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The Scary Tale Of A Flawed Sales Compensation Plan

Scary CEO

Ok... so it's not really that scary, but that picture of the guy over there is supposed to be.

I do like to have a little fun with my blog post subjects, as you can probably tell.

At any rate, while not that frightening, this short story can provide good food for thought as you think through the structure of your sales compensation plan.

If you recall our post on the 12 Universal Sales Management Truths, there's one truth in particular that relates to the sales compensation plan:

"The sales compensation plan structure is essential to sales performance and should, ultimately, determine how much of what gets sold."

The Scary Tale of a Broken Sales Compensation Plan

Here's the deal.  Top salespeople enjoy making money.

Research shows it, your experience tells you it’s true and there is little doubt that the closer a sales compensation plan is tied to performance the better that performance will be.

During a recent consulting assignment a client asked us to evaluate their 45 salespeople.  The organization’s sales had flattened, profits dissipated and layoffs were imminent.  The most glaring thing we uncovered was that their sales compensation plan, coupled with the experience level of the sales force, formed a recipe for average or sub-par performance.

Their sales compensation plan was an unusually healthy base plus a small bonus based on profitability organization-wide.  Each of their salespeople had been with the organization for a number of years, with the average having somewhere around 15 years of service.

The outcome of this scenario should have been predictable.

First, most had settled into a comfort zone where each was making in excess of one hundred and sixty thousand dollars per year plus a car, expenses and full benefit package.  They had little desire to work any harder than they needed to in order to maintain the lifestyle they wanted.

Additionally, their bonus plan was tied to something over which they had no control: overall company profitability.

How can you base a sales compensation plan on enterprise-wide profitability when they have no input into capital expenditures, office expenses, investments, salaries, marketing costs, etc.? If you do, you breed resentment and eventual complacency.

And that’s what they did.

The overall sales performance of the group was reflective of this flawed sales compensation plan.  What incentive did any of these salespeople have to expend the level of effort required to compete in a highly competitive market?  No one had been terminated for years due to poor performance, the base pay was in no way influenced by performance, was extremely lucrative to begin with and was coupled with a full array of attractive benefits.  The bonus plan was also flawed.  No one should have been surprised by the results.

In another situation, salespeople were given a reasonable base and a significant commission based on sales volume and margin on an individual basis.  There was a bonus based on how successfully each salesperson exceeded their personal sales for the previous quarter.  There were even additional bonuses for the sale of selected products.  The results?  You guessed it.  Their sales performance far exceeded that of the first sales group.

Let there be little doubt about it.  Correctly designed pay plans will ultimately drive what happens with a sales force.

 

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  • End-process vs. in-process measurement
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