Are you an executive or sales manager looking for sales compensation tips? Well, look no further! In the video blog below, Charles Bernard shares some awesome ideas on sales compensation to use with your salespeople and sales teams. Enjoy!
This video is based on content from the article: 10 Commandments of Sales Compensation
Sales Compensation Tips
I’m talking today about sales compensation.
This is something that we have discovered at Criteria for Success when working with many salespeople, many sales mangers, and many companies.
It seems to be a question on a lot of people’s minds, and so the first thing I want to talk about when speaking around sales compensation is to keep the plan the same.
Rather than change sales compensation plans for every single person, have one regular plan that you can always individualize.
The way we like to do this is by using something called Management by Objectives (MBO). They allow you to take the standard plan you have created and customize it per individual, per group, or per any set of criteria.
So let me give you an example: I have a standard plan where everybody gets 10% of the margin or 3% of revenue.
I chose these two numbers because 10% is a good number if you’re assuming a 30 percent margin on goods or services, which in general a 30% margin equates to 3% on the top line revenue.
Hopefully I didn’t confuse you, just remember: 10% margin, 3% of revenue might be your standard plan.
When you tailor it to an individual you’re going to use the term I just mentioned called MBO (Management by Objectives). For example, if you have a particular salesperson that is focused on a particular objective that could be different than what other sales people on the team are focusing on, that person may, in addition to getting the compensation that’s covered in the standard plan, a receive management by objective bonus, recommend to be paid out quarterly.
So, the bonus is tied to goals.
It could be one goal, it could be more than one goal.
However I would recommend that it be no more than three goals.
In this example you have one salesperson that might be focused on a particular quarter on closing new accounts in a new territory.
If they hit a particular goal that you had defined, maybe it is a million dollars for this quarter of new business in new accounts in the new territory, you would pay that person a bonus. It could be a lump sum or a percentage.
I’m a big fan of a lump sum because it speaks to another piece of criteria that we recommend when it comes to compensation… and that is to keep it simple.
Let people know, so they don’t have to struggle and scratch their heads at any particular moment of time when they close something of what it is that they’re going to get paid for having reached an objective.
Again, just to recap: have a standard plan for every tailored party or an individual whose focused on a particular goal.
Other goals could include selling new products. It might be selling new products to an existing account base or selling new products to a new set of customers or clients.
Either way, you’re essentially motivating, compensating, and incenting a particular person to produce a result as valuable to you as to the company.
Always have riders, never have a cap, is another point I’d like to make about commission plans.
I want people to think that they sky’s the limit. That they can continue selling and they can continue making money, and what I would then say is, if they exceed quota, meaning they’ve gone past the particular number that you’ve given them, give them a rider.
Meaning, if they go 120% of quota or 150% of quota, perhaps they’ll get paid another percentage point.
So take that 10% example I gave you before, if they get a 120% of quota, they would then get 11%. If they reached 150% of quota, maybe they’d get another 1.5%.
So, how do you want to orchestrate it? I think it’s just a good idea to let people know that for above and beyond attainment of goals, they should and must be compensated.
I like to predetermine whether I’m paying on revenue or profit.
I’ll come back to that quickly and just say that by and large, what we’ve found when we’re talking about sales compensation with our clients, is that, depending on what’s more valuable to you, you want a cent on that.
If revenue is more valuable to you and is generally a set profit every time someone sells something, then you can pay on revenue. If, on the other hand, profit is more important to you, then you may decide to pay on the gross margin of the profit.
Again, you should have a couple of guidelines in terms of if the margin falls within a range that you don’t want it to be. For example, you don’t want someone selling anything under the 30% margin.
On occasions there may be exceptions, in which case you would then say they need improvement, but generally speaking, pick whether you want to go revenue or profit.
Again, make sure that aligns with that’s valuable to you and to the company.
When you pay commissions, I like to say, pay when the customer pays.
Why is that important?
One, it is good for cash flow: particularly when you’re a smaller business and cash flow is king (trust me, I know, I run a small business).
And two, when the customer pays, I think it is important to involve the salesperson if for some reason there is a delay. Oftentimes, its not just accounts payable holding it up because it’s part of the process, you may actually uncover someone is holding back payment because they’re dissatisfied.
If that’s the case, it’s a good idea to involve the salesperson in finding out why there’s a delay in payment.
So that’s sort of like a checkpoint to make sure that the relationship is healthy between you and your customers and coins.
Furthermore, you must consider exceptions.
What do I mean by that? I mean that if you’ve got a standard plan and someone falls below the margin threshold, that’s an exception. Take care of that.
Head off as many possible scenarios as you can in terms of whether someone is going to, in essence, go outside of the best practice guidelines for selling the way you want them to sell.
Don’t be making up exceptions along the way: it would be much better if you can detail those out, or even document those ahead of time.
Then determine compensation for new and tenured sales people. That’s something that we actually discovered recently, that a salesperson that is in their first year, may be getting compensated on a draw, whereas tenured sales person may not.
Again, consider whether they’ve been with the company a while or whether they’re fresh, and perhaps adjusting, on an MBO basis, whether someone’s going to revive a particular compensation that’s different than the rest of the team.
I also like this other thought about creating a sales compensation team. In other words, don’t leave the designing of the compensation plan in the hands of one person such as the manager or the CFO.
It may be a good idea to have multiple people or executives within the company is part of a compensation team so that all constituencies and interests are represented.
It doesn’t all fall into sales: I’ve actually seen some other examples where you‘ve got the sales manager weighing in, where you’ve got head of operations weighing in, as well as the CFO (because it is a financial element of the business). More than one person, especially for larger teams, is a good practice.
One more thing I want to mention, which I very rarely see, and that is to bonus on values.
We’re very cut and dried- it’s easy to examine and measure whether someone is hitting numbers such as a dollar number or a particular goal.
Often times, bonusing could be a dollar bonus, recognition, or something that stands out for that individual. If they’ve hit a particular value, for example, teamwork, using the new CRM system that was implemented, or being a thought leader: anything that disposes values that you care about in the company.
I think being able to again, perhaps on a quarterly or annual basis and possibly through your MBO package, give someone either a monetary bonus, or a bonus on recognition of some way to just consider the exception that someone did something that went above and beyond.
That’s it for now, I hope this helps.
I look forward to the next video blog!