What I Heard about Sales Compensation Plans
at SOUC 2017
I recently had the privilege of moderating a panel on sales compensation plans at the SedonaOffice Users Conference. If you were at the conference but missed this panel (or weren’t there and wish you had been), fear not, I have compiled the key points here. For those of you not affiliated with the security industry, keep reading – the principles we discussed at the conference apply to most any business.
First of all, the contributors: I was joined by some wonderful business leaders in the security industry:
- Joslyn Alderson from Vancouver Fire & Radius Security
- Fred Johnson from Peak Alarm
- Bob McVeigh from Security Solutions.
They are truly rock stars and I thank them for their participation!
Each business leader presented sales compensation plans that worked in a variety of different ways, but there were common themes among them that demonstrated real life examples of tried and true principles. Here’s what we heard:
Incent the Behavior You Want
This is such an easy principle but so many companies neglect to focus on it. If you want more business from a certain type of customer, then incent more heavily for it. Or, conversely, reduce incentives for the types of business you don’t want.
For example, provide greater compensation for adding new customers instead of add-on business with existing clients. In many companies, we hear the same complaint that salespeople eventually get fat and happy and just keep going back to the same trough to eat. They stop prospecting and eventually customer attrition harms the business. By simply making sales to new customers more valuable, the salesperson has a strong incentive to continuously focus on prospecting.
Another good way the panelists incent desired behavior is with creative contests. For short periods of time, these promotions are very successful at getting specific results. But, don’t just reward with money. I recommend making a greater impact on salespeople by offering prizes they specifically say they want. By giving salespeople a choice of the prize they are working toward at the beginning of the contest, it will be more meaningful to them in the end.
A last note on this topic: Be sure the team knows that any incentive plan may be temporary, that it may change if it doesn’t produce the wanted results – nothing is set in stone. Be clear about this from the very beginning.
Keep It as Simple as Possible (or at Least Transparent)
It would be great (and more efficient) if you had the same, super-simple compensation plan for everyone. However, this may not be possible because of different components to your business. So, if you can’t make the plan super simple, at least make it transparent. The salesperson should be able to calculate their commission on their own, if they choose. Salespeople are actually more incented by their commission when they understand what doing certain activities that drive revenue and profit will earn for them.
In this same vein, rather than having management toil over reports to determine how much gets paid on various transactions, push that responsibility to the salesperson. Have them tell you what deals they need to be paid on. And if they have access to calculate their commission via your systems, all the better. The manager can then just check their work rather than spend their own hours calculating. (By the way, this type of setup can easily be configured within SedonaOffice or with plug-ins such as Vivid Reports.)
Incenting on Profit vs. Revenue
One frequently asked question we get is whether salespeople should be incented based on revenue or profit. The answer is: It depends. I know there are stalwart managers who insist on incenting based on profit, something I’m in favor of as well – as long as the salesperson has complete control over the profitability of a sale. (On the other hand, the consensus is that if the salesperson does not have control over price, then incent on revenue. It is quick, easy and low risk.)
However, incenting on profit can be very dangerous if you have individuals on your team who have issues discussing money or are cheapskates themselves. They will always reduce the price because it’s less threatening to harm their own pocketbook than to have to negotiate or discuss money matters.
What’s more, it’s important that profit-based incentive programs have certain boundaries. For instance, you could set a floor; that all deals must have a certain level of profitability or the salesperson doesn’t get paid. (Or have a tier that below which the salesperson has to get manager approval.)
Conversely, if they increase the profit, they get paid more. You would still want some oversight to make sure that salespeople retain market competitiveness and that deals are not lost because they have gotten too greedy.
A Third Way: One unique concept raised at the conference session was tying a salesperson’s incentive to their personal goal attainment. So, if the salesperson sets a very large goal for themselves and they don’t achieve it, they get penalized more than if they set a realistic goal. This is an interesting way to make sure the team is setting realistic, attainable goals that in the end predict the company’s growth.
One Final Thought
As you structure (or restructure) your sales compensation plan keep the three principles above in mind. But, it’s crucial to keep another very important component top of mind. You must calculate the ROI of your salespeople. In a perfect world, you should strive for a 5x ROI on your salespeople. If that’s not possible, be certain to at least get a 3x ROI. This may be a complex calculation if you sell both recurring revenue services and products or services that get paid upfront or upon installation. But it’s well worth keeping an eye on to ensure you retain appropriate profitability of your company.
It’s always enjoyable hearing about how different businesses approach their sales compensation plans at conferences like SedonaOffice. Whether you’re in the security industry or not, getting real life examples on how the principles of motivating a sales team operate in action can help lead to the successful implementation of your own company’s plan. You can also learn more about how the right sales compensation plan can go a long way to changing behavior from our Case Study here.