Your Rep Compensation Plan Should Reflect Your Business Objectives

Edition: September 1999 - Vol 7 Number 09
Article#: 468
Author: Jeff Stevens

Sales rep compensation is one of the most controversial, least-talked-about, yet crucial issues in the industry today. Management's challenge is to find ways to motivate sales reps while retaining enough control to guide the sales team. Although the answer appears to be hard to find, actually, it's right under your nose.

The No. 1 rule to keep in mind is this: The compensation package should be designed to support your company's sales and marketing plan. After all, how can you ensure that your people will be motivated by the products and services that are important to the growth of your business?

The Business Life Cycle

In order to design a comp plan, it helps to review the business life cycle as it relates to the rep. In the early stages of a business, the company's primary goal is to sell volume. Reps must be able to close. They must be seen as theatrical and confident. Rewards must be tailored to enhance these qualities.

When a business reaches the point where it is looking to expand, it must broaden its mix of products. Reps now need to be consultative, and they must have the expertise and competence to detail many new products. Incentives encourage this willingness to learn all they can.

In the third stage, competition becomes an issue, with all players seeking greater market penetration. Reps need to turn their attention to the loyalty of the customer. They must build relationships, and of course, their pay structure must support this. One benefit to relationship selling is that price becomes less of an issue for the customer and profitability for the supplier improves.

In the last stage, the market becomes saturated and there is no room for further competition. In this environment, reps must focus on their customers' needs. Being responsive and service-oriented becomes the bane of their existence. Compensation must be tied to retention and winning customers away from the competition.

Take a moment to consider where your company lies on the line between start-up and saturation. Then ask yourself if your compensation plan meets the parameters set out above.

Compensation Models

There are hundreds of ways to compute compensation packages, but for simplicity's sake, let's examine just five:

  • Straight salary. This method of compensation certainly allows for the best control of costs and sales direction, but it is limited in its ability to motivate many to greater things.

  • Salary and bonus. The salary component still gives the company a strong measure of control over its reps' direction, and it adds an element of drive towards agreed-upon goals. But it also makes it necessary to track performance, thus bringing more administration into the mix.

  • Salary and commission. While this method offers plenty of motivation to the reps, it takes away a lot of control over their actions by the company. Reps naturally migrate to those items where they can generate the greatest commissions, whether or not they match the company's business plan.

  • Straight commission. This method is the most aggressive, offering a high growth potential. But it can create a mercenary attitude among the reps. The sales program runs the risk of becoming unmanageable.

  • Commission and bonus. The added bonus component brings back a measure of control over the reps' actions, but it can become very expensive to support. Additional administration can also prove costly.

Building The Plan

So now you are getting ready to put pen to paper and outline your plan. Not so fast! There is more to comp plans than just creating them.

Some basic tenets must be followed when building the plan:

  • Confirm that the comp plan is in sync with the company's business plan.

  • Document and communicate the plan to the reps, clearly and concisely.

  • Apply the program consistently and fairly for all reps.

  • Make sure the plan is simple to understand. If details are too complex, interest will wane quickly.

  • Track the plan closely and report frequently to the reps. Keep a watchful eye on those reps who are not meeting targets along the way, in order to offer support, training, guidance, etc., if required. It is easy for reps to lose their motivation with a compensation plan, especially if they have no sense of what is blocking their success.

So now what? Well, only you can really answer that by analyzing your business. But here are a few ideas, as shared by some of your compatriots within the industry.

Rewards and bonuses -- Rewards can range widely, including the likes of car allowance, paid days off, trips, Rep of the Year awards, Frequent Flyer points and ballots toward a car or a cruise. Incentives are directed at many different things, such as spiffs on equipment, slow-moving and new products; bonuses for hitting GP targets, profit contributions, gross sales and units sold. Specific targets within market segments are also quite common. One company even rewards its reps based on survey results from their customers. With any or all of these incentives, frequency and duration can be modified.

Penalties and detractors -- What if offering bonuses for performance isn't enough to earn good performance? It is quite common for dealers to switch preferred manufacturers, but the sales team doesn't always follow along willingly. After all, they know the old vendors' products far better. So how do you get reps to shift their attention? Several dealers employ what I call a detractor; they reduce or eliminate the commission on lines they no longer wish to pursue. If this doesn't work, more dire actions may be necessary.

No matter what you use to encourage your salespeople, keep asking yourself if the program is supporting your company's corporate goals. If it is, your reps and company will probably flourish. This is the ultimate win-win.

About the Author: Jeff Stevens is Executive Vice President for The Stevens Company Ltd., and has worked there for 15 years. He represents the fifth generation of Stevens to work for the company, which was founded in 1830. The Stevens Company has four warehouses across Canada, which service most segments of the health care industry.