For all of the changes the business world has seen over all of the years that companies have done business with other companies, little has changed about how salespeople are compensated. Businesses typically follow one of four models: salary-only, base salary plus commission, commission-only and commission plus a draw on future sales.

Which system works best? That question ranks with “Ginger or Mary Ann?” as one of life’s unanswerable queries. Sometimes, there really is no wrong answer.

“People ask me all of the time what the best compensation plan is. I have to tell them I have no idea because I don’t know their customers, I don’t know their salespeople, and I don’t know their strategies or goals,” says Dave Kahle, a Michigan-based consultant and business-to-business sales coach (www.davekahle.com).

None of the compensation experts we talked with for this story said that one model works best in all situations. What they do agree on is that sales compensation has a critical impact on the success of any business. What’s more, a company’s compensation program should be fine-tuned regularly to suit any number of dynamics that change from year to year or even quicker.

Salary Structure and Newton’s Third Law 

How a company pays its sales force is a vital recruitment and retention tool, yet most businesses fall into one of two camps: they either haven’t assessed the effectiveness of their compensation structure in years, or they constantly change the pay plan because they still haven’t found what they’re looking for.

Consistency and clarity are among the most important traits in creating and communicating to a sales force how their pay program is structured. Constant tweakers are destined for disaster, says Paul Dorf, managing director at Compensation Resources Inc., a compensation and motivation consultant based in Upper Saddle River, N.J.

“If it doesn’t do what they want, the first thing some companies do is flush it down the toilet and put a new one up. They lose credibility with the sales force because of all the changes,” he says. The sales force pay plan is not an area in which to experiment, Dorf adds.

“Compensation is closely related to physics: One action causes a reaction. If you don’t know the right questions to ask, you sometimes get exactly what you asked for but what you didn’t really want.”

This is not to say that reviewing and revising sales force compensation programs is ill-advised.

To the contrary, increased competition, alternate forms of sales and distribution, ever-changing markets and the introduction of new product lines or different business objectives are all reasons to give your sales pay package a regular review.

“By looking at [the salary structure] top to bottom on an annual basis, you can make minor changes correctly rather than tweaks incorrectly,” says David J. Cichelli, senior vice president of The Alexander Group, a national sales effectiveness consulting firm, and the author of Compensating the Sales Force (McGraw-Hill, 2003).

Open the Lines of Communication As with any changes within a company, communication with those affected is essential to a smooth transition. Whenever possible, avoid altering pay opportunities and reinforce that fact with the sales team.

“If I give a sales rep the New Jersey territory and come back a year later and split New Jersey into major and small accounts, my rep is going to blow a head gasket,” says Cichelli. “I’ll do better if I say at the time I hire him, ‘Your target pay is $100,000, your upside opportunity is $225,000, and you’re focusing on all accounts in New Jersey. Next year, I may be splitting that territory into major, middle and small accounts, and I’ll talk to you then about your job opportunities, but your pay opportunities won’t change.’”

It’s not all about keeping the salespeople happy. Annual checkups will improve a compensation plan’s effectiveness and efficiency, says Kahle.

“If you’re like most companies, your sales force costs range around 25 to 35 percent of gross profit. Doesn’t it make sense to at least investigate the potential of changing the compensation plan to make that group more productive? A couple points’ worth of improvement in the sales force’s  productivity will drop directly to your bottom line.”
 

November/December 2005 Table of Contents