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CompensationMaster Newsletter Article, December 2002 Normally we talk about sales force compensation; let's take a
step up from that this month and address compensation of sales force managers.
Managers should be compensated, at least in part, for their
performance—for the degree to which their decisions influence the company and
contribute to its success. However, sales force managers have a wide range of
duties; some sell, some don't; some own part of the business, while others are
employees. Designing incentives that balance all these factors can be a
challenge.
The following tips can help you design compensation packages
that will motivate your sales force managers most effectively.
Base Salary
Start with a base salary that reflects the marketplace value of the manager's
administrative duties. For example, if those duties are expected to take up to
60% of the manager's time, the base should be approximately 60% of what a
full-time administrative manager in the open market would receive.
Overrides
Overrides can be calculated in many ways: on gross revenue, net operating
income, earnings of the sales representatives, or profit before interest and
taxes (EBIT).
Consider carefully which measure you use. When an override is
calculated as a percent of gross revenue, the impact of poor sales is not felt
as dramatically as it would be if the override were on net operating income.
Paying on the net operating income also encourages recruitment,
and rewards the manager who devotes time to getting sales representatives to
the breakeven point. It provides a disincentive to managers who readily give
exceptions or cut deals to recruit new reps—the manager's own income is
affected proportionally.
Task Completion Incentives
Many companies are instituting financial rewards for successfully recruiting
new associates, offering training or coaching, or increasing the percentage of
productive sales representatives.
Recruiting. If you
pay a flat amount as a reward for recruiting, consider a sliding rate relative
to the value of the new recruit. Make the payment in stages, as the associate
makes sales, to help guard against a body shop operation. Even better, pay when
the associate reaches breakeven, as this ensures that the bonus comes from
profit built into the breakeven point.
Training. Offering
an incentive for training or coaching helps ensure continuous improvements in
production. Try paying a flat fee for the amount of time invested or giving a
bonus based on the number of associates who complete training programs.
Productivity.
Incorporating an incentive for increasing the number or percentage of active
representatives encourages motivation of all reps, and helps prevent
preferential treatment of high producers.
Bonuses
Offering rewards for reaching targeted production levels can be highly
motivational. Bonuses might be given for reaching a certain level of revenue or
profit each month, or for bringing down the company's expenses.
Profit Sharing
You may want to pay a top manager a set percentage of any profits retained by
the company over a specified period of time. For this to work, your company
should have well-controlled expenses and a generally stable economic situation.
The manager should have access to all of the company's financial information,
and feel that he or she has enough influence in the company's day-to-day
operations to control the factors that affect profitability.
One risk is that relations between the manager and senior
management may become strained if the top executives want to make investments
that will grow the business at the expense of short-term profitability. For
this reason, profit sharing is best used as a component of a compensation plan
rather than as the whole means of compensation.
Offering a Choice
One of the most important factors in manager compensation is the competitive
situation in the market. Where lots of good managers are available, companies
do not have to pay as much. However, where talent is scarce, more aggressive
plans are essential.
One innovative approach is to offer managers a choice of
compensation plans. In the same way that you allow your sales associates to
choose the plan that best motivates them, you can allow managers to choose the
compensation structure that best meets their needs.
Whatever form of compensation you choose, it is important that
managers clearly understand how the commission or bonus will be calculated, and
feel that they have control over the factors that will affect those numbers.
Without that understanding and that power, they won't be motivated effectively.
Compensation plans should not only be attractive to the
manager, but should also be tailored to the needs of the company, providing
incentive in those areas most needing improvement. When compensation is
carefully thought out, managers can be motivated to lead the company in
directions well above and beyond the daily operations of the business.
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