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Compensating Your Salespeople

Compensating Your Salespeople

How are your salespeople rewarded for their efforts? You began this process in “Management” when you designed your compensation philosophy so you may already have a compensation plan in place for your salespeople. If this is the case, take a little time now to review your plan. If not, or if you are unhappy with it, it’s time to develop a new one. In either case, be sure to discuss your ideas with your sales staff to be certain that you are correctly rewarding the right kind of behaviour. It is all too common for management to dictate the rules of the game without fully understanding the consequences.

A common example of this is a company wanting to develop long-term relationships with their customers, using a compensation plan that promotes short-term growth. No matter how often they tell their salespeople to develop long-term relationships, they will continue to focus on short-term sales until the system changes.

A good strategy is to get input from your salespeople on their commission structure as early as possible. That way you can beat this potential problem before it shows up. Commissions should typically be part of the compensation structure, however, there are almost limitless possibilities. You can pay people a base salary plus commissions or straight commissions with or without a minimum guaranteed income. Of course you can vary any of these amounts and you can even give your sales people some options, based on their personal ambition.

Commissions can be handed out in a variety of ways as well. One effective method is to alter the commission structure based on the monthly sales volume. For example, they might move from a 10 percent to an 11 percent commission rate when they sell more than $100,000 in a month.

One-time bonuses can be handed out when salespeople reach certain levels as well. You might give $500 to those who reach their semi-annual “B level” targets and $2,000 to those who reach their semi-annual “A level” targets, for example.

Prizes can also be effective in sales. Every salesperson who makes it into the “President’s Club” by reaching over $1 million in sales in a year, for example, may be sent on a trip to Hawaii. If you want to encourage the sale of certain items, you might temporarily increase the commission or add a bonus to the sale of those items.

A salesman friend of mine works for a company that provides background music to restaurants and other retail outlets. He is paid a sales commission every time he signs up a new customer and a reduced commission when a customer renews their contract. Customers pay a monthly fee for the service, but my friend only gets paid when a contract is signed. Time and time again the sales manager has tried to encourage his sales team to maintain their customer relationships in order to keep customers from leaving when their contracts expire, but very little ever changes. No matter what the sales manager says, his salespeople continue to focus most of their energy on generating new business and very little energy on maintaining existing business. The problem is that while the sales manager is trying to motivate his team in one direction, the commission structure is busy motivating them in another. The salespeople are financially motivated to focus on the short-term. A better commission structure might give the salespeople a small residual income from the customers they bring in and a bonus when customers re-sign their contracts. Salespeople would then be financially motivated to focus on the long-term.

You might even have a residual component to your pay structure. If your customers pay a monthly membership fee, for example, you might give an ongoing 1 percent commission to the salesperson who made the original sale. This approach will encourage salespeople to focus more on long-term customer relationships.

Referrals are another consideration. If a customer brings in a referral, you might consider passing some type of commission on to the salesperson who brought in the original customer. This is another way of encouraging your salespeople to develop long-term customer relationships rather than just making sales.

Clinical psychologist Jim Johnson thinks you can motivate employees by giving them noticeable rewards. He gives significant rewards each day to the salesperson who has sold the most by the end of it. An example would be a pair of Gucci shoes for working 45 hours per week. If 90 percent of the employees are walking around in Gucci shoes, the other 10 percent are going to be embarrassed.

H.J. Heinz offers merit pay. Executive compensation is linked to shareholders’ gain. Because of their pay-as-you-perform methods, sometimes managers can earn 30-40 percent over their annual salaries. Parker Pen Co. offers hourly employees bonuses if they reach certain productivity targets.

Review the compensation work you completed in Management, and then use the space below to design a compensation plan for your salespeople that reflects the goals of your company.