It’s that time of year. Many senior sales execs are starting their planning for next fiscal year. Inevitably, the commission plan becomes part of the discussion.
“Dave, if only we get the right commission plan, we will fix all our performance problems! Can you help?”
Of course I can help, but I always ask, “What makes you think it’s the compensation plan that’s standing in the way of sales performance?”
The answers are pretty predictable, vague ideas about sales people being money driven, so all we have to do is show them the path to making more money, then they will sell more. I end up asking a lot more questions, they lead into weird conversations, here are some I’ve had in just the past few weeks:
Me: “Let me ask a few questions, how effective are they now? What’s they’re win rate, what’s the average deal size, what’s……”
Sales Exec: “Their win rates and average deal sizes are way too low and their deal sizes are too small, we need to improve both?”
Me: “How will fixing the commission plan improve those? Are they not winning as much business as possible because they are making too much money already? Alternatively, will giving them a better commission plan cause them to win more business?”
Me: “What percent of your people made/exceeded their plan and OTE this year?”
Sales Exec: “Only a small percentage of them made it this year, it’s been like that for several years.”
Me: “What percent of your people have left as a result of that?”
Sales Exec: “None, they’ve been here for a long time.”
Me: “So they aren’t making their OTE or plan, but they are happy with whatever they are earning. Am I missing something?”
Sales Exec: “I need to change what our sales people are doing and where they focus. We need to change the comp plan to do this?”
Me: “I can see that may be something that you may do, but have you considered all the other things you can do to refocus them and drive their performance. You might be able to do this more easily, without changing how you pay them or how much you pay them.”
Sales Exec: “We need our people to defend price and drive for price increases in renewals. We need to have a bonus element for that in our comp plan?”
Me: “Why don’t you just not allow them to propose anything but the prices you want? Why don’t you focus on developing their capabilities to defend whatever pricing you have? Also, pricing really isn’t in their control, you control it, they just have to sell it. So why are you paying for something they have no influence over?”
Sales Exec: “But how do I get them to sell that price?”
Me: “If that’s the only price they can propose, then they can’t sell at any other price. If they can’t defend the pricing, that’s a different issue, but that won’t be solved in your comp plan.”
Conversation 5: (I couldn’t believe this one)
Sales Exec: “We need our people to keep CRM and other reporting updated. I want to put a small bonus in place to encourage them to do this.”
I could go on, but I’ll stop here. These are real stories of conversations over the past few weeks.
Let me be clear is important (I’m not sure commission is). It has to be competitive, it has to reinforce the behaviors and priorities you expect from the organization. But compensation is not the “fix” for the majority of sales performance problems. Changing how we pay or how much a sales person can earn will probably impact only the smallest part of your organization (and they are likely to be the high performers).
Unfortunately, too many sales executives believe sales people are coin operated and driven purely by comp/commission.
There are too many things that impact sales performance. There are too many other “levers” management can use to drive sales performance. The comp plan is, generally, the last lever you focus on, if you want to drive performance.
- In the first case, sales performance was suffering because the people didn’t know how to compete and win. Changing the comp plan won’t improve their ability to sell.
- In the second case, people weren’t unhappy with what they were earning. Sure they may have wanted to earn more (who doesn’t), but they weren’t unhappy with what they were earning. It may be surprising, but despite all the words they feel obligated to say, too many people get comfortable with a certain earning level, even though they know they can earn more. They settle for what they get, they are unwilling or unable to change to earn more. Changing the comp plan won’t change that. In fact, done wrong, we may end up paying them more, but they actually don’t do more or change their performance.
- The third case is interesting. People will sell what and where they are most successful. Sometimes, that may not be aligned with shifting company strategies and priorities. If they can continue to be successful doing what they have always done, they probably won’t change. Shifts in the comp plan are helpful, but may not drive the behaviors the company wants and needs. Let’s imagine you are introducing a new product. You want to motivate a person to sell it, so the commission rate for every dollar of revenue is 50% higher than the commission rate for the products you currently sell. The thinking is, “they will sell more of the new product because they earn more.” But, it’s probably much more difficult, since it’s new, sales people may not feel comfortable, or it may take much longer. The risk to success is much higher. Let’s use an example. Say the products I currently sell are $100K. The new products are also $100K. One might think, everyone would shift to the new product because they earn 50% more for the same revenue. But if it takes me twice as long to sell that product, I won’t do it. I could sell two of the first in the same amount of time, making much more commission. Using commission, alone, people will do the mental calculation, “where am I most likely to be successful, maximizing my earning potential in the same period of time?” To drive these shifts, you have to look at other levers that will shift the focus, getting people to execute what you need them to execute.
- The fourth example is one I get quite a bit. I recently talked to a VP of sales that wanted to pay a larger commission for people that negotiated price increases. I challenged the manager, “Is the price increase optional? Does the sales person get to choose what price they want to sell the product for?” Lots of times we try to incent sales people to do things that really aren’t in their control. Pricing is one of the biggest areas where I see people putting compensation incentives, yet sales people don’t or shouldn’t control pricing. If people are struggling with this, incentives make no sense, but equipping them to defend value and pricing is important.
- The last case is unbelievable, but I can’t tell you how many times I see managers trying to incent behaviors around CRM, forecasting, or other non sales related tasks. This is craziness. There are certain expectations we should have of people in the job. If CRM updates are an expectation then make sure they know. Don’t pay them an incentive to to what they are expected to do in the job.
- As I mentioned, there are lots of other levers managers should focus on, before looking at the comp plan.
- First, we have to equip our people to do the things we expect them to do. Training, systems, tools, programs, processes and coaching are all things we can put in place enabling them to do and perform as we expect. If they aren’t equipped to perform as we expect them to perform, how we pay them or how much we pay them will have no impact.
- We have performance plans and expectations we put in place. As part of their jobs, we have certain performance expectations. For example, we expect them to do certain things as part of their jobs, we have expectations about how they treat and engage their customers, we have expectations about balanced performance in executing the company strategies. We can manage all these things through setting very clear performance expectations and making sure they own the accountability for those expectations.
Unfortunately, too many managers believe the compensation system is the primary tool they have to drive behaviors. They put everything they want people to do as an element of the comp plan. Inevitably, it gets too complex, people can’t figure out how they will be paid, and we end up paying for things we should be using incentive comp for. Frankly, I think managers who feel they manage their sales people primarily through the comp plan are lazy and don’t understand their job or people.
Managers need to leverage everything they can to drive performance. The comp plan is just one.
Having gone through this discussion, there is one comp plan issue managers often bring up, that just causes me to walk away:
Manager: “We have to put ‘caps’ on total earnings, I can’t have my people making more than me.”
Me: (Thinking this, I can’t verbalize it) This person is clueless!