Do We Have Sales Compensation All Wrong?

Posted by Dave Kurlan on Wed, May 06, 2015 @ 06:05 AM

balanced-compensation.jpg 

Earlier this week, I posted an article that explored whether or not a salesperson should be punished for landing a big deal if that same salesperson had nothing else in the pipeline.  It generated some heated discussion in the comments section and since there was disagreement about compensation in the comment section, I thought it would be helpful to discuss that.  Should a salesperson receive the maximum commission on the big deal if there was no other activity, critical KPI's weren't met, and the pipeline is essentially empty?

I believe the question merits more than a simple yes or no answer.

The negative comments appeared not only on my Blog, but also in the various LinkedIn Groups where the article was shared. One commenter said that we can't reward effort OVER results while another commenter said that we can't reward results to the exclusion of effort.  Both have their pros and cons, but is there a happy medium?

Let's suppose that our company expects each of its salespeople to generate $2 million annually, or $500K each quarter.  The sales cycle is 8 months, the average sale is $50,000, the closing percentage is 30%, and one quarter is already in the books.  The company has 5 salespeople and their quarterly performance was as follows:

Salesperson

# of Opps 
in Pipline

Value of Opps 
in Pipeline

Revenue YTD

Qualified 
Proposals

 Overall
Results

Overall 
Performance

1

0

$              0

$500,000

0

  On Target

 Poor

2

27

$ 1,850,000

$385,000

6

  Below Target

 Good

3

16

$    800,000

$520,000

3

  On Target

 Excellent

4

6

$    300,000

$250,000

2

  Under Target

 Poor

5

30

$ 1,500,000

$550,000

4

  Above Target

 Excellent

 

One commenter said the only thing he cared about was the results. He was referring to the big deal that salesperson #1 landed in the first quarter.  He wanted to celebrate this deal and this salesperson, but when you see the overall performance in black and white, it's clear that with an 8 month sales cycle and one quarter in the books, salesperson #1 will have annual sales of only $500,000 - the same number achieved for the first quarter.

Salesperson #3 is on target, but with a 30% closing ratio, there is not enough in #3's pipeline to support more than $240,000 in additional revenue.

# 5 will be fine, but #4 is currently failing and the rest of #4's year will likely be horrible.  

The interesting example is #2, who is below target, but has the healthiest pipeline, the greatest number of qualified proposals and will likely lead the sales force in revenue for the year.

Now let's factor in compensation.  If #1 maximizes his possible compensation by hitting his quarterly number, and then bombs the rest of the year, he will have been overpaid for his first quarter contribution to revenue.  If #2 is paid on the lowest possible scale for missing first quarter quota, she will have been underpaid for her first quarter contribution to revenue.

Those two salespeople and their first quarter performance make a great case for a compensation plan that factors results as well as quality effort (# of new opportunities/value of opportunities).  Results should still be weighed more heavily than effort, but if we include both, then both salespeople would be paid more in line with their overall performance.

If sales is worth 75% and effort is worth 25%, how would that affect compensation for these two salespeople on a bonus plan that pays out a maximum of 10% of revenue?

Salesperson #1 would be paid 75% of the maximum $50,000 (on $500,000 quota), or $37,500 for revenue and $0 for effort.

Salesperson #2 would be paid 25% of the maximum $50,000, or $12,500 for effort and 75% for revenue, or $28,500, for a total of $41,000.  Despite sales that were $115,000 short of quota, salesperson #2 would earn $3,500 more than salesperson #1 for adding 27 opportunities worth $1,850,000 to the pipeline.

I'm sure this will cause many to chime in with their own versions and variations and that would be awesome!  And based on what we read from commenters in the earlier article, I'm sure others will criticize the concept and they are more than welcome to do so.

I'm simply suggesting that we can get more from our salespeople if we factor more into the compensation plan than results.

Let's get as much feedback as possible. Have a comment?  Want to read what others think?  Either way, please use the buttons at the top of the article to share it on LinkedIn and Twitter to reach a wider audience for their thoughts.

Topics: Dave Kurlan, sales pipeline, sales performance, Compensation

Sales Compensation - Exceptions to the Rule

Posted by Dave Kurlan on Wed, Mar 07, 2007 @ 23:03 PM

I've previously written about sales compensation, with the average salesperson earning $96,000, a good salespeople earning $135,000 (varies by industry and geography) and poor and entry level salespeople earning around $67,000.  Several companies have recently asked me about how to hire salespeople when you can't afford to pay even the entry level sales compensation.

Case Study number one is a start-up with a complex sale.  By complex we're talking long sell cycles with a high-ticket sale.  By start-up we're talking unproven and challenging to sell.  Straight commission isn't an option here because it could take 18 months before the sales begin coming in. How is a salesperson supposed to survive for 18 months?  A base salary for 18 months isn't an option either because the company doesn't have any revenue (or any funding).  The only hope this company has of finding a good salesperson is to offer equity.  And when equity is on the table there is no room for error.  Selection excellence becomes critical!

Case Study number two has money but it's not realistic for a new salesperson to generate enough revenue to earn more than $45,000.  While that's well below entry level money, this is a great example of two possible compensation exceptions.  First, there is virtually no ramp-up time because the sell cycle is so short, so the salesperson can actually begin making sales the first week.  That makes straight commission very viable.  This easy-to-make sale makes it possible for even an inexperienced salesperson, one who would welcome $45,000, to be effective, as long as they are well suited for selling in a short sell cycle.  Once again, selection becomes critical, with no room for error.

Sales compensation is difficult enough in normal situations.  It becomes even more difficult when the organization doesn't fit into the normal category so the big difference maker is your sales selection tool.

© Copyright 2007 Objective Management Group, Inc.

Topics: recruiting, Compensation

Top 10 Factors for Getting Salespeople to Overachieve

Posted by Dave Kurlan on Sun, Feb 04, 2007 @ 15:02 PM

Here is a video where I discuss creating a culture of overachievers.

 

There isn't a single key to overachieving, so I'll list my top 10 factors for helping salespeople overachieve.  I'm sure I've written about each of these topics at some point in the past, but I'll put them all together here:

Goals - I'm talking "raise the bar, stretch, out of the comfort zone, more than the typical 15% increase in sales" type goals here.  You must raise expectations in order to celebrate superior performance.  Don't forget two things: (1) that a forecast and plan come from the goals; not the other way around; and (2) goals are derived, not from the company, but from the individual's income requirements, based on the bills that accompany life's obligations and desires.

Incentives - including compensation, contests, commissions, awards and prizes.  Incentives bridge the gap between corporate carrots and the personal goals we just discussed.  If an individual has the goals but the company's compensation isn't designed to reward superior achievement, the incentive to perform can not be maintained.  If the company has a rock-solid compensation plan but the goals are wouldn't excite Dr Phil, the personal incentive to perform will be AWOL.

Managing the Pipeline - a Visual Pipeline makes it significantly easier to manage the pipeline but the key to managing the pipeline effectively is working with your critical ratios.  Think monthly goal, closing percentage, average sale and length of the sell cycle. Let's say that your salesperson has a six month sell cycle, a $100,000 monthly goal, a $20,000 average sale and a 25% closing percentage. Effectively managing the pipeline requires that your salesperson places 20 (5 $20,000 sales x 4 at 25% closing) new opportunities worth of total of $400,000 (25% of $100,000) into the pipeline 6 months in advance of the monthly goal (if the goal is for July then the opportunities must enter the pipeline in February).  Get that to work and the outcomes are all but guaranteed.

Accountability - This is such an important factor in over achievement.  You must hold each salesperson accountable to something measurable (like the number of conversations required to book the number of sales calls required to identify those 20 new opportunities) every day.  Even more importantly, you must have consequences for failure to meet those requirements and consistently follow-through whenever necessary.  Develop the nerve for full accountability and you're nearly there!

Motivation - This is the combination of Goals and Incentives. In essence, does the salesperson have a strong enough Desire and Commitment to do whatever it takes - every day - to reach the goals?  When they don't, it's your job to motivate them by knowing what each salesperson's goals are. I'm not talking income requirements or gross sales here, I'm talking planes, boats and cars; big houses, vacation homes, golf trips, world travel, home theaters, fantasy camps, exclusive events, etc.

Self Starter - Last week I posted an article that discussed what it takes for salespeople to succeed in a remote location.  Those factors, whether salespeople are more effective when working independently or as part of a team; and whether they require supervision or can work without it; help to determine whether they are self-starters.  If not, you must start them up every day, twice daily or as often as it takes.  If you have self-starters, you are one lucky manager.

Skills - The more the better, but let's focus on the most important skill sets for overachieving.  Your salespeople must be able to hunt for new opportunities, identify the most qualified and be able to close them.  Anything else they can do is a bonus!

Urgency -  I wrote about Closing Urgency in January.  Your salespeople must have enough urgency to get their opportunities closed, when they become closable, even when their prospects are trying to put them off.

Weaknesses - Unfortunately, there are weaknesses that will neutralize all of the previous 8 factors.  There can be dozens of weaknesses that could impact performance but none are so powerful as these five:  Non Supportive Buy Cycle, Need for Approval, Tendency to Become Emotionally Involved, Money Issues, Self-Limiting Record Collection.

Coaching and Training - Your coaching must support any training initiative and help salespeople overcome their weaknesses, develop skills and master the selling process.  While most training will be conducted by sales development experts from outside your firm, the coaching absolutely takes place from within.  Pre-call strategizing and post-call debriefing, with every salesperson, every day.

This list of factors is not all inclusive but it's a good start.  You can build a sales force of over achievers if you incorporate not some, but all of these factors.

© Copyright 2007 Objective Management Group, Inc.

Topics: selling, accountability, Motivation, Pipeline, Performance, Compensation, Featured

Sales Compensation

Posted by Dave Kurlan on Mon, Jun 26, 2006 @ 16:06 PM

Sales & Marketing Management, in their 2006 Sales Compensation Study, provide some interesting statistics. The gist of the findings show that in most companies, compensation is up by more than 5% over 2005. 44% of all companies added performance measures to their comp program and 35% increased the percentage of commissions paid. When asked about incentives, 62% of all companies indicated that they use cash as one of the awards for their incentive program.

With so many salespeople earning more money than before, is it any wonder that sales candidates are getting more difficult to find?

With so many salespeople earning more money than before, is it any wonder that complacency is on the way up?

With so many salespeople earning more money than before, is it any wonder that most increases in business are coming from the growth of existing accounts and renewals?

(c) Copyright 2006 Objective Management Group, Inc.

Topics: Compensation

Some People Aren't Motivated by Money

Posted by Dave Kurlan on Sat, Oct 22, 2005 @ 12:10 PM

One sales manager indicated that he had a salesperson who wasn't motivated by money but was motivated by providing great customer service and making people happy. I told him that I was certain that he could not possibly be describing his best salesperson and, after a moment of consideration, he completely agreed. I went on to tell him that this person wasn't truly a salesperson, was probably not bringing in new business and probably belonged in customer service. He said he didn't have a customer service department and I told him he did now!

How do you know whether you have the right salespeople in the right roles? Evaluate your sales force and find out.

(c) Copyright 2005 Objective Management Group, Inc.

Topics: Motivation, assessment, Compensation

Money Motivated Salespeople

Posted by Dave Kurlan on Sat, Oct 22, 2005 @ 11:10 AM

The other day a client asked me about a salesperson about whom the assessment indicated wasn't money motivated. He went on to tell me how often this salesperson tells him he needs to make more money and wants a larger base. I explained that this is more a case of 'money need' rather than money motivation. The easiest way to tell the difference between the two is:
  • Money motivated salespeople don't ask for more money, they earn it;
  • Money motivated salespeople want the money for 'extras' like vacation homes, travel, sports cars, planes, boats, home theaters and college;
  • Salespeople with 'money need' want the money to pay bills;
  • Salespeople with 'money need' expect you to give them the money;

Finally, it is your responsibility to convert salespeople from having money need to being money motivated and the most effective method for accomplishing this is to have them go through a professional goal setting program.
(c) Copyright 2005 Objective management Group, Inc.

Topics: Motivation, Compensation

Compensation Stupidity Again?

Posted by Dave Kurlan on Wed, Aug 17, 2005 @ 23:08 PM

It happened again today. A company, complaining about their lack of quality candidates and disproportionate number of 'not recommended' results, blamed the assessment. However, they were nice enough to send along their ad, conceding that perhaps, their posting needed some tweaks. Tweaks? It needed reconstructive surgery.

They actually used phrases like 'must have been an award winner' and 'must have been the top salesperson' and 'must have major account experience'. They also sought a strong work ethic, determination, experience selling conceptual, high priced technological solutions to senior management. The candidate even needed industry experience. What's wrong with all that? The ad described a superstar. They promised sky-high commissions. The ad said 'prior income of $50K required.'

The candidates are out there. But when you offer to pay little more than entry level money yet expect your candidate to have a $250K pedigree, you will consistently fail to attract, select and retain top talent.

So raise the bar. Look for better people. Hire top talent. But for crying out loud, be willing to pay for that level of talent.

(c) Copyright 2005 Objective Management Group, Inc.

Topics: Motivation, assessment, Compensation

Compensation - the Unchanging Role

Posted by Dave Kurlan on Sun, May 22, 2005 @ 23:05 PM

It's quite interesting to learn that a company is considering a change to the manner in which they compensate their salespeople. This typically occurs when a company has already discovered a flaw and management is hoping that a modification, usually in the form of more commissions and less salary, will motivate their sales force to find some new business.

The companies that are smart enough to first evaluate their sales force sometimes learn that their salespeople aren't money motivated. This really shouldn't come as much of a shock but it always does. If these people, currently paid by salary, were money motivated they wouldn't be working for a salary for this or any other company. What's worse, the company, believing that these people will enthusiastically prospect for new business once they have the proper incentive, risks losing these people when the compensation undergoes a radical change.

On the other side of the coin is this: are these people worth keeping? They don't grow the revenue, profit, customer base or market share. They don't help to grow the company. If compensating them differently will cause them to leave, should the company let them go? Perhaps! While the company may feel that some of these people have product, application or market expertise that can't be replaced, there are others that would certainly be worth trading in for salespeople who are focused on growth.

What happens to the company that executes their modified compensation program without first evaluating their sales force? Disappointment, morale problems, turnover, and most of all, a lack of the change that management was hoping to see. Does this mean that a change shouldn't take place? Not necessarily. It means that management should identify the real problem. Is it really the comp plan or is it the selection criteria? Could it be ineffective expectations, lack of accountability and coaching?

Complacency is the most obvious symptom when there is a lack of new business. But compensation is not always the reason. A comprehensive sales force evaluation will always uncover the problem behind the problem.

(C) Copyright 2005 Objective Management Group, Inc.

Topics: Motivation, assessment, Compensation

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Best-Selling Author, Keynote Speaker and Sales Thought Leader.  Dave Kurlan's Understanding the Sales Force Blog earned a medal for the Top Sales & Marketing Blog award for six consecutive years. This article earned a Bronze Medal for Top Sales Blog post in 2016, this one earned a Silver medal for 2017, and this article earned Silver for 2018. Read more about Dave.

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