Lowering Your Breakeven Point

First, let's clarify what a breakeven point is. The simplest definition is that breakeven occurs when revenue equals expenses.

But since revenue and expenses are both moving targets, it helps to look at breakeven from a slightly different perspective.

There are two types of expenses: fixed and variable. Fixed costs are expenses that do not increase as business increases. Examples include office space, utilities and salaries.

Variable costs are expenses that vary with the amount of business you do. Commissions, telephone charges and manufacturing costs are variable expenses.

Variable costs are tied to revenue – if you don't have any sales, for the most part, you don't have those expenses. But whether or not you bring in any money, you still have to cover your fixed expenses. For the sake of argument, let's say that 80% of your revenue goes to variable expenses. That leaves 20% of the revenue to cover fixed expenses and profit.

At breakeven, that entire 20% goes for fixed expenses.

Once you pass breakeven – when you've got your fixed expenses paid for – the rest is profit. And lowering your breakeven point directly and immediately increases profit. Now, let's talk about why offering a choice of plans lowers breakeven (and increases profit).

1. Risk-sharing

Typically, at least one of the plans you offer will give sales representatives the option of taking on greater risk in exchange for a potentially greater reward.

A commission-only or 100% plan does this. So does a plan where the sales associate reaches a higher commission faster in exchange for paying for his own advertising.

The sales associate who has confidence in her own abilities chooses this plan because she believes she will make more money this way.

The company benefits because it is shifting an expense (like advertising or office expense) to the sales associate. Or the company is replacing a fixed expense (a salary) with a variable expense (a commission).

By reducing expenses like this, the company lowers its breakeven point and starts making a profit sooner.

2. Motivation

By offering a choice, you are allowing people to select the style of compensation that motivates them most effectively. This removes the disincentives to greater production that exist in so many commission plans. When sales representatives become more productive, profitability increases.

3. Turnover costs

Improving motivation reduces turnover. The expenses associated with turnover decrease; therefore, so does the breakeven point.

Offering a choice also helps retain those reps who want a different style of compensation. They no longer have to leave your company to obtain it.

4. Recruiting

Offering a choice expands the pool of potential recruits. If you offer only a straight commission, you are limiting the number of people who will be interested in working for you. When you offer more options, you can choose from a greater universe of talent. That lowers your recruiting costs and reduces breakeven.

Of these four factors, the first one is the most direct. Having sales associates pay some of the costs of running your business or having them take on additional risk has an immediate effect on your corporate profitability.

Is All Your Profit in Popcorn?

[Read time: 3 minutes]

By: David J. Cocks, CEO

"Get them in the theater, break even on tickets, and make your money on popcorn."

It's a business model that is used in movie theaters all over the country and has become quite popular in the real estate industry.

Many brokers are breaking even or even losing money on their core real estate business. All their profit comes from ancillary services, such as mortgages, title insurance and homeowners insurance.

What's wrong with that?

Nothing – as long as the profit from ancillary services is stable. But real estate is an industry that is in transition. There are many scenarios that could put that profitability at risk:

Legislation changes could keep you from owning a real estate company plus a mortgage company and a title insurance company.

New competition could enter your market, perhaps from banks or a more aggressive real estate company, causing margins to drop further.

Interest rates could rise.
Your market could cool down – or overheat.
Your agents might decide they want a piece of the ancillary services revenue.

You can even have problems if the only thing that happens is that your sales force gets more productive. Suppose they form teams or make better use of technology, so they reach higher splits faster. Your loses on the real estate side increase, so you need more and more profit from the ancillary services to cover those loses – money you may not be able to get.

What's the answer?

Fix your commission structures so you are making money on your core real estate business. Then you can make money on real estate and keep the profit from ancillary services too.

Without wanting to carry the movie theater analogy too far, many brokers assume that fixing commissions is like raising ticket prices. You're taking money away from the sales force and putting it in your own pocket.

That's not the case.

You should fix commission structures by tuning the way you pay your sales force as well as the services you offer them to better meet their needs. This rationalizes your costs: you spend more in some areas and less in others. You also adjust your commissions so they are fair to everyone. The result is a more nimble company that has a significant competitive advantage. (To see how this works, read some of ourcase studies.)

Then the next time you're at the movies, you'll be able to sit back, eat your popcorn, and think pleasant thoughts about how you are managing your business so much more effectively.

Pushing a Compensation Boulder?

[Read time: 5 minutes]

By: David J. Cocks, CEO

When your company's compensation plans were originally created, they were probably pretty simple and straightforward.

But then one of your top people was considering defecting to the competition, a new competitor entered the market, you acquired another company...

Now your plans are pretty complicated. You've got people grandfathered in. You've got exceptions – probably lots of different kinds of special deals.

When you think about updating your plans, there's a whole lot of baggage there.

Your compensation plans feel like a big boulder you are pushing uphill, with all kinds of sticks and leaves and moss and junk sticking out all over the place.

Making it move is a royal pain.

You think about chipping away at that – at making the changes you'd like to make in your compensation plans – but it just seems like it is going to be so painful.

It doesn't have to be like that.

You're getting caught in a trap.

Basically, you've been trapped by heuristics.

A growing body of research suggests that one of the ways humans have adapted to the complexities of modern life is by using heuristics, or rules of thumb, to navigate many decisions.

There are six heuristics that are recognized as being widely used in our daily lives, and a lot of them are relevant here:

Familiarity – the simplest decision in any given situation is the one you made the last time you were in the same situation. This means that it is easier to keep using your current compensation plans – making the same offers, handling problems the same way you have in the past – even if that isn't working well for you anymore.

Consistency – people want their actions to feel consistent, particularly if they are on the record as taking a particular position on an issue. If you've stated publicly that you are not going to change your plans or that you will meet offers by competitors, you feel you have to do that, even if it doesn't make sense anymore.

Acceptance – people want to be liked and accepted by others. This means it is hard, even for the toughest business owners, to do things that will cause others to resent them (including changing compensation).

Expertise – the natural tendency is to defer to the leader of a group or to those with the most expertise. Sometimes this means that people who have recruiting or financial expertise and state a strong position are the ones everyone falls in line with, even if those people don't fully understand the implications of the position they are advocating.

Social facilitation – people look to others like them when making decisions. If those people made a particular decision, the easiest decision for others is to make is the same decision. But this leads to group-think, rather than risk-taking.

Scarcity – people value opportunities in proportion to the risk that they will be taken away, which is why we all respond to time-limited offers or the news that "there are only 4 left at this price." This can come into play when a competitor is trying to steal away one of your people. Having a competitor want them can make them seem even more desirable than they are, and can lead to making special deals that are not cost- effective for the company.

When you combine all of these rules of thumb, you can easily see why it looks like it makes sense to keep pushing that boulder uphill – even as it gathers more and more junk as you go.

But sometimes the right answer is to leave that boulder right where it is. Walk away from your company's current compensation plans and start anew.

Look at what your sales associates want now – not what they used to want or what you negotiated for years ago.

Look at your company's current expense structure, your current competitors, your current market opportunity.

Then design a set of compensation plans that work for you now.

You might find that you have a tiny little rock – instead of a huge boulder – to deal with. And it becomes surprisingly easy to maneuver, making your company more nimble and more responsive to what is needed now.

You just need to let go of those old rules of thumb.

Is Your Profit an Illusion?

[Read time: 3 minutes]

By: David J. Cocks, CEO

"Of course we're profitable," says the broker. "I take a quarter million dollars out of this business every year!"

Every so often we hear statements like this from brokers. Sometimes it's an owner who is ready to retire and wants to sell the business to one of our clients.

But when we analyze their books, we discover that although the company appears profitable on the surface, it is actually barely breaking even.

To help determine a company's true profitability, here are the first three questions we ask brokers:

If you sell, are you paying yourself the appropriate split?

Very often, broker/owners don't take their split. They leave the money in the company account, and pay themselves out of what's left over after expenses are covered.

While this helps ensure that the company has the necessary cash flow, it can mask profitability issues. If the owner is the top-producing agent, that can really skew the results.

Are you paying yourself for the time you spend managing the company?

You need to determine how much of your time is devoted to administration and management. Then you need to figure out how much it would cost to hire someone else to perform those functions. Until you hire that person (or those people), you should pay yourself the same amount of money.

Are you getting a return on your investment?

You need to have profit built in separately from your split and the money you make performing management duties. This is your return on the capital you invested to buy

or start the business. If there is no return on capital, you are going to have a hard time selling your business for any significant amount.

The bottom line is that you need to structure your business financially so that if you decided to go live on a beach in Fiji and do nothing more than sip mango daiquiris in your beach chair, your company would still be profitable.

You have to make sure that you are paid for all the functions you perform: as an agent, as a manager, and as an investor.

Once you have done that, you will be able to sell the company at a substantial profit – or hire someone to manage your business while you go off to Australia!

TOP 6 Tips for Compensating Sales Managers

By David J. Cocks, CEO

Managers should be compensated, at least in part, for their performance – for the degree to which their decisions influence the company and contribute to its success. However, sales force managers have a wide range of duties; some sell, some don't; some own part of the business, while others are employees. Designing incentives that balance all these factors can be a challenge.

The following tips can help you design compensation packages that will motivate your sales force managers most effectively.

1. Base Salary

Start with a base salary that reflects the marketplace value of the manager's administrative duties. For example, if those duties are expected to take up to 60% of the manager's time, the base should be approximately 60% of what a full-time administrative manager in the open market would receive.

2. Overrides

Overrides can be calculated in many ways: on gross revenue, net operating income, earnings of the sales representatives, or profit before interest and taxes (EBIT).

Consider carefully which measure you use. When an override is calculated as a percent of gross revenue, the impact of poor sales is not felt as dramatically as it would be if the override were on net operating income.

Paying on the net operating income also encourages recruitment, and rewards the manager who devotes time to getting sales representatives to the breakeven point. It provides a disincentive to managers who readily give exceptions or cut deals to recruit new reps – the manager's own income is affected proportionally.

3. Task Completion Incentives

Many companies are instituting financial rewards for successfully recruiting new associates, offering training or coaching, or increasing the percentage of productive sales representatives.

Recruiting. If you pay a flat amount as a reward for recruiting, consider a sliding rate relative to the value of the new recruit. Make the payment in stages, as the associate makes sales, to help guard against a body shop operation. Even better, pay when the associate reaches breakeven, as this ensures that the bonus comes from profit built into the breakeven point.

Training. Offering an incentive for training or coaching helps ensure continuous improvements in production. Try paying a flat fee for the amount of time invested or giving a bonus based on the number of associates who complete training programs.

Productivity. Incorporating an incentive for increasing the number or percentage of active representatives encourages motivation of all reps, and helps prevent preferential treatment of high producers.

4. Bonuses

Offering rewards for reaching targeted production levels can be highly motivational. Bonuses might be given for reaching a certain level of revenue or profit each month, or for bringing down the company's expenses.

5. Profit Sharing

You may want to pay a top manager a set percentage of any profits retained by the company over a specified period of time. For this to work, your company should have well-controlled expenses and a generally stable economic situation. The manager should have access to all of the company's financial information, and feel that he or she has enough influence in the company's day-to-day operations to control the factors that affect profitability.

One risk is that relations between the manager and senior management may become strained if the top executives want to make investments that will grow the business at the expense of short-term profitability. For this reason, profit sharing is best used as a component of a compensation plan rather than as the whole means of compensation.

6. Offering a Choice

One of the most important factors in manager compensation is the competitive situation in the market. Where lots of good managers are available, companies do not have to pay as much. However, where talent is scarce, more aggressive plans are essential.

One innovative approach is to offer managers a choice of compensation plans. In the same way that you allow your sales associates to choose the plan that best motivates them, you can allow managers to choose the compensation structure that best meets their needs.

Whatever form of compensation you choose, it is important that managers clearly understand how the commission or bonus will be calculated, and feel that they have control over the factors that will affect those numbers. Without that understanding and that power, they won't be motivated effectively.

Compensation plans should not only be attractive to the manager, but should also be tailored to the needs of the company, providing incentive in those areas most needing improvement. When compensation is carefully thought out, managers can be motivated to lead the company in directions well above and beyond the daily operations of the business. 

TOP 5 Ways to use Sales Compensation as a Competitive Weapon

By David J. Cocks, CEO

I spoke with a gentleman recently who was buying a business and wanted to develop a sales force compensation strategy that would give him a competitive advantage.

He wanted to lure top sales representatives from his competitors, motivate them powerfully, and grow his business rapidly to the point where it would dominate the market.

Here's the approach I recommended he take:

1. Analyze your competitors' plans

First, you need to know what compensation plans your competitors offer. What salaries, base rates, draws, commissions, incentives, quotas, perquisites and benefit packages do they provide?

2. Ask sales reps what they want

Far too many firms skip this step, either because they don't care what the sales representatives want or because they think they already know. Don't make assumptions – ask! Your sales associates will tell you what they like about your compensation plans (and your competitions' plans), what they don't like, what motivates them, and how they would prefer to be paid.

3. Find out what you can afford

Many companies skip this step too. But you can't be aggressive about compensation without knowing how much your business can afford to pay your sales force. Analyze your expenses and revenue to find the maximum that you can afford to pay.

4. Blend what the sales reps want with what the company needs

When you know what your sales force wants and you know what you can pay and you know what else is available in your market, you are in a good position to create very desirable plans.

For example, top producers might be frustrated with plans that put a ceiling on their income. You can create a compensation plan with a lower base and a higher commission that rewards them for accepting more risk by giving them the opportunity to make more money.

Sales associates who have high fixed expenses (or trouble managing their money) might be willing to accept a lower total compensation package in exchange for the security of a higher base.

People who have health insurance through a spouse's plan may resent having to pay for coverage through your insurance plan. You can structure plans so people who don't want benefits don't have to pay for them.

5. Offer a choice

The key to success is realizing that the same compensation plan isn't going to work for everyone. You'll get the best results if you create several plans, each meeting the needs of a different group, and then let your sales associates choose which they prefer.

When you follow this five-step process, you can design a compensation strategy that supports your business plan, positions your company successfully against competitors, and allows you to recruit and retain the sales force you need. 

How to Handle Sales Performance After a Merger or Acquisition

By David J. Cocks, CEO

When companies go into a merger or acquisition, there is often a tendency to leave compensation alone – the feeling is that the ownership change will be traumatic enough without changing the commission structure too.

However, this leads to problems. Invariably, representatives compare plans. There are bound to be differences: different commission levels, base salaries, incentives, perquisites, benefits and more.

No matter how generous the plans are, representatives are going to feel that "the other guys have a better deal."

One company's reps see that sales associates at the other company receive a higher commission, while the other company's reps notice the higher level of administrative support and lead generation the first company provides.

To keep everyone happy, there's a tendency to creep towards a plan that has the best of both – higher commissions and higher levels of support, services and benefits. This can be disastrous.

The longer it goes on, the worse it becomes. Top producers have the leverage to cut better deals for themselves, and resentments build and fester.

Additionally, the longer plans are left alone, the harder it becomes to find a good time to make a change.

Right after a merger or acquisition is the perfect time to rationalize compensation. Creating new compensation plans makes a clear statement of the company's goals and positions everyone to move forward without the baggage of the old arrangements.

Start by asking sales people from both companies what they like and don't like about their compensation structures. You'll get good feedback that will help you design new plans, and you'll also have information about what works and doesn't work that you can use to better manage the combined sales force.

The simple act of asking what they want sends a powerful message to the sales force and is an excellent retention device.

Then you need to decide what value proposition you want to offer the sales force. Can you combine what each company is doing now? If one company has a particularly attractive culture, you may want to transition everyone to that offering. Or it may make sense to start over with something brand new.

You can take this opportunity to rationalize the compensation structures, bringing them into line with what the sales force needs and wants. Maybe some of the services or benefits one of the companies offered are no longer needed. We have actually seen companies pay for an acquisition simply by restructuring compensation.

Don't forget to do a thorough financial analysis of any proposed changes. We saw a merger once where one of the companies offered a very generous commission at high sales levels, which they could afford to do because very few people ever reached that level. The company they merged with had far more high producers, and when management decided to offer that plan to everyone they quickly found themselves in serious trouble.

Of course, you need to take into account the revised cost structure of the new company. You'll be saving money through consolidation and reducing duplicate costs. Those savings can go to the bottom line.

Or you might invest them in your sales force by designing plans that provide higher commissions – which would be highly motivational to the existing sales force and very useful for recruiting.

By taking advantage of a merger or acquisition to revise your compensation plans, you can better meet the needs of the combined sales force and position your company for greater growth in the future. 

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

At Risk of Losing Your Top Producers?

By David J. Cocks, CEO

Are you at risk of losing your top producers?

In our work with hundreds of sales organizations, we see many making the same mistakes with regard to their top producers. To keep from losing your best sales reps, here's how to avoid these common pitfalls.

Reward proportionally to their contribution

In many organizations, top producers are carrying the load for the new reps and other low producers. This just isn't fair. You need to design your commission structures so that even lower producers generate a profit for you. That way, you can afford to pay your top reps more. Fair warning... if you don't figure out how to do this, one of your competitors will!

Remove disincentives to greater production

Sales reps often stop working once they reach a certain level, either because their commission gets capped or they are concerned that their territory will be reduced. When you remove these disincentives and structure commission plans correctly, you can motivate your top reps to keep working hard year round, increasing revenue and profits substantially.

Occasionally we'll run into a situation where the disincentives are in place because the CEO doesn't want anyone else making more than he or she does. But this isn't an appropriate comparison. The compensation sales reps receive is based on short-term revenue; CEOs are typically compensated over the long term with ownership or stock options. You should be delighted when you have sales reps making more than you do!

Reward the right behaviors

Sometimes compensation plans are so complicated that the reps can't figure them out or they end up rewarding unproductive behavior. You want to design plans to focus on what's most important for the company, which usually is increasing market share and operating profit.

Maintain consistency

Some organizations will introduce a compensation plan, then halfway through the year when the results aren't what they expected, they change the plans. Their top people get frustrated and leave.

You need to model the results of your compensation plans before you introduce
them – using a modeling approach that has been proven accurate in the past – so you know what's going to happen before you launch the plans. Then you can leave them in place for a full year before tweaking, giving your sales reps the predictability they need.

Well-designed plans retain your top reps, who are so important to achieving your revenue goals, and reduce the hiring and training costs associated with high turnover. 

They're a solid investment in your future.