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.

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.

Aligning the Goals of the Sales Force & Management

By David J. Cocks, CEO

When management start talking about increasing profitability, sales representatives start to worry. They know improving profitability usually means cutting commissions and eliminating expenses, possibly for marketing, administrative support or benefits they value. They are concerned the increased profitability will come at their expense.

But that's not the way CM Global Partners and CompensationMaster approach the situation.

One of the main reasons our system is so successful is we don't just come in and transfer money from sales representatives to the company. We wouldn't be able to achieve the 98% retention rate we are currently getting if that was the way we worked.

Instead, our strategy is to optimize the way our clients do business.

Better Meet The Needs Of The Sales Force

First, we re-allocate expenses to better meet the needs of the sales force. We come in and analyze the market, the sales force, and the company's financials. We talk with the sales representatives and find out what they want. Very often this produces some surprises for the management team, which may not have realized the needs of the sales reps have changed. We identify groups of sales representatives that are not having their needs met and look at what the company can do to better meet those needs.

Very often we can identify expenses no longer providing the value they should. In some cases there are benefits the sales force doesn't want anymore. For example, sales representatives might not want health insurance because spouses' employers provide coverage. In other cases, investing in training or additional administrative support might give the firm a competitive advantage in its market. We help our clients re-allocate their expenses to produce the maximum value for the sales force.

Motivate Effectively With The Right Commissions

Then we design compensation plans that are consistent and fair to everyone. We eliminate exceptions and disincentives to greater production. We try to give all the sales representatives the same opportunity to increase the amount of money they make.

We like to offer a variety of plans so each sales representative can choose the risk- reward combination that he or she finds most exciting and motivational. And we make sure the sales representatives are paid as much as possible while ensuring that the company has enough money to pay its bills and make a profit.

Reward Sales Force For Increasing Revenue And Reducing Expenses

One advantage of our system is we tie together human resources, finance and sales management, and align the goals of those three groups.

With a contribution-based approach, sales representatives are responsible for contributing their fair share towards corporate expenses and profit. Once a contribution has been made, they are able to keep most of the rest of the revenue they bring in.

Sales representatives are motivated to increase revenue; as they sell more, they make more. But with this system they 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.

The result is that the sales representatives acquire a perspective similar to the one management has, with twin goals: increasing revenue and keeping expenses under control.