Awake at 2 o'clock?

With so many of our clients trying to boost sales in a tough environment, we’ve been having lots of discussions about sales incentives. It’s surprising to me how many business owners create incentives that don’t fit their business, simply because a concept like “straight commission” or “straight salary” appeals to them.

I’ve worked on sales incentives for years, and find that if they don’t fit your business they are inevitably doomed to failure. By “fitting” the business I mean that the rhythm of the sales process and the timing of the incentive must match. Salespeople need to eat regularly, just like the rest of us. Letting them eat too regularly, however, isn’t the number one priority of a compensation plan.

Let’s take an extreme example. You are a salesman for Boeing. You spend many years cultivating, just for fun say, the national airline of Tonga. They aren’t big, but they are clearly committed to buying their first giant new airplane to bolster national pride.

You wine and dine them at the Paris air show, bring them to Seattle for a plant tour, and eventually land the sale. The order winds through Boeing’s process of suppliers, manufacture, testing and delivery. Finally, the customer pays for the plane, about 7 years after your first trip to Tonga for a cold call. Since you are on straight commission in a “pay when paid” system, you have gone 7 years without any income at all, and now receive a commission check for $13,248,911.

Ridiculous? Of course. But it is no more ridiculous than this scenario. A beauty supplies distributor has salesmen with distinct territories. They are not exactly route men (like a Snap-on tools guy) because they don’t carry inventory. Otherwise their job is the same. Call on every customer once a week or so. Determine what the hair stylists have consumed. Write an order to replace the inventory. Make sure your product is being displayed well. Watch for any competitor making inroads.

This distributor is paying his salespeople a salary, with a small commission at the end of the quarter based upon their performance against goal. “Why?” I asked. “Because there are a lot of weeks where they don’t sell enough to make a living.” he replied.

This is just as silly as my Boeing fairy tale. These people are being paid to make sales; all day every day. They are expected to sell something on virtually every call, perhaps up to a dozen times a day. Why would you pay them for not performing? The job requires instant results, and should bring instant gratification. Straight commission is most appropriate.

There may be other reasons that they can’t make a dependable living on straight commission. There might be a monthly or seasonal business cycle of highs and lows, or special pricing offers that distort the sales flow. Their territories may be too small. They may be expected to do in-service, classes, training or other peripheral activities that take away from their sales time.

Those are not reasons to distort the entire incentive process, however. You can adjust compensation with a draw, or larger territories, or an inside support person to get orders when the salesman can’t. These are mechanisms for fine tuning the rhythm of the compensation, not making it into something that doesn’t fit the business or the employee.

Lots of things go into the rhythm. Your products, sales cycle, customer relationships, technical skill levels of the salespeople, size of the average sale, payment terms, gross margins, and more. In my next post I’ll discuss the difference between being a supplier and being a vendor.