Why Paying Sales Reps Straight Commission Or Salary Is Outdated
Question: There has been a lot of conversation inside our company about our compensation plan. We haven't changed it in 20 years. We pay a commission based on gross profit. Would you comment?
Answer: A well-designed compensation plan is one of the biggest pieces of your sales system, and a poorly designed compensation can be the biggest detriment to sales effectiveness.
So, let me start here: If you're paying your sales reps straight commission, you're using an obsolete formula.
If you're paying your sales reps a straight salary, you're also using an obsolete formula.
Both of those formulas are vestiges of an earlier, simpler time.
You may be like thousands of other companies who are using compensation plans that served them well in the past. In the last few years, however, a number of changes in the economic environment have combined to render some of those compensation plans ineffective.
There was a time when your market was growing relatively rapidly. You wanted your sales people to get as much of that business as they could, with little concern from where it came. For all but a few industries, that has changed. Even though the last couple of years have been good for many, most will admit to a general uneasiness about the demand for their products. Markets are leveling off, and customers are much more conservative than they used to be. Factor in changes in the dynamics of the marketplace caused by things like the growing power of the mass marketers, and you have several trends that translate to a perceived softness in the market.
At the same time, sales force software has grown incredibly sophisticated. Today's CRM systems give you the ability to easily measure performance more precisely than ever before. For example, a few years ago you could probably easily measure sales and gross profits per territory. Anything much beyond that may have been very difficult to get.
Now, however, you probably have the ability to easily measure things like gross profits per line of billing, profitability per customer, profitability per product line, and sales costs as a percentage of gross profit per territory.
This increase in information sophistication should be viewed as an opportunity for increases in sales productivity. With this newly acquired ability to measure the results of sales behavior more finely comes the corresponding ability to reward sales behavior more precisely.
All of these relatively recent changes combine to create a climate where smart sales leaders should take a close look at their current compensation plan to decide if it really is meeting their needs.
Dave Kahle is one of the world's leading sales authorities. He's written twelve books, presented in 47 states and 10 countries, and has helped enrich tens of thousands of sales people and transform hundreds of sales organizations. Sign up for his free weekly Ezine. Check out our Sales Resource Center for 455 sales training programs for every sales person at every level.
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