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!

Increasing Share Value through Sales Compensation Design

[ read time: 4 minutes ]

By David J. Cocks, CEO

While there are a number of factors that impact the share price of a company, the two basic drivers remain earnings (or profit) and the multiple applied to earnings.

Two companies with the same profit, working in the same overall environment, frequently have different multiples; these multiples dramatically impact the value of the company and therefore the share price.

For example, a company with a $10,000,000 profit and a multiple of 5 times earnings receives a $50 million valuation, while another company with the same profit and a 7.5 times multiple has a value of $75 million.

While many companies focus on increasing profit, and therefore shareholder value, relatively few focus the same effort on improving their multiple. So, what drives this multiple?

The first driver is economic expectations. If the economy is deteriorating, even though profits have not yet fallen, share prices will drop and multiples retract on expectations of leaner times. Despite the fact that this is outside of management's direct control, it is important to note that some companies do not drop as significantly as their counterparts.

This is due to the influence of the second driver, corporate expectations. These expectations are a function of the company's ability to lead the industry. Proven leaders typically have higher multiples than others in the same industry, regardless of economic expectations. One of the key leadership criteria is whether or not a company has a sustainable competitive advantage.

So if a company's compensation plans strengthen the company financially, increasing profit immediately and protecting earnings in a downturn, it would provide such a sustainable advantage.

Such a solution does exist today and has stood the test of time. It is particularly effective when the primary distribution channel is through people whose skill is key in binding the consumer to the company. Examples range from industries that use a typical sales force, like real estate and manufacturing, to professional service organizations, such as law firms and dental offices.

The companies that have used this bold new approach have experienced increased productivity from their existing staff and improved ability to recruit key revenue providers from their competitors. They typically have seen an immediate increase in profit and have been able to retain their lead even after competitors copied their strategy.

The essence of the approach is:

1. Design compensation plans so that after the company has recovered its costs plus a profit from each revenue-producing individual, those individuals can then receive substantially more of the revenue they bring in.

This drives productivity and immediately increases profit. It also creates a naturally cost-efficient environment and improves recruiting.

2. Offer choices that empower the individual to find the right compensation fit; usually this involves selecting the risk-reward relationship that works best for each revenue-producer.

This maximizes recruiting and retention and lowers the breakeven point of the company, increasing its survivability and maintaining profitability, even in a downturn.

If you have any questions, please call us, email us on hello@cmglobalpartners.com or schedule a demo here.

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. 

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. 

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.

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

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. 

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.