Why Do Compensation Plans Fail?
I once heard it said that the most important person in the company was not the CEO but rather the one who makes the sale. Think about it. Without that first transaction is there any reason for the company to exist? No. Within that context the sales activity takes on an entirely different complexion, one requiring thoughtful, strategic alignment with the company’s mission and the sales persons’ triggers.
In this article, my friend Bert Sadtler, an expert listener and thoughtful organizational staff strategist, shares his remedy for correcting what is all too often broken.
Fix this and you will be on your way to greater sales and lower turnover—a winning combination if ever there were one. - John Foster, PathFinder Group
Why have a Sales Compensation Plan?
Aren’t sales commission plans and sales compensation plans designed to drive revenue and favorably compensate the revenue producers?
First of all, sales and marketing are NOT the same. They may look the same if you have never done either but to marketers and sales producers, they are very different. To be clear, we are not talking about a marketing compensation plan.
Let’s first outline some key characteristics of sales producers and then identify three reasons why sales compensation plans fail.
Sales producers are wired differently. Sales producers have to be risk takers. They have to be laser focused on a specific target and then measurably rewarded when they reach that target.
Many people say they can sell but there are very few who really can. Remember that sales producers are basically asking to be handed money from a party who would rather not pay them. They hear “no” many more times than “yes”.
The compensation plan for a sales producer is their gratification or reward for the performance of delivering sales revenue. Gratification comes in many forms as sales compensation models are structured very differently from company to company. Some have a cap, some are very complicated, some are arbitrary.
Great compensation plans are:
Very simple
Aligned with the company’s goal of either driving gross revenue or driving more margin
Deliver unlimited rewards for unlimited results
Why do sales compensation plans fail?
1) Unrealistic Goals
When a business is hiring new sales producers, is the business really positioned for a realistic sales result OR does the business first need to build a sales foundation? Too many companies are hiring producers to sell when the actual sale is 12-24 months away, yet the sales foundation has to be created first.
The solution is to define the necessary steps that will lead to sales within 12-24 months and then compensate the sales producer for achieving those steps until the sales platform has been built and the sales producer can be transitioned to a sales commission program.
2) Pay-out takes too long
As humans, we all respond well to gratification. For the sales producer, gratification is the commission paid from a successful sales effort. The more efficient turn-around to when commission is paid from when the sale was executed delivers the highest gratification.
For simple sales models, the customer pays their invoice for goods or services and the sales producer is paid commission in their next pay cycle.
However, I have seen models where that commission goes through a complex formulation at the end of the calendar year, the sales commission dollars are calculated, and a lump payment is made several months into the new year. In my opinion, this model completely misses any “gratification value” to the sales producer and an unproductive amount of time is spent by the sales producer who is attempting to calculate their personal sales earnings through an overly complex spreadsheet.
3) One-sided plan
The “Us v.s. Them” model of sales producers versus management has been around far too long. For example, the finance department might be thinking that sales producers are overpaid while the sales producers think the finance department is driven to pay the least amount possible in commissions, instead of developing a model which incentivizes the sales producer to want to sell the most amount.
When finance departments are left to design the sales commission structure, it is frequently a one-sided plan that does not motivate or reward talented sales professionals to deliver great sales results.
Good compensation models have the total buy-in from the sales producers.
Remember, if selling were that easy, everyone would be doing it. If the folks in finance think that sales producers are overpaid, perhaps the finance folks should give sales a try and see first-hand what it really takes.
There should never be “Us v.s. Them”. Conducting business requires precious time. Internal distractions are time killers and a quick way to give your competitors a huge advantage.
Strategic Questions the CEO Should Ask Himself
To summarize, has your business taken the time to understand what makes a sales producer different from other members of your team?
Have you involved your sales producers in the development of their compensation plan?
Are you working with a sales compensation plan that is exciting to the sales producers and also delivers great revenue to your business OR are you fighting through a sales compensation plan that is failing?
Good hunting.