Originally published: 07.01.17 by Drew Cameron
Sustain sales, profits, performance and customer happiness with an effective compensation plan.
When leadership and management systems promote proper operation, rich residential salespeople equal rich residential companies.
Personal and company success comes from customer happiness and loyalty. Customer happiness and loyalty is derived from happy sales and service personnel caring for customers and providing an excellent experience worthy of remarkable reviews. And a company’s success results from customer and co-worker happiness and loyalty and the performance of its people and their ability to sustain sales at profitable levels.
Therefore, a clever compensation plan is one of several critical components for rewarding personal performance while behaving in a manner consistent with the company vision, mission, core values and strategic corporate goals.
A properly designed sales compensation plan stimulates sales of and profits from products and services, drives achievement of company objectives, and attracts and keeps sales representatives producing at increasing rates by incentivizing performance.
A residential salesperson compensation plan can be based on a salary, a commission or a combination of the two components. Additionally, sales compensation should include incentives for achieving pre-determined sales metrics.
Salespeople are paid a fixed rate of compensation. They may periodically earn additional compensation such as bonuses, performance incentives, sales contest awards/rewards.
Setting a salary is typically based on experience, ability and longevity along with a job description outlining duties and responsibilities of salespeople as well as other required activities (e.g. attend meetings, work home shows, etc.). In the end, the final determination is on a discretionary basis. The cost is covered in departmental overhead.
- Guaranteed income
- May develop loyalty
- Allows for flexibility in meeting company objectives
- All business activities are expected and compensated
- Keeps the cost of sales fixed
- Easily managed
- Does nothing to drive sales or mix of business, because salespeople would run leads, give quotes and only sell what customers want without exploring all options
- Little to no incentive for salespeople to perform and excel
- Does incentivize initiative or extra effort
- Rewards mediocre and poor performers the same as top performers
- May yield performance complacency or even demotivate salespeople to perform as senior pay is not significantly offset from newbie pay and performance is not rewarded
- May increase direct sales costs over other plans
The salary plan works well when the main objective of compensation is prospecting or servicing accounts. This is not the case in residential sales where the primary function is to sell an account and turn it over to operations. Certainly a salesperson should follow-up to ensure customer happiness and make additional future sales.
Salaried sales people don’t produce the same results they would if on full commission. Some managers prefer to pay a partial salary so they can expect salespeople to be in the office periodically to do administrative tasks, such as answer phones, order materials or stage jobs.
A salesperson’s job is to sell exclusively. It makes no sense to handcuff their performance with duties that can be performed by a wage or salary earning clerical person. Salespeople that demand or require a salary are not the type of people who are hungry enough to create and pursue opportunities to be successful.
Salespeople are paid in direct proportion to their sales. The plan can be for straight commission or a draw/advancement against commissions earned. The percentages paid are discretionary and covered in direct cost of sales.
Commission incentives can be paid based on one or more of the following:
- A fixed percentage of topline revenue, gross profit or net profit
- Different rates by product/service type
- Different rates by grade/tier of product/service
- Different rates for existing customers versus new prospects
- Commission enhancement for self-generated leads that sell
Commissions should be paid based on topline revenue and not gross or net profit. Commission scales should remain fixed as a percent of sales revenue generated over all sales at all times and be tied to the level or grade of product sold with higher percentages for higher margin products.
Your job is to ensure proper pricing to cover compensation and all other costs, as well as profit levels, and train salespeople to quote and sell properly so that margins are met.
Salespeople are ONLY allowed to negotiate prices except within guidelines of promotions. Financing and technician spiffs and commissions paid for leads turned over may be considered direct costs, but I feel should be covered in departmental overhead costs.
- Provides greater incentive than a salary plan
- Pay only for sales performance
- Easy for salespeople to understand and calculate earnings from a sale
- Salespeople have unlimited earning capacity
- Compensation is proportional to sales
- The company typically has a reduced sales expense due to increased revenue
- Emphasis may be placed on closing sales versus selling the proper scope of work
- May not develop loyalty that a salary may provide
- May yield wide variances in income between salespeople
- Salespeople may debate whether commission pays them for non-sales related activities
- Salespeople may quote all leads thinking sales is a numbers game
- Salespeople may only pursue high probability prospects
- Salespeople may not offer the right mix of products
- Salespeople may oversell a job to make more money or
- Salespeople may undersell a job just to earn some money
- Customer care aspect may suffer and communication and follow-up may be limited
- Salespeople may feel slighted based on lead allocation
- Pay can vary greatly based on season, economy, etc.
- Salespeople may look for short-term self-gain versus company long-term relationships
- Turnover may be an issue in lean times
Most of the disadvantages can be cured by you, and the upside in revenue and profit generated will be more than enough to justify the plan.
One area salespeople tend to debate is whether a commission covers non-selling activities. A commission should be large enough to cover and reward such time investments by componentizing it based on job functions:
- 50% Selling and customer care functions, including paperwork
- 20% Service team sales coach
- 20% Home shows, join and attend networking and trade association group meetings
- 10% Sales, marketing & company meetings
Avoid paying based on par pricing or padding your book price for purposes of allowing salespeople to drop price. A par price is what you set as its lowest acceptable price. A higher list price is set for salespeople to go to market.
Salespeople are provided flexibility in negotiating sales prices with customers and are able to reduce list price to make a sale then are paid a flat percentage for par price and split any overage with the company 50/50. This practice lacks integrity as some customers will pay more than others for the solution.
Set a list price for products/services and only allow for documented promotional discounts or buying incentives.
Teach salespeople how to differentiate their value proposition and build value in all that you do.
If a customer needs an incentive to do business with you beyond the value the salesperson conveys, then allow your salespeople to throw in an accessory, extend the warranty or add a maintenance plan.
The perceived value is greater and the customer will not think you were trying to squeeze them for more money to start. This way your company maintains pricing integrity.
The commission plan works well to drive performance when a company has the proper people that rise to a challenge and are motivated by money and what it can do for their lives. Competitive people are also stoked by commission play plans. This plan also ensures compensation is in direct proportion to sales volume.
This plan includes a salary plus an incentive in the form of a bonus on sales volume over a goal or a commission on all sales. The bonus is based on a salesperson hitting a goal.
Variations can be a salary plus bonus, salary plus commission, salary plus commission plus bonus, etc.
- Provides greater security than commission plan and greater incentive than a salary plan
- Permits better control of the variable income than is possible with the commission plan
- Provides management a lot of flexibility to be creative in developing pay plans based on objectives, performance, experience and longevity, etc.
- Allows for customized plans by salesperson
- Offers salespeople the advantages of both the salary and commission plans
- Broadens the possibility for greater range of earnings
- May give salespeople a greater security because of reliable base income
- Compensates salespeople for all activities
- Allows management to provide motivation toward specific goals and objectives
- Salary-plus-incentive plans tend to be more complex than the other two methods. Thus they involve more paperwork, control, and administrative work. They need more frequent revision because of the interaction of the elements that comprise the total plan. In making individual adjustments over the years, one should be careful to avoid a gradual loss of uniformity in the plan.
- Sometimes complex, may be difficult to understand and may be costly to manage
- If salary is low and bonus or commission are high, retention may be an issue in lean times
- Can lead to excessive compensation
Salary and commission are set as previously mentioned.
Structuring the mix between salary (fixed) and incentive (variable) is vital. The percentage split should be based on historical sales performance and compensation records along with predictable forecasted expectations.
Combination plans tend to have caps on bonuses, commissions and overall income.
Incentives are optional elements paid at your discretion on top of one of the aforementioned plans, based on preset expectations or level of achievement.
As revenues increase and most overhead stays fixed, more money falls to the bottom line in the way of profits and all employees, including salespeople, should benefit.
So how do you address this in the compensation plan? It’s simple.
Commission kicker incentives should be placed on predetermined monthly targets that provide an additional percentage commission on all sales or on just the incremental portion over the target each month.
Bonus incentives are usually paid as a percentage of salary, percentage of sales or flat amount for commission-based plans and vary by goal performance levels. Bonuses can be paid for attainment of sales goal and incremental amounts above the goal.
Other factors used as a measure for bonus goals are overall volume compared to team, product mix, add-on sales, new accounts, customer happiness, average sale, closing ratio, most self-generated leads over a set amount, increased sales from existing accounts, etc. Bonuses can also be at your discretion.
Bonus payments should be structured to begin at the 80 percent-of-goal level to motivate salespeople to achieve goals. Setting an all or nothing approach with a lower threshold level works against sustained sales effort and may discourage performance.
Bonus payment rates above and below the goal may be uniform, however offering incremental increases beyond the 100 percent mark adds an additional incentive with a lower cost factor over the book of revenue sold.
A bonus incentive plan can be difficult to set and manage. Bonuses can be paid monthly or quarterly to elicit active, vigilant salesperson engagement from month-to-month, especially in a large income earning month. Rewards paid on a quarterly basis are not as effective motivators as weekly or monthly commission payments.
Salespeople tend to work mostly solo, with limited personal contact with their manager; have extended periods of time away from the office possibly yielding disconnect, loneliness, and inconvenience; decisions that require a high level of motivation (when to quote jobs or not, how many follow-up attempts to make when to make them, objectives to be achieved on each call, when to end for the day); and emotional swings from winning sales to potential frequent frustrations of orders lost to competition.
You need to create an environment for each salesperson to motivate themselves by providing incentives that make salespeople work harder all around.
These incentives can be financial, non-financial, or a combination of both.
Short-term sales contests are fun and engaging. Costs are typically predictable and covered by results, the sales and profit yield successful, and rewards are immediate. Contests can run for a day, week, month or two months.
Longer contests can also be run, but require regular promotional reminders. Awards can be money, trips, personal paid time off, merchandise and personal recognition.
A successful sales contest should include these basic elements: well-defined objectives, simple rules, short duration, goals attainable by most salespeople, inclusion of significant others and families when possible, and follow-through to sustain enthusiasm.
Be careful to ensure fairness in contests. When contests are improperly used or done so for the wrong reasons, they can create discord and unhappiness amongst the team. When done right, contests can promote a friendly-competitive climate to drive sales and additional benefits.
Most importantly, contests should be fun for everyone and elicit other staff involvement when possible.
In addition to the usual contest objectives of increased sales and profit performance, more new customers, etc. contests can serve to minimize the impact of shoulder seasons, build other departments, reactivate dormant customers, help cover and reduce costs.
Emotional currency is something that is not typically given a lot of attention by owners and sales managers, however, is something that drives the ego of most salespeople. Ego-drive is a crucial element for sustained success in sales. Drive is the fire of desire for salespeople.
Ways in which companies can leverage a salesperson’s ego-drive is by conferring more meaningful roles and titles as commensurate with the person’s role and desire for a higher level of involvement.
Elevating a salesperson’s status with customers and co-workers instills a sense of pride and gives the person a feeling that the work they do and their impact is important, recognized, and appreciated. With role expansion, the title and a possible salary more aptly describe their functions and rewards their contributions beyond sales.
Other productive ways to recognize good individual performance or encourage more active internal company engagement are: distinguished salespeople awards, publicity, personal letters, texts, calls of commendation, face-to-face encouragement, meals with ownership/management and significant others and families, ride-alongs, time off, gifts, trips and individual support with personal responsibilities.
Pay all or part of the following benefits: medical, dental, optical, emotional health and wellness insurance; life, accident, and disability insurance; educational assistance; profit sharing; pension plans; stock purchase; moving expenses, etc.
Provide a laptop and/or tablet, smartphone, company car, uniforms, training, etc. Vacation, holiday and all-purpose time off paid days should be earned consistent with company handbook. Pay for time-off is based on an average day’s pay for the last twelve months or a minimum of $200/day gross.
Every compensation plan will be a compromise. Marketing and sales objectives will determine what salespeople need to do to be considered successful. Success should be rewarded commensurately.
Additionally, you should do a competitive analysis of other company’s programs and determine what type and level of compensation is necessary to attract and keep top performers.
Should income for salespeople be capped? Why de-motivate salespeople and de-incentivize performance by capping earnings or offering diminishing returns for extra effort? It’s a win-lose scenario and is not fair.
When it comes to compensating top-producing professional salespeople, you have to pay to play. Develop a plan that drives company objectives and “incentivizes” and rewards maximum performance handsomely.
Both salesperson and company will be glad you did. This sort of clever compensation sustains sales, profits and people performance, as well as customer happiness.