Compensating salespeople fairly BY Jayashantha Jayawardhana
The first thing that comes to mind when we think of salespersons is their glibness or that capacity for smooth talking. However, the reality is that salespeople – much like production, finance, human resources and R&D personnel – play a central role in any company.
If they don’t sell, stocks will pile up in warehouses and there will be no cash generated to keep the machines running or the lights on in the office.
So we must give them credit for the tough and vital job they perform, and offer them compensation that’s commensurate with their efforts. At the same time, it’s important to be watchful and leave no room for them to game the reward system.
So how can salespeople be motivated to perform while protecting the organisation’s common interests?
Doug Chung, a management consultant turned academic and author of a Harvard Business Review (HBR) article titled ‘How to Really Motivate Salespeople,’ recounts one of his consulting engagements while he was working as a management consultant. The project involved working with the Asia-based sales force of a global consumer products company.
The company practised route sales – which means that sales reps spent their days visiting mom and pop convenience stores, and servicing accounts as FMCG salespeople are typically required to do. What struck Chung during his consulting engagement was that the reps griped about their compensation all the time.
“The complaints were based on what the reps saw as myriad problems,” he says, adding: “Their quotas were too high so they couldn’t possibly reach them. Or their territory was subpar, limiting their ability to sign up new accounts.”
Chung wrote: “Sometimes the complaints focussed on fairness where a rep who was hitting his quotas and making decent money would want a manager to do something about a ‘lazy’ colleague who was earning outsize pay simply because he had a good territory. Imagine any conceivable complaint a salesperson might have about pay and I guarantee the sales managers at my client’s company had heard it.”
The company itself was as obsessed with the sales compensation system as the sales reps were. And the system was fairly basic where the reps earned a salary in addition to a commission of around one percent of sales.
But the flaw in this simple system was that it focussed too much on outcomes and tended to under reward some sales reps or over-reward others for factors beyond their control. So the company started basing compensation on effort and behaviour rather than only on top-line sales.
For instance, under the new system, a portion of compensation was based on customer satisfaction surveys, the number of prospective accounts visited (even if they didn’t buy) and retention of existing accounts. Although it was slightly more complex to implement and practise, it’s evidently fairer than the earlier compensation system.
There’s compelling research evidence that suggests some standard compensation practices hurt sales. To curb excessive sales compensation, some large corporations put caps on such commissions – meaning that no matter how much sales a rep makes, beyond a certain threshold, he or she won’t be entitled to a proportionate commission.
Another counterproductive practice is ratcheting where the annual quota of a salesperson is increased if it exceeds that in the previous year. Both measures dampen the enthusiasm of high-performing salespeople and stall sales growth.
However, there’s no universal sales compensation formula that fits all companies alike. For instance, salespeople at Boeing may spend years talking to an airline before the latter places an order for an aircraft. But at a typical FMCG company, a salesperson can complete a number of sales on any given day.
So the more uncertain the sales cycle is, a fixed salary should form the major portion of a salesperson’s compensation; and the more certain it is, commissions should constitute the larger portion of compensation.
Drawing on his extensive consulting experience and strong research evidence on compensating salespeople, Chung advises companies to formulate a multi-component sales compensation system that’s not too complex.
It has to be fair by the salespeople and boost the company’s sales growth. He recommends experimenting with different incentivisation plans and measuring their relative effectiveness by engaging a trained researcher.
Similarly, you too should analyse your current sales compensation system and see where you need to fine-tune it, and decide whether it’s necessary to obtain professional assistance to arrive at the most appropriate compensation structure that will keep your salespeople motivated.
And as your business evolves, you’ll have to revisit it time and again.