Sales Compensation: Desired Results?

Is your sales compensation program producing the results you desire?

Background

While I’m not a compensation specialist, in my work I’ve seen some blatant mistakes made when it comes to sales compensation. Here are a couple of examples:

I asked a new client when he’d last raised prices, he told me it had been five years. When I asked why, he said he wasn’t sure that they were providing the level of service necessary to warrant a price increase.

I asked, what are your customers telling you? He said that he hadn’t done any customer surveys in quite some time. When I asked: What do your salespeople tell you? He said, “You have to understand that our salespeople are compensated on generating new accounts.”

I said, if I understand what you’re saying, your salespeople have no incentive to visit existing customers to see how they feel about your services, how their needs are changing and how you might meet those changing needs. He said that’s correct.

In two other instances, I found that the salespeople were receiving the same compensation regardless of the profit margin on the item sold. Consequently, they were selling more of the lowest price items, which were also the lowest margin items…because they were easier sales to make.

Sales compensation ➠ Poor results

In the first example, our first priority became restructuring the sales compensation program so that the salespeople made as much selling to existing customers as to new customers. As we all know, it’s easier to make sales to customers who are already happy with our offerings than to new customers.

In the other two instances, we used a tiered compensation approach so that the salespeople made more money selling high-margin items and considerably less selling low-margin items. The result was that very few low-margin items were sold which enabled the owners to generate higher profits with fewer sales and low infrastructure costs.

I made a mistake in the first example when I didn’t consider including the tiered approach in their sales compensation program.

To me, the purpose of sales compensation is to get your salespeople to sell the highest margin items. This approach has dual benefits.

It enables the company to generate greater profits with fewer sales. It also enables salespeople more time to spend with existing customers to determine:

• What workarounds customers are employing to overcome something that your offering isn’t doing.
• What customers would like your offering to do that it currently isn’t doing.
• How your customers’ customers’ demands are changing.
• How you can help them meeting their customers’ changing demands.

Not only are you assuring higher margins for your offerings, you’re positioning your company for exceptionally high customer retention rates. When you help your customers meet their customers’ changing demands, and do so regularly, they aren’t going anywhere else. This approach also enables you to gain, and retain, industry leadership.

This is only half of the dual benefit. In addition, because your customer base includes only those who purchase your high-margin items, your production capacity, inventory levels and staffing are all smaller than those of your competitors.

Smaller infrastructures not only assure greater bottom line profits, they assure that your company thrives regardless of what the economy is doing.

Takeaways

Your sales compensation program determines the mix of business you get.

Make sure that your program:

• Gives your salespeople a reason to visit existing customers at least twice a year to gain insights into how their needs and their customers’ demands are changing.
• Provides an incentive to sell your highest-margin items, while minimizing the incentive to sell low-margin items.

You’ll find that these two factors alone will help you:

• Generate greater profits with fewer sales.
• Position your company for high customer retention rates and, possibly, industry leadership.
• Keep your infrastructure costs smaller than those of your competitors.
• Thrive regardless of what the economy is doing.

That’s a lot of benefit from incorporating two factors into your sales compensation program.

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Resources

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