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Cash for Clunkers..and other Bonus Schemes - Aug 19, 2009

Posted by: David Kirkup in Articles

In ancient Soviet Russia bonus schemes were quite transparent. “You pretend to pay us, and we pretend to work for you.” By the time of the Great Recession bonus schemes had evolved tremendously. In pre-melt down Wall St (well...also in post melt-down Wall Street, actually) the banker’s bonus slice was carefully cut from the pie according to precise and complex motivational formula agreed to by all parties (well…just the bankers). Then, the bankers take the cake…literally, and leave the slice for everyone else to fight over. Neither of these approaches seems to be much help to the entrepreneur who wants to motivate a sales force.

Key factors in growing sales are to attract profitable deals, to preserve customer service, and to build employee team work. A badly designed sales compensation plan can lead to disaster, with sales staff bringing on the wrong deals, placing unrealistic demands on operations, engineering or support staff, and creating the potential for disappointed and angry customers. Unless you're very careful about how you use them, they almost always have the effect of undermining any sense of unity and common purpose in a business.

Salespeople are a company's ambassadors to the world. They actively promote the company and its products and services. These employees have a direct impact on how the marketplace perceives their employer and its products. The way salespeople conduct themselves is often a reflection of the company's sales compensation program; and how well the company does can also be dependent on the effectiveness of its commission program. A well designed sales compensation program focuses salespeople on activities that support the company's business objectives, and, in turn, rewards those salespeople for their contributions.

1. Base salary, commissions, and sales prizes make up the bulk of a typical salesperson's compensation package, but the specifics vary by industry. Stock options grants to salespeople are becoming more widespread too. Sales commission can be determined in several ways:

· Simple: a straight percentage of the value of the product/service sold. Example: $100 (Total value) * 5%(commission Rate) = $5.00(commission)

· Accumulative: an increasing percentage of the value of the product/service sold. Two main versions:

o Plateau: Example: first 10 items at 5% commission, next 15 items at 7.5% commission, all susequent items at 10% commission.

o Ramped: Example: if sales in period total less than $100K then 5% commission; if $110K to $500K then 7.5% commission; if more than $500K then 10% commission on total value.

o Pyramid: used for sales managers who also get a commission for each salesperson’s sales.

2. A contract should specify conditions: percentages, specified hold back period to allow for returns, whether commission is on booked sales or collected sales. Confusion about terms will kill a sales commission relationship faster than anything except non-payment.

3. Generally commission on profits is preferred by the company to encourage the right type of sales i.e. profitable ones, but can be very difficult and messy if your accounting cannot support job or product based profitability analysis. You may also have to deal with allocations of general operating overhead which can lead to arguments about “Hollywood Accounting” and can demoralize the sales force. Generally, payment on gross paid sales with periodic reviews of job or product profitability may be a better approach.

4. Salary vs Comission: This can vary widely, but generally you will have less loyalty and more risk of losing customers to a commission only sales person. This type of sales person will inevitably see their rewards coming from the customer, not the company. According to Salary.com: “Commissions usually account for 30 to 50 percent of a salesperson's cash compensation package, which means that commissions routinely run between 43 and 100 percent of base pay. The percentage that commissions contribute to a salesperson's compensation depends on factors such as required technical knowledge, sales cycle time, product profitability, and whether the sale is dependent on the skill of the salesperson.”

5. Driving Growth: Commissions can vary within a commission plan, reflecting the priorities of the company. If the company wants to grow market share, it may pay larger commissions for selling products to new clients. Commissions are also higher when new products are launched, especially if they are more profitable. Commisiion plan design is critical. A poorly designed plan can have unintended results such as rewarding employees for the sale of new products that cannibalize more profitable ones.

For a great deal on driving growth profitably, call David Kirkup, Partner at B2B CFO, on 404 348 0326 or dkirkup@b2bcfo.com. Further Government subsidies are pending...