(November 22, 2002)
How to create salary and incentive combinations in sales
Harry S. Dennis III
It’s almost that time of the year when a review of your sales compensation is in order. In short, do you have the right salary/incentive mix for the job?
Most experts on the subject would agree that determining the appropriate balance here is tricky, at best. But there are some solid pointers to get you heading down the right path. My thanks to TEC associate Jerome Colletti for some great thinking on this subject.
To begin with, the more central and significant the salesperson is in the buying process AND the shorter the time to close on a sale, the greater is the likelihood that the incentive part of the compensation arrangement will be high. So a 70/30 ratio says that the sales employee has an important impact on customer buying decisions, and a 90/10 ratio (10 being the incentive) indicates the impact is small. By the way, industry surveys indicate that an average salary/incentive ratio is 70/30.
There are seven company-related factors to consider:
1. Are the sales objectives (A) strictly volume oriented, or (B), do they combine volume with other related objectives such as gross margins?
2. Is supervision (A) limited and reactive, or (B), is it proactive and developmental?
3. Is the amount of company support such as engineering or customer service required to support sales (A) minimal or (B), great?
4. Are the product/service offerings (A) narrow, or (B), broad, such as true product/service families?
5. Are the primary product/service offerings (A) generic with no recognized brand identification, or (B), are they perceived as offerings derived from a unique specialty or which have strong brand recognition?
6. Is the value proposition associated with the product/service offerings (A) easy to communicate and low cost, or (B), highly reliant on the salesperson’s ability to communicate competitive value-added?
7. Is the basic sales process (A) one that requires justifying a cost-plus pricing formula, or (B), one that is based upon creative problem solving and solution concepts to complete the sales process?
If you leaned toward an "A" response to the seven company-related factors listed above, you are describing a selling situation that is probably short cycle, repetitive, with commodity products/services, and one in which the salesperson has a high degree of control over the sales process. This is a low salary/high incentive sales mix job.
If you lean toward a "B" response to those seven questions, you are describing, typically, long-term selling processes, intimate customer relationships, where a true "team" approach probably best describes the sales job. This is a high salary/low incentive sales mix job.
There are five sales position factors to consider:
1. Is the level of customer assignment (A) small, at the lower end of the market, or (B), does it involve dealing with large, more strategic accounts?
2. Is the amount of presales work involved (A) limited, or (B), demand significant customer involvement before, during and even post sale?
3. Is the amount of time from the first sales contact to sales close (A) short, or (B), long?
4. Is the primary source of influence over the purchase decision (A) the salesperson, or (B), the company’s internal sales support team?
5. Is the customer relationship (A) limited to the first sales contact, or (B), on-going and not restricted to a particular sales transaction?
Once again, "A" responses signify a low salary/high incentive sales mix job and "B" responses typify a high salary/low incentive sales mix job.
You can develop your own scoring system, as well as your own factor weighting system for each one of the 12 sales mix variables. It is very important to have your sales personnel involved in the scoring system so that the results are not construed as one-sided.
One of the toughest decisions a pay-at-risk selling system must address is the timely altering of the system to truly characterize the current selling environment. For example, a firm whose origins were with a simple and readily deliverable product or service may have begun with a high incentive low base sales job mix.
In time, as the offerings become more complex and interdependent and strategic in a long-term sense, the need to move toward a more balanced scheme presents itself. Our TEC members tell us it is better to anticipate and plan for a change in the sales compensation system, rather than make changes after the fact.
In these trying economic times, you want a sales compensation plan that is competitive and self-motivating. An internal audit of your program is the best way to find out where you stand. Until next month, good sales compensation planning AND execution!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.
Nov. 22, 2002 Small Business Times, Milwaukee
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