During the go-go market of the late 90s and early 2000, the economy was robust, business was plentiful, many markets were growing rapidly, and salespeople had an easier time of finding enough customers to keep their companies profitable. As the economy shifted downward and markets leveled off, competition has become fierce, revenues and profits have declined, and many organizations have resorted to massive layoffs and other cost-cutting measures. The costs associated with the sales force and it compensation programs have also come under close scrutiny as companies strive to improve both their overall sales revenue, as well as their bottom line.

To illustrate these points, we report here on three brief case studies of companies that successfully adjusted their compensation programs to refocus the sales force on behaviors that supported the company's changing business goals in the tighter economy. We also include a fourth example, a company that failed to anticipate its changing circumstances and didn't make a change in time, and we offer some options it could have chosen to avoid the difficult situation that ensued.

Our first case relates to a successful, nation-wide service company with a sales force of approximately 3,500 inside and outside sales personnel, and revenues in excess of one billion dollars. Unfortunately, like most businesses in the industry, their sales were affected by the downturn in the economy. While the economy was at this stage, the company's volume of business forced them to absorb some of the undesirable aspects associated with the changing times; issues like high sales force turnover, early cancellations of service, and non-renewals of contracts were becoming more common to their operations. However, beginning in 2001, the economic realities that affected their business were extremely difficult to ignore, as the rate of new sales and renewals dropped off more quickly than anticipated. An additional and positive aspect to their business is tied to activity in the real estate market, which was somewhat bolstered by the upturn and continued strength of the housing market. Although the real estate industry brought a positive impact to revenues for the company, it was not, however, enough to offset the effect of the declining marketplace which brought a negative impact to their overall revenue and profitability.

The sales process of the company's products and services was not complex and therefore did not require a sophisticated or highly skilled sales force. Typically, the ideal characteristics of a sales employee included traits of perseverance and initiative, which are critical to the success of the sale. The typical learning curve for the company's sales team was four to eight weeks, and primarily focused on product training, also including aspects of salesmanship behavior and general administrative training. Because of the high turnover of both inside and outside sales personnel, which averaged 120% a year, a major focus of field and branch management was to recruit replacement sales personnel. Since no consistent company-wide standards existed, in many cases, individuals were hired without taking into consideration skills, capabilities, and experience. This negatively impacted both the selection process and the excessive time spent on training. Coupled with this lack of a definitive profile for recruiting a qualified sales force, the company had a compensation program that was based off of the already present, qualified, and accomplished sales personnel. Specifically, the compensation program provided pay in the form of a non-recoverable draw for the first three (3) months of employment. This time period was meant to carry the new sales employee during which time they would be exposed to training and development, familiarizing oneself with the company and all of its policies, and the development of a sufficient line of business to be able to stand-alone and become fully independent. After the initial three months, the sales force received a small recoverable draw, which in many cases was not sufficient to sustain a decent lifestyle. If their sales did not cover this draw, the excess, unrecovered draw amount was carried over and would have to be credited back before any commissions would be earned. This became a "financial Albatross around their necks", from which there was a high likeliness that they may never recover. As would be expected, as the outstanding draw began to grow, it ultimately hastened the exit of any individual who had doubts as to their eventual success as a sales employee for that company. Similar to many older pay plans, the commissions were calculated as a straight percentage of revenue associated with the sale, rather than the net income to the company. For example, if the "rate card" called for $1,500 for a specific service, and the commission rate was 15%, the sales person would earn $225; however, if the sale were discounted to $1,300, the commission would have dropped by $30, while the company lost $200 of revenue and $170 of net profit. This had a minimal effect on the sales force, but an increasingly greater impact on the company's bottom line. As the economy began to further decline and the impact on sales grew, the number of "below rate card" sales became more prevalent since the sales force encountered more resistance from its customers.

In addition to the issues of high-turnover, under qualified sales staff and declining sales, the company also had a problem with its tracking system, which was not compatible to the type of sales executed by the company. The company's tracking system made it extremely difficult to accurately record data on a timely basis. For example, the data needed to record and pay the field sales force required an excessive amount of manual work and auditing within the system itself. Due to this lag time between the sale and the time in which is was recorded, the commissions to the sales employee were typically not paid for six to eight weeks after the close of the month. The lack of timely reports to management pertaining to their sales force was a contributing factor in their inability to quickly identify those individuals needing special attention; specifically, those creating large unrecovered draws, while simultaneously losing profits for the company, and therefore should be under review and perhaps terminated.

Although the initial concern of the company was the amount of unrecovered draw that was being lost as sales personnel terminated, it quickly became apparent that this was only the tip of the iceberg. The lost draw advances were approximately $1.5 million, whereas the total cost of turnover including recruiting and training costs, lost opportunities resulting from non-sales, lost contracts and renewals, etc. amounted to hundreds of millions of dollars of lost revenue. After considerable analysis and research, the company decided to shift its sales force strategy, while at the same time undertaking a major overhaul of its administrative capabilities and procedures. The first phase of this multi-pronged approach was to improve the quality of the sales force, provide a more effective pay system, and raise their level of competence of the entire staff. The second phase of improving the effectiveness of the sales effort was to provide consistent administrative procedures and data tracking, which would result in improvement to the timing and accuracy of management information and the decision-making process.

In order to improve the recruitment process, the company decided that it needed a specific profile of the best type of sales employee based on past results. The company recognized the need to identify the personality traits they wanted in this type of role, and then upgrade the screening process to match the desired candidate qualifications. This allowed the company to select applicants that best met the correct sales profile and that were going to add value to the company.

After realizing the tremendous amount of lost dollars due to unrecoverable draw amounts and inappropriate commissions percentages, the company decided to re-evaluate the method in which base salary and commissions were to be paid to all levels of employees, with varying lengths of employment. They settled on a concept that allowed a set amount of base salary for each employee as well as a draw amount, depending on their length of service. For example, a new employee would have a higher amount of base salary and a lower draw amount considering their level of experience and exposure to the business. Throughout their first year of employment, their guaranteed base salary would slowly decrease in increments, and their draw amount, which needs to be earned through sales, would increase at the same rate. This concept assumed that more experience would be gained throughout the first year of employment and that there should be less of a cushion (i.e. base salary) to support them. After the first year, the draw amounts would be much higher, relating to higher levels of experience, while only having a small guaranteed base salary. Regarding commission percentages, the company realized that having a straight commission percentage on every product and service sold, disregarding the cost to company, was a major factor in lost profits and a flaw within the system. A matrix schedule was designed to correlate both the number of units sold per month and the price of each corresponding unit sold. Therefore, the price of the service is factored into the commission earned on that service as shown in the following matrix. In addition to this matrix, a target level was set for each level of sales employees, both in units and in price per unit sold. For example, sales employees with less experience had a monthly unit target that was lower than those employees with many years of service. Even though their target was lower, there was still potential to make the same commission percentage due to the fact that these percentages were also calculated on the price of the unit sold. The commission matrix was also based off the pre-determined "rate card" of the service sold. For example, if the rate card was $1,500, all targets and commissions would be based on that price per unit and the number of those units that were sold that month. An example of the commission matrix is as follows:

In addition, the company was able to reduce the unrecovered draw amounts that have caused a tremendous loss in profits in the past by slowly offsetting a new employee's compensation mix of base salary and draw amount. With these new advances in compensation and unit sales, they decided they needed to upgrade their old tracking system, which had proven to be inaccurate, to a more sophisticated system that allowed timely activity reports. Finally, with the upgraded screening process, the company was able to select more qualified candidates that better fit the desired sales profile that was already determined by the company as value-added sales employees.

This is a case where a change in a sales compensation plan did more harm than good. The company, located in the Northeast, provided moving services and warehouse self-storage space for household and commercial goods. As a result of the 2001-2002 economic recession, the same number of competitors was chasing far fewer customers; naturally, unit sales and revenues shrank. In an effort to motivate more aggressive sales efforts, the company supplemented its existing commission program for outside sales representatives with a bonus program that rewarded just about everyone else in its remote storage locations-the in-house customer service representative, the manager, and staff members-on the premise that the sale was a team effort. The concept was sound, but the execution led to serious problems.

The intent of the new plan was to provide the lion's share of the sales bonus to the individual who had actually initiated the sale, which required the ability to identify which individual had the initial customer contact. Customers, however, were not aware that they needed to inform the sales staff if they had prior contact with another company representative. Potential customers often called ahead to price the company's services before making a final decision, and the sales person who answered the call may have assigned them a file number at the time, but few customers used or even remembered the number when they called back or visited the location to purchase the service. The result was a scramble among the sales staff to sign up potential customers on first contact to assure "first credit"-an often-chaotic situation that led to poor customer service. Potential customers were bombarded by staff in the rush for initial contact but then quickly forgotten. Often more than one rep claimed having initiated the deal, and so bonuses were often split as a way of resolving the dispute, which did not satisfy anyone. Rather than generating a spirit of teamwork and increased sales, conflict among inside and outside sales representatives erupted and customer satisfaction plummeted, with a resulting decrease in new and repeat business-hardly the outcome anticipated when the new plan was put in place.

The current reward structure reinforced that "get them in the door" behavior, with less focus on actually closing the sale and no focus on after-sale customer service and satisfaction. But in a tight economy with fewer sales opportunities and a customer base that wanted more value for every dollar it spent, the company could ill afford to lose a potential or existing customer to a competitor able to provide better service at a competitive price. It was critical that the company protect its existing customer base along with its need to acquire new customers.

After evaluating the situation and gaining greater clarity about the behaviors that would best support its business goals, the company modified the sales compensation plan to reinforce customer satisfaction as well as the actual sale. Sales to repeat customers would be rewarded at an equal, sometimes higher percentage than sales to new customers. As a result of this change, sales representatives remained involved with customers after the initial sale to ensure their satisfaction and continued use of the facility. To simplify the program and make it easier to understand, the company streamlined the commission plan. The company, with the assistance of its company's IT manager, also evaluated and selected a software system designed specifically for the moving and storage industry to address its problem of tracking and recording sales. Not only did the software help solve the tracking and sales credit dilemma but it also improved operations with a reporting system that recorded results and linked them directly into an accounting system thereby allowing the employees to calculate their sales bonus compensation.

The current economy has actually been a boon for some companies. Our third case, a company that provides outsourcing services for noncore functions such as accounting, HR, and customer service, saw a jump in its business as companies hard hit by the recession laid off large numbers of support staff and then had to find other ways of getting these services provided to their organizations.

The company's most profitable contracts were renewals and new contracts more than five years in length because the initial set-up costs, e.g., for a new customer service call center, could be amortized over a longer time period and recouped through a larger revenue stream. The sales cycle for securing a contract was typically 12 to 18 months, and commissions were based on contract size defined in terms of revenues and length. The larger the contract, the larger the commission percentage, and thus the dollar value of commissions had the potential to escalate rapidly.

The program had worked for a while, but increased demand for the company's services, due in part to the economy and the company's growing reputation in the industry, began to produce larger and longer contracts-and significantly higher commissions for the sales account executives who weren't necessarily working any harder or smarter to bring in these bigger contracts. The company had never made provisions for windfalls in its plan design and was caught off-guard by the substantial size of a potential contract being secured by a top account executive. In a panic to avoid paying out a huge commission, it placed an arbitrary cap on future commissions a few months prior to her closing the deal. The account executive resigned in protest and sued for lost earnings in commissions.

A closer watch on the its markets and better analysis of its captured business might have revealed the upward trend in contract size/length and alerted the company to the vulnerability of the commission plan to windfalls. It then could have thoughtfully made better provisions for dealing with the problem should it ever arise.

Even in the best-designed plans, a cap on the maximum amount a sales person can earn in commissions often causes bitterness in the sales organization, which sees it as arbitrary way for employers to limit a salesperson's compensation even as value continues to accrue to the company from the salesperson's efforts. While many motivational experts agree that caps should be avoided, cost-containment pressures may require caps to be incorporated into some plans, at least for some period of time. There are a number of options far less objectionable than arbitrary caps that can be incorporated into a sales program, options less likely to produce resentment and potential lawsuits on the part of disgruntled sales employees. For example, a company can

Regardless of the option chosen, it is vital that the policy for handling commission or bonus payments for windfalls be defined and clearly communicated before a windfall ever happens. The policy should detail how the amount will be calculated and how it will be paid to current employees as well as those who may leave the organization after the sale but before they receive their commission/bonus.

Although most sales people are in their jobs because of the potential for high earnings, even money can't motivate people who feel they have enough of it. The company in question had sales representatives who averaged $75,000 a year in sales compensation although they had the potential to earn three times as much under the company's sales compensation plan. No amount of prodding was successful in getting the sales representatives to up their productivity to earn a higher cash incentive. They simply did not feel the urge to work harder and were satisfied with their current level of earnings. In the meantime, because of the economy, the company had an increasing need to goose up sales.

The company turned to nonmonetary incentives to find another motivational route that would tap into the unmet needs of its sales people in a better way than outright cash could. It instituted periodic sales contests that offered valuable prizes not commonly or easily available to the sales representatives. Some reps jumped at the chance to earn a digital camera. For those who already owned a digital camera, an alternative prize-the use of the company condo in the Caribbean- was just the ticket to get them on the phones and into the offices of potential customers. In addition, the company offered a series of new noncash rewards-in conjunction with the cash incentives already in place-for attainment of sales quotas. These rewards included such company perquisites as coveted parking or office spaces, a greater role and responsibilities, or public recognition. Many members of the sales force found these kinds of rewards worth working for because they satisfied their needs for status and recognition in a greater way than a few more commission dollars could not. For example, the top producer was given a gold Lexus, a far cheaper and much more important status symbol than the dollars which an increased commission would have cost.

As companies seek ways to manage through today's turbulent economy-and to position themselves advantageously for the time when the economy eventually rebounds-they may turn to their sales forces to drive performance under difficult circumstances. But a broad focus on increased revenues, which may have been enough to sustain good performance in the hey-days of the 1990s, may not be sufficient for the current economic realities. Instead, many companies need their sales forces to "sell smart" by focusing on selling profitable business to profitable customers.

While the economic slowdown did temporarily alter the landscape in which organizations compete for and reward talent, efforts to attract, retain, and motivate good sales people has only heightened. Turnover has slowed only for the most successful companies, as top salespeople now evaluate opportunities based on a company's chances of delivering on its performance expectations. Even for successful companies, the challenge to motivate employees is always present.

These conditions pose new challenges for sales compensation programs. Organizations that are evaluating their sales force compensation and management programs need to take increased care to ensure that their plans support overall business and marketing goals, which may have changed in response to the new economic and market realities. More than ever, compensation plans need to motivate in ways that will maximize the efforts of the sales force and maximize the returns to the company for those efforts. The most successful companies will be those who do not use turbulent economic conditions as an excuse for average performance, but rather as an opportunity to take bold action and strive for even higher performance.