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[S32]Sales Compensation Plans Examples

by Lori Smith, Lor

At some point in time, if you are going to grow your construction business beyond $2 million, you are going to need someone working on sales full time. Now,
maybe sales is your thing and you want to do that full time. Fantastic.

It's almost always best when a business owner is committed to selling. But even if you sell successfully, you may still end up wanting to add another salesman.

If sales isn't your thing, then you will definitely need to hire a salesman. Either way, you are going to be faced with a critical decision.

How should you pay your new salesman?

Draw (salary) plus commission? Bonuses for sales generated? Increased commission with increased sales volume? A higher commission for new customers? Straight salary?

All of these are commonly used approaches. Not one of them is likely to produce the profit results you seek.

If you let your salesman have his way, he will want a draw plus commission. Most will ask for a pretty stout draw and a relatively modest commission based on revenue sold. Don't agree to that!

Draw plus commission lines the pockets of your salesman regardless of whether he is making you any money. The purpose of draw plus commission is to drive sales volume. Don't fall into the trap of thinking sales volume is important.

You need your salesman to focus on PROFITABLE work. Let your competition sell the unprofitable work. That's work you don't want and you certainly don't want your own salesman bringing it to you.

How do you get your salesman to chase profitable work? You align his pay to profit.

Put in place a pay plan that rewards him for profitable work and punishes him for unprofitable work. Basically, make him a pseudo-partner. It is surprisingly easy to do and I'm going to show you how.

1. His entire compensation should be based on commissions on gross profit (a commission rate often in the 20% range).

2. He should be guaranteed a minimum income, whether his earned commissions surpass it or not.

3. His commission rate should stay the same regardless of sales volume or profit generated.

4. If he doesn't earn his guaranteed minimum income within a reasonable time period, say 18 months, you replace him.
With this approach your salesman will be highly motivated to ask for the highest price possible. He will not leave $100 on the table, because with a 20% commission, he would be leaving $20 behind. An example will drive the point home quite clearly.

Let's say your salesman has estimated a job's direct costs will run $10,000. Let's look at how the usual approach, draw plus commission, compares against my recommended approach for driving desired sales behavior.

The salesman being compensated with the standard salary plus 2% of sales has little incentive to risk losing a sale by raising price. If he sold the job at cost, he would
earn a $200 commission. If he sold the job for $15,000, he would earn a $300 commission. He only makes an extra $100 for substantially increasing the likelihood of losing the job.

He will not raise the price to $15,000 just to earn the extra $100. Of course, you lose money if he sells the job at $10,000 but he doesn't care. It's all about volume, right?

Now, let's look at my recommended approach.

Your salesman earns nothing if he sells the job at $10,000. He earns $1,000 if he sells the job for $15,000 and he earns $2,000 if he sells it for $20,000. How motivated will he be to pursue the highest price possible? Very, very motivated.

Do to the potential windfall he can earn, he will become a master at qualifying customers. He will not spend time on price sensitive customers. He will aggressively pursue the customers who value your company's superior services and are willing to pay for them.

These are exactly the customers you want him to pursue because not only are they profitable, they tend to be far more loyal, and tend to be far more willing to refer you to their friends, family, and professional associates.

Look at what you get when you are paying a 20% commission on gross profit. You pocket $4,000 for every $5,000 of gross profit your salesman generates. Sure, a great salesman will make a killing with this type of pay plan, but you're going to make an even greater killing.

You want your salesman earning $200,000 because that means he contributing $800,000 to your OH&P. Imagine having four such salesmen in your company. How well off would you be?

This is the type of pay plan that will draw top salesmen like flies. Where else in the construction industry, or any industry, are they going to have a chance to make that kind of money?

You know the difference between a $50,000 salesman and a $200,000 salesman? You go broke with the first and get rich with the second!

In summary, the best way to supercharge your bottom line is to implement a sales commission plan that rewards your sales force for generating gross profit. In doing so, you will make sure that they have your best interest in mind.

Assessing sales compensation effectiveness from the perspective of expected market pay levels is far too limiting. Sales compensation should be evaluated within the context of the entire performance and pay range for the job performed and results delivered. Furthermore, sales compensation plans and pay levels should be created or critiqued in the same way that one assesses any other investment geared toward making money or improving future business.

Companies expect a substantial revenue and profit return on their investment in sales compensation. For example:

1. A company that pays a 10% commission invests $1.00 to net $9.00 – a 9:1 return on its commission investment.

2. A company that provides a $25,000 bonus opportunity to a field sales representative for generating $2,500,000 in revenue does so in the expectation that it will receive $100 for each dollar of bonus paid.

So how do you increase the odds of getting a substantial return on sales compensation and achieve a reasonable compensation cost of sales? First, you build a clear understanding of how sales resources influence the sale so that your sales force is precisely focused on factors that matter. Supporting the sales effort through astute organizational definition and performance-driven pay creates the link between sales effort and delivered results.

Every bit as important as incorporating the drivers of performance into the sales incentive plan is the creation of an effective connection between pay and results. This means you need to make sure total pay is incentive-weighted and variable compensation is leveraged – configured to produce market-leading payouts for high performance. Low performers must be paid meaningfully below market, creating significant performance-based incentive payout differentiation. Aligning your incentive payout profile with the marketplace doesn't adequately pay “winners” like winners and “losers” like losers.

You can reveal the amount of incentive payout differentiation in your sales incentive plan by examining your incentive payout multiples. Compare your payouts for high performance to the awards paid for low performance. The high performance payout divided by the low performance payout is your incentive multiple. The multiples across your performance distribution (e.g., “target” vs. “minimum acceptable,” “excellent” vs. “target,” and “outstanding” vs. “excellent”) should accelerate, recognizing the value of achieving increasingly difficult performance levels. You can test your incentive payout differentiation against the market by comparing your multiples to the market's 50th vs. 25th, 75th vs. 50th and 90th vs. 75th percentile incentive payouts.

Best-practice companies have high performance sales cultures. Their strategies for acquiring and retaining business are aggressive. Losing profitable revenue growth that was hard won isn't acceptable. Goals at the salesperson level are stretched.

High performing companies are intolerant of, and pay stingily for, below goal performance. Rewards for high performance are significant. Their incentive payout at “outstanding” performance is at least four times the award at “target” performance and as much as twenty-five times the payout at “minimum acceptable” performance. But, they also know that sales compensation alone won't drive high performance. And so they employ an integrated approach toward performance management, emphasizing sales leadership, training, sales focus, communication, performance measurement and pride of achievement.

Article Source : Pg. 17

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Both Lori Smith & John Tallitsch are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Lori Smith has sinced written about articles on various topics from Home Improvement Contractor, Management and Bathroom Design. Lori Smith is a webmaster of ">TrueBlueContractors.com allows. Lori Smith's top article generates over 74000 views. to your Favourites.

John Tallitsch has sinced written about articles on various topics from Sales letter, Management. . John Tallitsch's top article generates over 3600 views. to your Favourites.