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Business Oracle

Sales Compensation

With the second part of the eight-step compensation system, Nick Devine, The Print Coach, presents the final four ways in which to maximise the earning potential of your sales team

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Developing a system that motivates and rewards sales staff in direct proportion to their work ethic and results oils the cogs of a successful businesses

The sales compensation eight-step system

Last month, this feature looked at compensation packages and leverage plans for peak performance. In this edition I will focus on the final stages of the eight step sales compensation system, to ensure you get the best from your team of sellers.

Flat or ramped accelerators

A flat accelerator is simply a constant commission rate regardless of level of performance. A ramped accelerator increases the commission rate for higher levels of performance. 

In the example below, you will see we are paying 10 percent on initial revenues, and that at a certain point the commission rate changes to 15 percent.  This motivates the salesperson to get into the higher commission band—at those higher performance levels our carrying costs for the salesperson are already covered. See chart below.

Hurdles and multipliers

Hurdles and multipliers tie performance and commissions from one area, to the performance and commissions in another. If you under perform in one, it hurts both; if you over perform in one, you earn higher commissions on both.

Some objectives are so important that companies will not pay commissions until these objectives have been met.  Unlike a threshold, which dictates the performance level at which commissions are paid, hurdles tie payout of one measure to the performance accomplishment of this second measure. 

Some objectives are so important that companies will not pay commissions until these objectives have been met

These are powerful ways of communicating our priorities to the sales team. Hurdles and multipliers should be used to send a clear message: do this first, then do that. For example, focus on revenue and profit first; focus on product mix second.

In the following example we are focusing on sales of wide-format printers. We are saying to the sales-person that sales of these systems will significantly help or hinder your earning ability. See chart opposite.

The target is to sell five systems. If you sell two or less, you will only receive 50 percent of your earned commissions. If you sell seven or more, you will receive the 150 percent of your earned commission. So, using arbitrary figures as an example, if the salesperson has earned £10,000 in commissions and only sold two systems, they would receive £5,000.  On the other hand, if they sold seven they would receive £15,000.  

Sales credit timing  

The purpose of this step is to define when the sale becomes a sale and a salesperson gets paid. Options include:  
                                      
Booking: When the company accepts the order.
Invoice: When the company sends the invoice.
Payment: When the customer has paid.
Hybrid: 50 percent when invoiced and 50 percent when paid. 

The hybrid is my preferred system, as it aligns the company goals with the salesperson’s desire to get paid quickly. 

Ensure you implement sales credit adjustments. Sales people should not be paid for sales that were not 100 percent realised

Ensure you implement sales credit adjustments. Sales people should not be paid for sales that were not 100 percent realised. This needs to be made clear in your compensation documentation.

Avoid these critical mistakes

The purpose of this step is to ensure you are not making any of the following mistakes that typically occur.

Wrong focus: Sometimes you can inadvertently put your focus on the wrong priorities without being aware that you have done so. If you put all of your focus on revenue, but do not have a variable for margin, you will see a lot of discounting to win jobs. If you do not encourage and pay for new business development, it is unlikely your team will deliver it for you. Sometimes known as ‘the law of unintended consequences’.

Corrupted job design: Avoid having sales and marketing people working on activities that are not linked to their three core objectives. Do not give them other responsibilities. These are the most important people in your company, because these are the people bringing in the revenue and profit.

Hybrid roles: these can be very dangerous to business growth. This is where you give a talented person too many objectives to focus on. They are doing account management, marketing, website development, research, new business and sales management. 

Aim to have no more than three crystal clear measurable objectives. Sales, margin, and new business development are the priorities; have your best people working on those areas. Do not create confusion and distraction by developing hybrid roles for them.  

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