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It doesn't take long for those plans to become outdated, so they no longer recover the company's expenses and the profit margin erodes.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 Profitable Was This Year?

Now you're about to close the books for the year, it's time to take a look at your results and see what changes – if any – need to be made for 2016.

First, obtain the following statistics for the past three years. If you don't already have them at your fingertips, they should be in the end-of-year information you get from your accountant:

1. Total Revenue;
2. Total Expenses;
3. Operating Profit;
4. Sales Representatives Ranked by Production.

Start by looking at the trends. Revenue and profit should both be increasing. Now calculate the percentage increases. Are they comparable? Revenue and profit should be growing at the same rate. If they aren't, that's your first indicator of a problem.

Now look at expenses. They should be growing at a slower rate than revenue – and, optimally, slower than profit. If not, that's a second indicator. Also look at what expenses are increasing. Are they temporary investments that will help you increase revenue, or are they permanent?

Finally, look at production levels for your sales force over the past couple years. Are they fairly stable? If there have been lots of changes, particularly if revenue is up and profit is not, that's a third indicator. Significant increases in productivity, such as those brought about by the Internet or customer relationship management software, cause many financial problems.

How did your company do?

If you passed with flying colors, congratulations! If not, there's still plenty of time to make changes. Many profitability problems can be fixed, particularly in commission- based industries, by adjusting your compensation plans appropriately. At a minimum, though, you'll want to go over the results with your accountants. 

At CM Global Partners, we regularly perform 'current state assessments' which help to identify the pain, conflict and waste in sales compensations in companies.

Many companies rush to alter the sales compensation without going through this process. It's better to get your compensation plans right and introduce them mid-year for example, than to introduce plans in early January that you've rushed into and might have adverse consequences.

TALK TO US about how you can apply LEAN to your sales compensation and get a competitive advantage.

Happy Holidays, and have a fantastic New Year.

David J. Cocks, CEO

Can Companies Improve Their Sales Process Using Strength Based LEAN?

By Kevin Klump

Sales are regarded as a mysterious art where performance depends almost entirely on individual ability. Organizations tinker with compensation schemes and metrics, but never really look to solve problems or eliminate the waste in their processes.

Most sales processes are 85% PURE WASTE and add no value whatsoever to either the customer, profitability of the company, or the performance of the sales representative. The way to unlock this huge cost drain is to apply Strength Based LEAN improvements.

Here is a great example. Let's say a sales person has a territory with a certain number of customers. Eighty percent of the time available to sell might be spent doing paperwork, waiting for things to happen, retrieving information or complying with internal requirements, which have nothing at all to do with the customer, the company's bottom line, or the company's or sales representatives profitability. 

The Right and Wrong Way to Use Strength Based LEAN

By David J. Cocks

Too often companies are afraid of making improvements to their sales process because they do not want to stop what they are doing and start over EVEN if their processes are broken. When applying Strength Based LEAN you can identify what is being done correctly -- and build onto it.

Strength Based LEAN allows clients to still remove waste from their processes while keeping their business and processes in place. Too often companies try to make improvements and end up destroying what is working and doing more harm than good; instead of building on what is right and identifying waste.