|
CompensationMaster Newsletter Article, February 2003 When you first start a business, it's easy to turn on a dime
when you perceive an unmet need in the market or encounter a new competitive
threat. But as the business grows, it becomes increasingly difficult to respond
as quickly.
How can you make an established firm nimble again?
Use a Contribution-based Approach
The first step is to design compensation structures that get everyone pulling
in the same direction.
Normally, when you design sales force compensation plans, your
goal is to maximize revenue. But as a manager or owner, that's not all that
concerns you. You want expenses kept as low as possible, so profit can increase
too. Right?
A contribution-based approach allows you motivate sales
associates to increase revenue, reduce expenses, and increase profit—all at
the same time. With a contribution-based approach, sales associates are
responsible for contributing their fair share towards corporate expenses and
profit. Once that contribution has been made, they are able to keep most of the
rest of the revenue they bring in. (For a more detailed explanation of this
approach, visit www.CompensationMaster.com/contrib.html.)
Sales associates are motivated to increase revenue; as they
sell more, they make more. But with this system they can also increase their
income by reducing expenses. When expenses drop, the amount they have to
contribute decreases, so they keep more of the money they bring into the
company.
You would naturally expect profit to increase when revenue
improves and expenses are reduced, but a contribution-based approach provides a
higher level of control—you define the percentage of profit you want to
achieve. That amount is then built into the plan design. The result is a system
that provides automatic incentives for sales associates to increase revenue,
reduce expenses, and increase profit.
Meet the Needs of the Sales Force
Now that you've aligned the goals of the sales force with yours, the next step
is to reduce unnecessary expense so you can run a more efficient operation.
If you're in a service business, your biggest expenses are
related to your staff—salaries, commissions, and benefits. You can mandate
across-the-board expense reductions, but the way to really save money is to
find out what your sales associates don't value and stop spending money on
those items. Normally, you can't simply ask what sales associates want; they
want it all.
However, with a contribution-based approach, your sales
associates learn that benefits, perquisites and support services come out of
their pocket—not yours. We recommend that our clients design several
compensation plans that offer different combinations of benefits and support
services. Let the sales associates choose the plan they prefer. If no one
chooses the plan with the most expensive health and life insurance, and many
choose the plan with additional administrative support, you know where to spend
your money.
We've had clients save hundreds of thousands of dollars, simply
by adjusting their benefits packages to line up more effectively with what the
sales force wanted.
By using a contribution-based system, you take a holistic
approach to designing compensation. You can factor in the company's level of
expense, the competitive situation, the desired level of profitability, and the
needs of the sales force. The result is a more efficient operation that
responds to the needs of the marketplace quickly—and stays nimble over time.
Back
to Newsletter Archive
|
