April 1988
Small Business News

Ask four different business owners how they pay their sales reps and you'll probably get four different answers. One might be straight commission (otherwise they loaf around), another might be salary (otherwise they only care about money, not service), or a mixture of both (because that's the way it's always been).

Every owner has his or her particular beliefs about the best way to get the most out of sales reps, and each has a mostly successful sales history to prove it. But who is right? What's the best way to compensate your salespeople?

"I think the most important thing to know is that there is no simple answer," says Paul Dorf, managing director of Compensation Resources, a Saddle River, N.J.-based firm that helps businesses tailor their compensation programs to meet their goals. "One of the major problems we have encountered is companies try to adopt something that worked somewhere else without understanding their own needs. You have to consider your business and marketing strategies."

For example, a service company identified long-term contracts as an important component in its continued success. With longer service contracts, reps don't have to visit old clients as much and can seek out new business instead. If reps had to go back, a lengthy renegotiation began in which cost concessions had to be given to remain competitive in the marketplace.

"When we examined their contracts, they had no business contracts for anything more than 24 months," says Dorf. "When we examined the issue, we found the vice president of sales didn't think the reps should get commission on the sale after 24 months. So they didn't have any business over 24 months. It was a self-defeating policy."

Examining goals

The first step in evaluating your sales compensation program is determining the main priorities in sales. There should be a minimum on which to concentrate, otherwise you try to do too much and nothing gets accomplished. A good number is between three and six priorities.

Look at the possible mixes of fixed and variable incomes. What direction do you want your company to take and what's the marketplace like? In car dealerships, for example, almost 99 percent pay their sales force on a draw against commission. If the salesperson doesn't start selling after a short time, they are let go. Saturn has taken the opposite approach. Saturn reps have no sales incentives and are paid a salary to focus them more on the service aspect. A sales rep thriving in the high-pressure sales of a regular dealership wouldn't be able to make it at a Saturn dealership.

"If you have sales reps all over the country selling to anybody they can, is that making sense?" says Dorf. "If you are paying a salesman a salary of $75,000 and they're stopping by at one business and selling $1,000 worth of product, then driving several hundred miles and selling $50,000 worth, maybe you need to restructure your plan. Have the salespeople concentrate on the $50,000 accounts and maybe use telemarketing to try to sell the smaller ones."

It's also imperative that any plan that measures performance and translates it into pay be structured so everyone understands it and the variables can actually be measured.

"There are often too many bells and whistles," says Dorf. "If you want to make sure they sell as much as they can, service the old contracts, introduce new products and control costs, you end up with a plan that is far too complex to administer and understand. The assumption on the salesperson's part will be you are out to rip him or her off and the plan becomes non-motivational."

Any base plan should cover the major objectives; secondary objectives can be emphasized through contests or awards outside the framework of the regular compensation plan. When they are no longer appropriate, the contests emphasizing the secondary objectives are eliminated. These secondary contests or awards cannot be in conflict with the primary ones, otherwise everyone will concentrate on the secondary items.

The base plan should be flexible; its objectives don't change, but the targets and award levels can.

Strategy and tactics

If you are paying a salesperson a salary, it usually works best to have that person sell a sufficient amount of products or services that the margin generated would cover the company's expenses for the employee before paying any bonuses or commission.

For example, if someone is hired at $50,000, plus benefit costs of $5,000 per year, that person has cost the company $55,000 and it hasn't made a penny back yet. If the product margin is 10 percent, then the rep has to sell $550,000 worth of merchandise for the company to break even. No bonuses or commission should be offered until that person has cleared that mark.

At the same time, the company needs to make it clear to reps what they need to do to generate that amount of sales.

Another important rule is to have one plan. Smaller firms often fall into the trap of negotiating a different deal with every salesperson they hire. There should be one sales compensation plan, not 10.

"Individually negotiated deals are ridiculous," says Dorf. "It overly complicates the programs. It results in sales programs not being very professional or well designed. The business owner does it out of emotion and it is not logical.

"The company needs to step back and ask themselves what they are trying to accomplish, and what's the best way to sell it. Is the best route using a sales force, telemarketing, mail pieces, advertising or combinations?"