One Size Doesn't Fit All – In Sales Force Compensation

As appeared in the April 2001 issue of SLC Insider.

By David J. Cocks

"You can have any color you want, as long as it's black."

We chuckle at Henry Ford's famous quote now, but a hundred years ago, people did have far fewer options than we have today. Think about all the choices that were available the last time you bought a car: color, of course, CD players, tilting and rotating seats, dual climate control, and so much more.

People love to have the power to select the options that are right for them, and fit their lifestyle.

Today, businesses have learned the power of offering a choice – not just to consumers, but also to employees. Most companies offer a variety of health plans; many let you set your own schedule; an increasing number let you choose to work from home part of the time.

One new area choice is starting to touch is sales force compensation. In the past, most companies offered one sales force compensation plan – if you wanted a choice, you were free to choose to work for another company.

However, more businesses are discovering that it makes sense to offer employees the ability to choose their own compensation plan. Experienced representatives who are confident in their own abilities appreciate the option of maximizing income with a 100% commission plan. Representatives who are new to the company or who have high fixed expenses, such as children in college, often prefer to trade some of their commission potential for a higher level of guaranteed income.

Companies that have started offering a variety of compensation plans are finding that it brings powerful benefits:

• Improved motivation – when sales associates choose the compensation structure they find most appealing, it motivates them more effectively and more permanently than any kind of temporary incentive plan.
• Easier recruiting – offering a choice of compensation plans is a very attractive benefit for potential recruits.
• Expanded labor force – there are many people for whom the typical style of sales compensation is not appropriate, yet who would make excellent sales representatives. By offering different plans, you expand your potential pool of recruits.
• Competitive advantage – combining the recruiting and motivation benefits results in a powerful competitive advantage.

Although the logistics of offering a variety of plans might seem intimidating, it's actually much simpler than might be expected. Many companies handle compensation the same way they do health insurance: once a year, employees choose their plan for the following year. Typically, either there is an open season or employees make their choice on the anniversary of the first day they started with the company.

Advanced software provides assistance designing the compensation plans, and simplifies ongoing management. In fact, some of the new compensation software allows companies to safely design very aggressive compensation structures.

The traditional approach to sales force compensation is to give the salesperson a flat amount (salary), plus a percentage of each sale; the company keeps the rest. With the right software, it is possible to turn this concept on its head: the company keeps a flat amount (enough to cover the representative's share of fixed expenses) plus a percentage of each sale (for variable expenses – those associated with delivering the product or service – as well as the desired level of profit); the salesperson keeps the rest. [An in-depth explanation of this approach is available in an article published earlier on www.saleslobby.com, "Profiting from a New Sales Force Compensation Strategy".]

One way to implement this approach is to have the representative's commission level start out at one level. The company holds back money to pay both fixed and variable expenses. Once the company has taken out enough money to cover the representative's share of fixed expenses, that contribution stops. The money that was going to the company to pay fixed expenses now comes directly to the sales representative. The sales representative will now receive a substantially higher commission for the rest of the year.

With this approach, there is no quota; neither are there any disincentives to production at any level. The effect is to maximize income to the sales representative – yet it is done within the constraints of making sure that corporate expenses are paid and a reasonable profit is assured.

Using the same basic strategy, a number of innovative variations are possible:

• No commission (or a very low commission) on sales at the beginning of each year, then a high commission on the rest. This lets representatives pay their contribution to fixed expenses quickly and then move up to the higher commission level faster. This benefits the company as well, since the firm receives its money up front.
• Flat monthly payments. A sales representative's contribution to fixed expenses can be divided up into twelve equal parts, with the representative paying that amount to the company each month. This allows the representative to receive a higher commission year round.

It is also possible to structure plans so the company recovers the cost of maintaining each representative. For example, an experienced sales associate who does not want a draw, is on the road most of the time and so works out of a home office, and requires little in the way of support services costs the company much less than a newer associate who does need a draw, plus extensive training and other support. On the other hand, a top producer who wants a big office, an expensive company car, and requires a great deal of administrative support, may be very expensive to support. The point is that compensation plans can be customized so that sales representatives receive – and pay for – the support and services they need, without having to pay for things they don't want.

The exact structure and variety of compensation plans depends on the industry, the length and complexity of the sales cycle, and a number of other factors. However, the bottom line is that when sales associates are able to choose the type of compensation plan that best fits their needs, their tolerance for risk, and their lifestyle, they are motivated far more effectively than with any standard one-size-fits-all type of sales force compensation. The result is a happier and more productive sales force.