength-based approach draws attention to the strengths of the company as well as the sales team, and subsequently initiates changes that encourage continuous improvement and growth of both the company and individual sales representatives. 

Serious Consequences Result From Poorly Designed Compensation Plans

In the past, sales force compensation plans have been based on conjectured industry standards, competitive pressures, and outdated notions of objectivity. When exceptions are made for specific individuals, the unfairness quotient increases, eventually leading to the loss of vital members of the sales team. 

Imagine a sales representative who refuses to continue pursuing sales after reaching a poorly-designed predetermined compensation cap, or a company that loses a large percentage of its forecasted profit by promising unsustainable compensation to a sales team livewire. In both circumstances, someone stands to lose money and gain a mindset of resentment.

Strength-Based Approach is More Effective

When the strength-based LEAN Six Sigma process is applied to sales force compensation, significant benefits accrue to both the company and individual members of the sales force. 

Begin by thinking of your sales representatives as customers.

Just as you offer your regular customers products and services, consider how you can offer your sales executives a unique bundle of compensation and benefits that attract them to your company, motivate and retain them. 

With a strength-based approach, you can find the strengths of the company through the eyes of your customers (i.e., the sales representatives), who are in the market and aware of the strengths and weaknesses of your competitors.

A Strategic, Strength-Based Discovery Methodology

When CM Partners starts working with a client, we do interviews with the sales representatives and management team to identify those strengths. We use a narrative interview style, with 21 questions designed to identify the strengths of the company as well as the individual sales executives. Of the 21, only one is compensation-related. For example, we ask “Why did you join the company, and does that still hold true today?”  

Some interview questions help us identify issues that might be holding the company back, such as “Are there any policies that are unfair or make it harder for you to do your business?” and “Is there anything we are doing today that, if improved upon, would be really useful?”

Unlike internal company surveys, which are often designed around existing policies and agendas, this approach brings us in as an unbiased third party that can offer an environment of total confidentiality. Sales representatives typically respond very well to this approach. They are eager to share their thoughts and help make the company better. Often, they are ahead of us, telling us how to improve things before we even get to those questions. 

When designed like this, the interview process is a critical component of the solution, allowing the sales team to feel heard and helping bond them to the company. 

War Room Involves the C-Suite

Once the interviews are complete we analyze the results, looking for common themes, and present the results to the C-suite in what we call a “War Room.” We discuss the perceived strengths and barriers, focusing on the opportunities and continuous improvement. 

Executives join us for a productive exploration, focused on learning to see the strengths in their process and looking for ways to improve what they have, communicate more effectively, and get creative about addressing issues.

Coming out of the War Room, we craft a framework for a strategic approach to sales compensation. Then a mathematical layer is added.

Adaptive Algorithmic Business Model Validates the Compensation Strategy

We connect sales compensation directly to the profit and loss statement (P&L), creating an adaptive algorithmic business model that incorporates predicted sales distribution and expenses, and is compared with competitors’ plans.

The company can now develop a new compensation strategy that builds on the strengths of the business; addresses pain, conflict and waste; and delivers a powerful and sustainable competitive advantage.

It is possible, for example, to create different compensation plans to address various product lines, or to design specific plans for top producers who are willing to trade greater risk for a higher payout. With the model, compensation plans can be designed that sound very different and appeal to different sectors of the sales team while meeting the same profitability requirements. 

The model acts as a validity check – it allows the company to analyze the results of the projected changes with a great deal of precision – to know ahead of time what impact the sales compensation changes will have on revenue, profitability, sales force retention, recruiting, productivity, and shareholder value.

CASE STUDY: Revenue Increases to 209%

To illustrate the strength-based approach, let’s look at one client we worked with. When we asked the question “Is there anything that the company is doing that if improved upon could really be useful?” the sales force mentioned that the matching 401K retirement plan for salaried employees was very attractive. But they were not able to take advantage of it because they were independent contractors and not eligible to participate.

After discussion in the War Room, the company decided to implement a CMGP wealth-building program that followed approved SEC guidelines and would apply to the sales force as independent contractors. This program was build into the newly created sales compensation programs. 

The sales force was very pleased, stating that this was the best program the company had created for them and that it “beat the competition hands-down.” 

In the following year, the company saw a significant increase in production from the existing sales team and was able to attract more top sales talent. Gross revenue increased to 209% and company operating profit rose to 191%.

As you can see, with this approach, the sales compensation plan development process builds on the company’s strengths, and relies on the collaborative efforts of the entire team, not just the sales department or managers alone. 

Benefits From Applying Strength-Based LEAN Six Sigma

Why does strength-based LEAN Six Sigma work for sales force compensation?

• Allows a narrative process improvement – Sales and sales compensation are processes, not policies. When a company’s management treats sales compensation as a dynamic process that requires input and feedback for evolution, instead of a stagnant company dogma, significant improvements are possible. For instance, most sales processes are 85% pure waste. Considering sales force compensation as a process allows the team to identify and reduce the waste that is impacting the company and the top sales representatives.
• Doesn’t rely on sales volume metrics – Traditionally, when a member of a sales team closes a sale, there is a documented increase in sales volume and the sales representative receives predetermined compensation. Inherently inefficient, this method is like a manufacturing company that only develops cost-per-unit metrics for good parts but fails to calculate the loss of scrap or reworked items. For instance, consider the time spent on unclosed sales or manipulating a sale to better fit a needy client. However, when companies connect sales force compensation with the P&L, they are able to see how the sales process influences overall financials.  
• Manageable contribution-based sales compensation – When executives consider sales force compensation, they often only see an unmanageable tide of money that ebbs and flows with sales activity. By modeling contribution-based sales compensation plans, executives can more accurately predict the effects of a sales tsunami or drought on other aspects of their business.
• Provides bottom-line insight – Executives who consider the development of sales force compensation plans a process improvement can see improvements to the company capital, and not only the sales volume.  Also, the methodology allows for successful waste remediation that can improve efficiency and provide the company with previously lost funds.

Issues in Implementing Strength-Based LEAN Six Sigma

Despite the benefits of adopting a strength-based LEAN Six Sigma process for designing and managing sales force compensation, resistance to change can stand in the way of its successful implementation.

• Emotional attachment - Often, executives are unable to clearly observe all the moving parts of their company’s machine and instead rely on a nebulous impression to make decisions. Consequently, they fail to recognize the problems or innate waste in their processes. Similar to manufacturing, sales force compensation requires LEAN tools and processes to eliminate waste and discover obstacles to success.  For example, an executive that blindly trusts their established sales force compensation plans are competitive and comparable to other contender’s plans can expect to lose their tops sales talent, customers, and market share. Electing to preserve personal comfort and maintain sales compensation plans that are based purely on conjecture will eventually cause unnecessary setbacks.
• “Status quo-or-die” management – Some executives do not consider sales or sales compensation as a process, but a management decision that once made must be maintained like it is company policy. This is the same as if a manufacturing process has internal policies that are self-imposed and are keeping the process from being improved yet management does not view it that way.
• Aversion to change – Consider an executive who does not classify sales force compensation as a process, but rather a static policy. Since companies do not normally track the efficaciousness of policies, the executive does not have access to relevant compensation metrics. Essentially, the executive does not know what they do not know. The data dearth eliminates their ability to identify factors that compel preemptive changes and is subsequently limited to resolving crises discovered after damage is incurred.
• Fear of loss – Sometimes, a company’s management is reluctant to effect financial changes due to preconceived, and often unfounded, beliefs that the change will cause their company’s future financial failure. Citing the absence of a well-defined method on which to model new compensation plans, they automatically refuse to move forward. This is similar to a manufacturing company refusing to improve quality because they believe it will cost them too much money.
• Donning business blinders– In many companies, executives draw conclusions about their sales based on an erroneous perception of their company’s current state of sales force compensation. When executives see the valid current state through the strength-based lens, including the ever present LEAN visible waste, they can transform their decision making and sales process in to a more profitable and competitive model.

Focusing on what works raises energy and motivation. A strength-based LEAN Six Sigma approach to sales force compensation creates a committed and focused sales team that continues to generate sales and actively engage in an improvement initiative. Creativity is higher than that generated by following traditional improvement methods, and innovation is therefore easier to achieve. Leveraging current or past knowledge of experiences and successes from within the system provides great resources for the next generation of sales force compensation plans. 

Authored by David Cocks, CEO, and Kevin Klump, Director, of CM Global Partners. CM Global Partners specializes in applying LEAN techniques to sales force compensation. Over the past 20 years, the company has developed innovative compensation plans that are in use by more than 65,000 sales professionals around the world. David can be reached at david@cmglobalpartners.com.

Top 4 Things To Avoid When Applying LEAN To Sales Force Compensation

By David J. Cocks

When compensation plans are structured correctly, it is possible to achieve all of your goals at the same time. Sales people can be paid the maximum possible while ensuring that corporate expenses are covered and profitability goals reached. Goals of the sales team and executive management can be aligned, with it being clearly in everyone’s interest to maximize revenue and control expenses.  

The company that structures its strategies correctly and with the right partner can gain a competitive advantage over other businesses by drawing the right people to the business almost magnetically. Here are some key lessons to avoid to ensure a successful restructure. 

Don’t Assume You Know What Your Sales Associates Want! 

Talk to them and ask what style of compensation they would like. When we do focus groups and online surveys of sales associates, we often see situations where managers are surprised by some of the things the sales force says. It’s easy for perceptions to be skewed by a few vocal people, and even managers who do a great job of having their finger on the pulse can find that the needs of sales associates have shifted due to new competitors entering the market or economic changes. It’s important to consider issues beyond commissions, because those can have a powerful impact on motivation. The company may be spending money on benefits that are no longer wanted. Technology changes rapidly, and tools can become outdated fast. Marketing may be delivering collateral the sales force doesn’t value the way it used to. Even office furniture and fixtures can make a difference. You want to determine if you are offering the combination of services and support the sales associates need – you can often identify opportunities to reallocate expenses to spend money on the things that matter more now.  

Don’t Neglect Updating Plans.

 Merit-based compensation plans are not something you can design once and leave alone forever. They need to be updated regularly, partly to meet new competitive situations as other companies enter and leave your market, and partly to take into account the changes in the CPI and prices in your market. You also want to update plans whenever you make an acquisition or engage in a merger. This is the best way to keep your company nimble and aggressive in your market.  

Don’t Skimp On Training Managers.

 Make sure your managers understand the vision and know how to sell it. If they don’t fully understand the value behind your new plans, you won’t get the results you are expecting. So make sure you invest in training them and getting them excited.  

Don’t Make Exceptions. 

There will be people who push back about the new compensation plans. But don’t make exceptions or special deals to keep them satisfied. That undercuts the whole structure of your compensation strategy and damages your integrity. If there is a strong reason to create an exception, instead of making it an exception, consider making it one of your public plans. Hold it to the same standard of profitability as the other plans, and make it available to everyone.