Paul Dorf is the Managing Director of Compensation Resources Inc., an Upper Saddle River, N.J., company that provides compensation and human resource consulting services, including executive compensation, sales compensation, salary administration, performance management and litigation support.

We spoke with him by telephone in early October for our November/December cover story on sales compensation programs.

SFXP: Can you walk us through the evolution of sales compensation programs?

P.D.: There are four basic ways that a salesperson can get paid and it hasn’t changed a lot: Salary-only, salary with commission, commission-only and commission plus a draw on future sales. In most cases, we like to see some kind of base compensation with incentives above that. The greater the degree of incentive they have as a proportion of total pay, the less control you have over that person. You can’t put a lot of artificial controls on a person that interferes with them making sales.

It should also be stressed that a bonus and commission are different. Commission is giving X amount for every dollar a salesperson brings in; a bonus is, “I’ll give you something for hitting certain thresholds.”

SFXP: Are companies getting it right in terms of how they compensate their sales force?

P.D.: Sales compensation does not receive the level of respect within an organization that it should. If you recognize that it is the one thing that drives the organization – you can’t do anything unless you can get somebody to pay for it – then sales and its cousin, marketing, are very important, and yet it doesn’t always get top-level consciousness on the part of management.

SFXP: What mistakes do you see repeatedly in conjunction with creating a sales compensation plan?

P.D.: There are tremendous fiefdoms created. The sales and marketing head doesn’t want to get HR involved if they can help it; They don’t want to get finance involved; They may or may not get IT involved. What ends up happening is you don’t have all of the resources brought to bear, and you end up having an individual who more than likely was a salesperson at one time putting a program in that may or may not have all of the aspects of a good program.

At the same time, we see a lot of pay plan’s that are too complex. There is a tendency for everybody to want to put their two bits in, so they have a plan that is so complex nobody can administer it. If you can’t administer it, you can’t communicate it to the individuals. It’s like the old adage that a race horse designed by a committee looks like a camel. I don’t have a problem with the committee, but there has to be a final determinate of what it’s going to be. Somebody has to be in charge of this thing! Everybody has things they think are important, but you have to design it in such a way that it’s not so confusing that you can’t explain it to people.

SFXP: Does that in turn lead to frequent changes to pay plans?

P.D.: If it doesn’t do what they want, the first thing a company does is flush it down the toilet and put a new one up. They throw the baby out with the bathwater. They lose credibility with the sales force because of all these changes. Salespeople are probably some of the most cynical people in the world because they are so used to people saying “No” and then they have to convert that no into a yes or at least a maybe.

They should be asking themselves, “Why are we changing the sales plan?” When they tell the sales force that it’s not doing what it’s supposed to do, the salesperson says, “Sure, what it’s not doing is putting enough money in the company’s pocket!”

SFXP: When should a company change its sales compensation plan?

P.D.: A plan should work until it no longer works. I don’t mean that to sound flip, but as long as a plan has the flexibility to be tweaked – not arbitrarily tweaked – then that’s great. It only needs to be changed if it is not producing at the level you expect it to. It also should change if the product line, the focus of the company, or the marketplace inherently changes.

If you can’t say what your marketing strategy is, then how can you say what you’re going to reward salespeople for? If you can’t define it, then the salesperson won’t be able to either. I met with a client once who had recently changed its compensation plan and I kept asking, “Is it based on revenue? Is it based on profitability and margin? Is it based on the development of new customers or maintaining existing customers? Is it trying to get new products out there? What are you trying to accomplish?” The president’s answer was, “All of the above.” But he couldn’t prioritize that list. Without having a marketing plan in place, there is no way you can put a compensation program together.

On the other hand I had a client that had not changed the plan for 25 years and they were proud of that. But it was a crappy plan! He was trying very hard not to change the plan even though the reality was it was not accomplishing what he wanted it to.

SFXP: What’s your formula for salary-plus-commission?

P.D.: In most situations, we will not pay a commission from the first dollar. If you determine what that person costs you in base salary and benefits, we look to get to a point that a company begins paying commission after they have already started paying you back. For instance, if I determine that a salesperson is costing $60,000 [in base salary, benefits and T&E] and the average product margin is 10%, I know that they have to sell $1 million in order to cover their cost, so that’s where I start setting incentives. This way, you can give them a bigger share of money from that point on. As a concept, the controller sleeps at night, the CFO sleeps at night, and the salesperson doesn’t feel like it’s rape and pillage. They may not love it, but it’s something they agree with because they understand where management is coming from. It’s not arbitrary numbers that supposedly are scientific but in reality are not.

SFXP: Are there compensation strategies that can alter the 80-20 rule by pushing the 80% that don’t always push themselves?

P.D.: The answer is yes. The first thing we want to do is determine how the client is measuring the success of each salesperson? Salary surveys tell you by type of industry how much certain positions make, what the mix is between base and total salary, and those sorts of things. But they don’t tell you what a salesperson should bring into the organization. It’s a deficiency in most sales compensation surveys. As a result, a company could be paying its salespeople the right amount, but their expectation of what each salesperson brings in isn’t enough. Their cost of sales is too high.

SFXP: What other mistakes do you see companies make?

P.D.: Too often, the corporate strategy is in conflict with compensation program. We were called into a large company that provides computer services to other businesses. Anyone in the business of selling service contracts will tell you that you always want those contracts to be as long as possible. You don’t want to spend time renegotiating, you don’t want to open yourself up for competition to sneak in, and every time you renegotiate you leave yourself susceptible to making concessions to get that contract. This company wanted long-term contracts, but they didn’t have one over 24 months because their compensation program, which was put in place by the vice president of sales and marketing, stipulated that salespeople would only be paid for the first two years of a contract. The salespeople learned very quickly not to pursue something they weren’t getting paid for, so they wanted to renegotiate a new contract every two years.

I also have had clients who try to be too egalitarian and pay everyone the same amount. The worst thing you can do is something harmful to your top performers. You should give all salespeople the same general program, but treat them differently according to their contribution. You may give top performers more salary or larger commission opportunities.

SFXP: What is your opinion of a salary-only sales compensation structure?

P.D.: When you pay a salesperson all salary, that person gets paid whether they’re doing a good job or not. The only determinate of them not keeping the job is the tolerance level of the company for somebody who doesn’t perform well. Good salespeople, by nature, have certain skill sets, ideology and desires that are different than most people. They have a certain level of self-confidence, and in many cases they are willing to take a certain amount of risk.

SFXP: How do you feel about measuring and paying salespeople for results other than actual sales?

P.D.: We were called by a large Chemical company in Canada that compensated its people based on the sales process – how many calls they made, presentation given, letters written… It evolved over time that a sales call included making a telephone call or just driving by and waving at the client’s building. We recommended paying people for results, but the owners of the company don’t want to give them any kind of targets to shoot for because they fear it will have a detrimental effect on the relationships they’re salespeople are building with customers. I’m a firm believer that you pay for results, you don’t pay for the process.

SFXP: Any final thoughts?

P.D.: Don’t make it so complex. One of my crowning achievements was putting a sales compensation program together between 1976 and 1978 for Northern Telecom, which is now Nortel. It was a flexible plan that had a tremendous amount of ability to change over time without major upsets to the apple cart. The company has totally changed its marketing strategy and product mix, but they have been able to maintain the skeleton of the program that we put in place and just add parts as needed. That’s important because with pay plans, everything you do has a ramification. Compensation is very closely related to physics: One action always causes a reaction. If you don’t know the right questions, or if you have too much leeway, you will sometimes get exactly what you asked for but that which you did not really want.

November/December 2005 Table of Contents