From the ArcaMax Publishing, Business Success Newsletter:
http://www.arcamax.com/news/businesssuccess/s-347587-259756
According to a compensation survey summarized in Selling magazine,
only seven percent of the sales organizations in the U.S. use straight
commission plans. What have 93 percent of the companies figured out?
Straight commission plans reduce the sales manager's ability to
control and direct the behavior of the sales team. If you can live
with that, straight commission is great. If you want to be a more
effective manager, you might have to bite the bullet and make some
changes.
Pretend that I'm selling for you. Here's the biggest problem with
paying straight commission: I get my 15 percent whether I make my
quota or not. Say my budget is $20,000 for the month. I sell $18,000.
Hey, I can live on $2,700 a month. But if five salespeople feel the
same way, your station is going to fall short of budget by $10,000.
Can you live with that? How about your owners? You could fire me for
not making quota. But you probably won't for a few months at least.
My colleague Norm Goldsmith at The Leadership Institute says, "When
you pay straight commission, people work as hard as they want to earn
as much as they want." In a nutshell, that's what's wrong with
straight commission.
The trend is toward a salary-plus-bonus compensation system. A "bonus"
is different than a commission because you pay a bonus for
accomplishing specific financial objectives. And you control the bonus
based on the objectives you need the sales team to accomplish.
At The Leadership Institute for Managers, we advocate a system that is
based on 70 percent salary and 30 percent bonus.
To make it very simple and specific, let's take a salesperson who
earned $30,000 in commissions last year. This year, you changed the
compensation plan. (You can do that because you're the manager, but
you'd better get a buy-in from corporate or your boss.) You pay the
salesperson $21,000 in salary (70 percent of last year's earnings).
The salesperson will get 26 checks of $807.60. You have now put 30
percent of the last year's earnings, or $9,000, at risk. That $9,000
gives you some management control over the salesperson's behavior.
Here's why: In order to get back to $30,000, the salesperson must do
what you want him or her to do.
That leaves you with $750 per month ($9,000/12) in bonus money (not
commissions) to reward performance. You could pay the salesperson $375
for making quota. And if new business is important, you could pay the
other $375 for getting five new accounts or upgrading three current
accounts and selling two new accounts. You are now paying for
performance instead of paying the salesperson for whatever he or she
feels like doing.
"But great salespeople are money motivated," you're thinking, "and
this puts a lid on what they can earn." First, you probably don't have
a staff full of great salespeople. If you're lucky, you have one
pretty good one, a couple of "Steady Eddies" or "Edwinas," and one you
should have fired six months ago. Still, you can pay commission on
every dollar sold after the salesperson has made quota. You can even
pay 20 percent commission. Sell an extra $1,000 over quota and take
home $200.
If, at the end of the year, the salesperson who earned $30,000 last
year has earned $35,000 this year, you recalculate the salary at 70
percent of the $35,000.
For the entry-level person, figure out what an average first-year
salesperson earns in commissions at your company, multiply by 70
percent, and you have a salary for rookies. You may have to adjust
this when hiring experienced salespeople, but at least you have a
bottom, entry-level salary.
Salary-plus-bonus compensation programs have another bonus for you.
Paying a salary plus bonus can let you go after established workers in
other industries instead of just entry-level people who are desperate
enough to work for straight commission. You might go after
schoolteachers, social workers, or other people who understand
preparation, have good people skills, and are looking for a chance to
use their talents to earn real money.
Years ago I attended a Don Beveridge sales management seminar at which
he said, "Money doesn't manage." I don't know who he stole that from,
but I stole it from him.
What that means is that, after a certain point, the fact that people
can earn more money doesn't make them go out and do it. After a
certain income level they may be motivated by an extra week of
vacation rather than another hundred dollars in their pay envelope.
Money doesn't manage. And if you don't have a compensation plan that
pays for accomplishing what you need done, then you're not managing
either.
The bottom line is (and this is Harvard Business Review stuff) that if
you pay straight commission you have relinquished management control
and said to the salesperson, "Make it or quit." The salary plus bonus
plan puts more control in the sales manager's hands--where it belongs.