The sales remuneration program is one of a company's most important tactical weapons for reinforcing business strategy and development. Yet, most sales pay programs are very ineffective because they are based on a historical environment and are not integrated into the company's overall goals and strategies. Unfortunately, remuneration programs are, in most cases, independent of the overall strategic goals of a company. A company's strategic goals cannot be achieved unless the remuneration program is designed to support the achievement of those goals.

A primarily commission-based incentive plan that is sales volume and gross profit based is not an effective plan for driving strategic and value-added behaviors. Commission plans evolved in an environment when "order taking" was the primary role of the sales person. Today, as businesses face maturing markets, new and nontraditional competitors, reduction in the number of suppliers with whom our customers will do business, pricing sensitivity and other challenges, there is a mandatory trend away from commission plans as companies require their sales people to focus on critical activities other than revenue and gross profit generation alone.

Specifically, the remuneration program must be reevaluated based on the identified needs to evolve the sales force to a Consultative/Sustaining Resource sales methodology, improve account penetration, increase market penetration and grow overall sales. Compare your situation with the following three observations our Consulting Group have made in various organizations:

1. Sales representative income is more dependent on the existing account base and "given" accounts versus effort and skill required.

   Today, rewards are incorrectly based primarily on total gross profit. This compensation methodology communicates that the same level of effort is required to attain the same gross profit volume in every territory. Factually, every territory has a varying degree of difficulty regarding its penetration. The level of historical account activity is different, competition varies, market segments vary, economic conditions are different and other factors come into play. When sales efforts are constant, those sales representatives in larger territories or in territories where your presence is stronger will always have higher sales volumes than those with "lesser" territories or market segments, and, in fact might be performing at a lower level. As a result, earnings today do not always correlate to performance. All management expertise today demands pay to be tied to specific performance.

   "When a sales representative leaves, the top rep always gets his accounts. These senior reps don't ever have to look for new business."
   Sales Representative

   "I kept the sales representative by giving him some of my accounts so he could earn some money nest year."
   District Manager

2. Current rewards incent short-term, smaller sales.

   The current compensation plan in most organizations motivates sales representatives to go after the "here and now sale" or to skim the market because they need earned commissions each and every month. This does not allow for the penetration of larger accounts which may take longer to develop, but have greater rewards in the end.

   This focus is evident in some organizations for example where the facts show that "50% of the field sales representative's time is spent on very small accounts."

3. The remuneration program does not allow for optimizing control of sales representative activities.

   It has been acknowledged that within most sales organizations, sales representatives have trended toward those accounts they feel comfortable with (i.e. specific market segments, geographic locations, size of accounts, existing accounts) often at the expense of the other market segments, geographic locations or specific key strategic accounts. History suggests this is not uncommon in organizations paying commissions primarily on gross profit volume. The sales representative trends toward what is comfortable and what he/she knows.

   Management objectives of account penetration, new market penetration, increased market share, improved margins and others are not the priority for the sales representative on a commission plan. Without a compensation structure to support these management objectives, managing a sales representative to achieve these goals is difficult at best.

   "If I see a big opportunity, I will give it to a sales representative, but there is no guarantee he/she will follow-up on it."
   Regional Manager

   "What's needed to make value-added selling happen ... we need to set goals and pay based on achievement. Now we are compensating for anything they bring in the door."
   Executive Manager

   "It is the market. I don't like selling on price, but I like to make money."
   Sales Representative

   Recommendations

   The Beveridge Consulting Group recommends a planned and evolutionary review and possibly restructuring of the sales remuneration program that is consistent with the territory and sales responsibility. The objective of the remuneration restructuring is to implement a plan that is better suited to meet the long-term goals and objectives of the company.

   Any remuneration program must be designed to accomplish the following:
   
   

   • Be competitive in the marketplace so as to attract and maintain top performing sales representatives,
   
   
   • Support the evolution to value-added selling,
   
   
   • Pay for performance which is in line with corporate objectives, and
   
   
   • Pay for the degree of difficulty in obtaining results.
   
   In discussing results oriented compensation plans, there are two key components which need consideration. While of course not all incompassing, these are:
   1. Base Salary
      
      A base salary between forty and sixty percent of the position's total potential will be paid to the salesperson. The base salary is designed to accomplish two critical objectives:
      
      
      • Provide the salesperson financial security: This does not mean the retirement type of security. However, a law of management suggests that "no one can work continually, productively and effectively in an environment of insecurity." A base salary will provide security in the form of predictable standard of living.
      • The base salary allows the company to make demands and to manage the activity of the sales representative.
      
      
      Base salary minimum and maximum salary ranges will be established for each of the three sales titles. The salary ranges might look something like the following (please understand the numbers are for illustration purposes only):
      
      
      
      
      
      
      
      Base salary increases should be merit and included in the overall sales compensation plan. The merit increase structure should be added to the sales force compensation based on your firm's overall merit increase policies.
   
   
   
   2. Quarterly Bonuses
      
      Commissions based on actual sales are strongly discouraged because the relationship between performance and sales/gross profit volume is not always strongly correlated, especially in an environment in which sales channels (i.e. Key Accounts versus Territory Accounts) have varying degrees of potential. Regardless, some monetary instrument is necessary to incent the sales representative to perform beyond the minimum standards of the job.
      
      The recommended monetary instrument is a quarterly bonus. A bonus is a predefined financial incentive paid for accomplishing specific results. The performance criteria can vary (and probably will!) within each sales title, geographic location and the specific sales representative's area of responsibility. Executive management can now place priorities on products, markets, skill development and targeted programs. Three components of the quarterly bonus system are:
      
      
      1. Available bonus should be equal to forty to sixty percent of the position's available potential.
      
      
      
      2. Bonus will be paid on multiple and targeted performance criteria. For example:
      
      
      

      Percent of Available Bonus	Performance Criteria
      30 Percent	Gross Profit Attainment
      20 Percent	Base Account Growth
      20 Percent	Market Segment Attainment
      20 Percent	Product Mix Goal
      10 Percent	Selling Skill Goal Attainment

      
      
      
   This information is provided to generate thought relative to a more targeted and focused compensation plan for your sales organization. The Beveridge Consulting Group (www.beveridgeinc.com) has a history of developing practical and proven solutions to compensation and other issues surrounding sales organizations.
   
   To explore the possibility of Dirk Beveridge speaking on these issues at your next business meeting visit the Book Dirk section of our web site. It is guaranteed, he will make a real difference at your meeting.
   
   Visit the BOSS section of our web site for further insight into the needed positioning of your sales team and entire organization. Our presentation topics also offer some solid and proven ideas as to how best to make your company aware of the needed sales, management, and marketing expertise.
   
   The Beveridge Institute of Sales and Sales Management provides university level coaching proven to improve the performance and productivity of field sales representatives and sales managers.
   
   This article is provided by The Beveridge Consulting Group

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