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!

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. 

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.

Dealing With Change

By David J. Cocks, CEO

Here at CM Global Partners, using our proprietary software CompensationMaster, we have a unique view into sales force compensation industries – we work with companies around the world, helping them restructure their businesses and design (and implement) new commission structures that ensure financial stability. We know how thin profit margins are for most companies. And we know how hard business owners are working to keep their companies afloat.

It is deeply troubling to see so many businesses going under, being bought for almost nothing – sometimes just 20 cents on the dollar – seeing dreams and livelihoods disappear overnight.

But we are also seeing companies succeeding, despite market fluctuations. Companies buying up other firms, recruiting top producers away from weaker competitors – companies that are growing rapidly.

Here's what you can do to copy those companies...

Let go of entitlements

If you are giving your sales force splits that are not justified, you need to STOP. It is a mistake to give sales people a higher commission just because they have been with the company for a long time, when their production does not justify that split. They might be the nicest people in the world, but as much as we all would sometimes like to, we cannot run a business by giving more to people just because we like them.

Stop driving from the top – listen to your sales force!

You need to figure out who you are in today's changing environment. Ask your sales people what they want and listen to what they are telling you. Then take action, even if it is painful.

Get rid of bricks and mortar

We are seeing companies around the world let go of bricks and mortar. You still need storefronts, but do you need all of them? Walk through the offices in each of your branches. How many people are there? Almost every company can get by with significantly less space than they have. And since this is probably your biggest expense after commissions, this is a perfect place to look for savings.

Time and time again when we restructure a company, we are seeing that it makes sense to close branches and create drop-in centers where sales staff have flex-based desks. Since so many people work from home now, this works for them.

Consolidate administrative staff – use technology

Creating support centers lets you centralize your administrative staff. Then you can use technology to provide better service to your sales people and clients at a lower cost.

For example, we are seeing companies provide high-tech touch screens in their storefronts. Clients can touch the screen, push a button, or make a call to reach a call center that immediately sends them information and notifies the appropriate sales person instantly via their smartphone. Sales people love this and it costs less than you would expect.

Recruit aggressively

Sales representatives are looking for companies that can provide the opportunity to earn a living. If you can cut costs by reducing the amount you spend on things the sales force doesn't value, you can turn that savings into increased commissions, making you much more competitive in your market.

Top producers are looking for stability – like everyone else. Make your business the one in your market that delivers what they want, and this will turn into the best opportunity to recruit that you have ever seen.

Change is necessary

Very few people embrace change. It is always going to be easier to try to hold on to things as they are, and hope the green pasture days come back soon. But the companies that are going to find the greenest pastures are the ones who leap into this new environment with both feet. 

Why Choice Matters

By David J. Cocks, CEO

One of the issues we discuss often with managers is why offering a choice of compensation plans is such a smart strategic move for the business, especially in this market. Here is what we tell them...

The fact is no single compensation plan is going to be able to address the needs of all members of your sales force.

People have different levels of experience and ability. Some need more training and support; others don't want the services and prefer to be independent. Some are more willing to take risks; others value security and having a predictable income.

When you offer only one option for compensation, you are not meeting the needs of everyone who works for you as well as you could.

The result is that you leave open the door for competitors whose plans do a better job of meeting the needs of specific individuals.

The way many managers deal with this is to make exceptions. But special deals erode trust and leave some people feeling like they are not being treated fairly.

Offering a choice of plans solves these problems.

When you provide a variety of options, you allow each sales associate to choose the plan that most effectively motivates them. They can balance their need for risk and reward, as well as for support and independence.

You can design new plans that motivate more effectively than what you had before – you can remove disincentives to greater production and inspire sales people to new heights.

You can introduce a true merit-based system that fairly rewards all sales associates, regardless of their level of productivity.

This also gives you the opportunity to address legacies – outdated and unprofitable compensation structures that no longer serve the purposes for which they were designed. Instead you offer a selection of other options and let each person make their own decision. Giving people this level of control makes it substantially easier to convert your sales associates to new plans.

But what's more important is that you are introducing transparency into the compensation system. You are treating everyone with trust, respect and fairness. Instead of secretive special deals, you are showing integrity by publishing an official set of plans and letting people choose.

The result is a much stronger, more competitive business, where recruiting and retention become significantly easier. 

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. 

NEW PRESS: Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth?

CM Global Partner's CEO, David J. Cocks, has recently been interviewed by David Massover in an Ebook titled Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.

We are thrilled to share the below with our community - below note from David Massover:

Being a front line sales manager or the executive that front line salespeople report to is tough - and even tougher when they have a personal quota to meet.

So which is it? Should front line sales managers sell to their own accounts and if so how much - and how does that impact their ability to help the salespeople who report to them do better...

In other words, which role is right - individual contributor or team leader?

In many cases, it is a little of both, and in most - not enough of the leader part, and a lot of conflict between the two roles!

To help open up this question, I interviewed six sales experts from a variety of perspectives and compiled their interviews into a “simulated panel discussion eBook” called Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.

READ NOW

Top 6 Considerations When Applying LEAN To Sales Force Compensation

By David J. Cocks

The challenge of designing sales force compensation plans is to create an environment where sales people are motivated and a transparently business culture is created. It is vital as many obstacles as possible are removed from the process so sales people can maximize their results while ensuring the company’s greater goals are met. Those goals could include achieving profitability targets, increasing revenue, controlling expenses or recruiting and retaining a desired sales force.  

From our experience spanning over 25 years, the below points are vital to enhance the process of successfully setting up LEAN to your sales force compensation plans. 

Treat Everyone Fairly and Consistently

If you have longevity bonuses or other features built in that give one group of people a built-in advantage, this is a good time to remove them. The best way to be fair is to give everyone the same opportunity to excel – and to pay them based on current production, not what they did in the past or might do in the future. When you do this, you build in a level of transparency and trust that is deeply appreciated by your sales people.

Offer A Variety Of Compensation Plans

The reality is that not all sales people are the same, and what motivates them isn’t always the same. Someone who has just joined your company will need more training; a top producer may want administrative assistance or more control over money spent on marketing and lead generation. Personal issues come into play too – someone who has college age children or is getting close to retirement might be more risk-averse and prefer a compensation plan that offers greater security. Or they might be ready to go for broke and do whatever gives them the chance to make the highest income. The simple fact is that offering a variety of compensation options makes your company more competitive – your sales associates can evolve their capabilities and grow in their careers, and get compensated appropriately. They don’t have to leave your company to get a different style of compensation that is more suitable to their current situation.  

Take This Opportunity To Re-Examine Past Deals

Re-examine the company’s business model. Why are people working for you rather than a competitor? What sets you apart? Do you have a clear, defined value proposition? If you do, your compensation plan should support your value. If not, you may have some changes to make. Don’t be afraid to question long-standing policies or services. Just because your sales associates negotiated for something years ago doesn’t mean they still want or need it. Put everything on the table and don’t be afraid to craft a vision that is brand new – even revolutionary. You’ll be surprised at how much energy a brand new, crystal clear value proposition can create.  

Use Business Modeling Software To Project Results Ahead Of Time

When you are making significant changes to your company’s sales force compensation, it is essential to know ahead of time the impact those changes are likely to have on total revenue and profitability. You can do projections in accounting software or Excel, but using business modeling software such as CompensationMaster’s makes it easier to see the big picture as well as interpret the nuances.  

Make Sure The Sales Force Wins! 

Oftentimes, sales associates are reluctant to have commission structures changed because they believe any change involves money coming out of their pocket. But if your new plans are designed correctly, sales associates should be able to make more than ever before. You also want to make sure they win on the sup- port and services issues. This is one reason the focus groups are so important – when you know what the sales force cares about, you are better able to re-allocate expenses to give them what they want. A sales force full of people who are powerfully motivated and have had disincentives to greater production removed is going to propel the company to increase revenue like never before.  

Measure Results

There are a variety of numbers you should track when you change compensation plans, including the increased productivity of people who are on the new plans, enhanced recruiting, retention of sales associates, and more. Start with a bench- mark before you introduce the new plans and track important statistics over the year after you launch the new structure. You’ll find it easier to report on ROI, as well as to see which offices or regions are surpassing others.