KEEP SALES COMPENSATIONS SIMPLE
I love to shop at Nordstrom’s. Everything in the store is presented attractively and the salespeople are numerous and helpful — a perfect combination. Now if I could knock down some of their prices, I’d really be happy. So, more often than not, you’ll find me at their Rack discount store. Either place, I use my Nordstrom credit card and when the bill arrives I always pay the whole balance (another reason I don’t shop there as often as I’d like).
Included in my bill this week was an insert with “Important Changes to Your Account Terms” in bold letters. While I usually just toss these “important messages,” this one really caught my eye. It read . . .
We’ve replaced the section of your Nordstrom Credit Card Agreement titled Minimum Monthly Payments. It now reads:
The Current Due each month will be the greater of $38 or the sum of all Interest Charges and Fees imposed during the current billing cycle plus 1% of my New Balance, rounded to the next higher whole dollar amount; provided, that if the New Balance shown on my monthly billing statement is less than $38, the Current Due will be my New Balance.
Huh?? Math was never my strongest subject, but I needed to read that three times before I understood it!
KEEP IT SIMPLE
I know some companies with sales compensation plans written like that Nordstrom Credit Card Agreement. You actually have to read the plans a few times to understand them. This is never good.
I’m not going out on a limb when I say that most salespeople are no- risk averse. And this trait means they are willing to risk a portion of their compensation on their performance. That’s the good news for sales managers – their employees share in the risk. Think about it. You wouldn’t offer that type of compensation plan to your engineers, programmers or to your CFO, would you? But for salespeople, it’s tapping into their personalities, and it works! When crafting a compensation plan with not only many components, it can be a challenge to construct. Some managers wonder if they may be “giving away” too much, or conversely, that they may not be giving away enough to motivate their sales team.
The exact sales responsibilities of the job must be taken into account as well. Some managers want their salespeople to only “hunt” new business and not worry about add-on business with existing customers; some managers want their salespeople to grow the sales of existing customers while hunting new business, as well.
Just like Russ believed, your sales compensation plan holds the key to where your sales force is putting its effort.
Here are the three elements of a solid sales compensation plan to get you sales results and keep your salespeople happy at the same time.
THE “SSC” FORMULA – SIMPLICITY, STRUCTURE AND CLARITY
1. SIMPLICITY – The KISS (Keep It Simple Sweetheart) rule is fundamental to all good compensation plans, but especially sales compensation. The base salary and potential commission and bonus percentages should be structured simply and spelled out clearly. A sales compensation plan should not have the element of “gaming” in it. Don’t mistake a risk-averse person for a gambler. I have seen plans that are so convoluted they immediately provoke feelings of distrust. A good rule to remember: If it takes you more than two minutes to explain it (like it took me more than two minutes to understand that love note from Nordstrom’s), it’s probably too convoluted.
2. STRUCTURE – Structure the plan so you get the sales results you want when you want them. For example, if your salespeople have a $1M quota and you don’t want that $1M in revenue to come the last quarter of your fiscal year, put a quarterly bonus plan in place. If your sales are smaller and more transactional in nature, put a monthly bonus plan in place. You should always have an annual bonus component in your plan as well.
For commission percentages, utilize a sliding commission scale. These are very motivational and can drive much increased sales and revenue. You spell out clearly the levels that the higher commissions go into effect. Some companies will pay the higher rate attained on the total amount of sales reached, while some pay the higher rate just on the delta that is reached. Either way works fine and just depends on how much you want to pay out.
On the issue of new vs. existing business sales growth, if you want your salespeople to hunt new business, make those commissions higher than the commissions paid on growth of existing accounts.
3. CLARITY – Let’s face it, sometimes deals fall apart and commissions or partial commissions that have been paid to your salesperson have to be “charged back.” Be fair and clear in your plan about how these chargebacks will be handled. Sure, no one likes to be charged back, but for the most part everyone understands. Acrimony can happen when a company is dubious and “unforgiving” about how they handle these chargebacks. Make sure everyone understands and accepts, upfront, the charge back policy. And then, if and when it happens, be accommodating if at all possible in a payback plan. I have seen companies lose good salespeople all because of the way this issue is handled. Be sensitive.
Want to read more about sales compensations?
Click here for my newsletter on keeping sales compensations tied to the top line!