12/14/2018
Recently, the Greg Brooks/Misura Group HR Roundtable leaders had some questions surrounding compensation plans for Outside Sales Reps (OSRs). The following was my response, I hope you find this helpful.
The most common mistake we see leaders make is developing plans based on what they “think” and not on what is fact. Make a commitment to collecting the new and current facts surrounding your business and your competitive market for both customers and talent. If you are diligent in collecting the facts and ranking them by relevance, the appropriate action becomes quite clear.
Here are my top 5 questions for developing a sales compensation plan:
1. What is the competitive edge of the products or services?
2. What is the value proposition the sales professional is personally delivering?
3. What is the competitive “Compensation Currency” the hiring company is offering?
4. What is the amount of sales volume/gross profit dollars the business model can deliver?
5. What percentage of gross profit dollars are paid to the sales professional?
1. What is the competitive edge of the products or services?
Apple, Budweiser and Leaf Guard do not need to pay their salespeople above market. Why:
Apple has Facetime, end-to-end encryption and a long list of proprietary high-demand products the public wants. Their strategic product position is excellent. Their toughest sales question: Do you want that in black or white?
Budweiser – who sells more beer, the sales professional or the Clydesdales on NFL Sundays? Their brand dominance is impressive, only order taker sales talent is needed.
Leaf Guard, it’s an exclusive distributed product with patent protection that allows “old guys” like me to have clean gutters without the risk of breaking their leg. High demand for products or services means a low level of sales compensation is needed.
What is the level of demand for your products or services when compared to your competition?
Your gross margin percentage might be a leading indicator.
Complete, accurate and on time are low barriers to the competition and typically are not enough to command customer loyalty and high margins.
What is it that your competition is not doing, or not doing well, that is the area to focus your competitive edge?
If you have a “me too” product or service offering you have to pay more in compensation or offer more “Compensation Currency” to attract top-level sales talent. The success of the business requires the sales professional to carry more weight.
2. What is the value proposition the sales professional is personally delivering?
Truss and wall panel sales professionals make more money because their math, blueprint and construction knowledge is in high-demand and short-supply. Whatever the skill, it must be quantitative and reflected in higher gross margin dollars.
The best new-business developing sales professional in the county is worth more compensation than the account-maintainer sales professional. Again, supply and demand, driven by return on investment, are the factors.
If an OSR is claiming their “relationship-selling focused model” is working, it must be reflected in their gross margin dollars. (Warning: the good ol’ boys “relationship” selling model is not sustainable today.)
3. What is the competitive “Compensation Currency” the hiring company is offering?
What are you offering the sales team that they want, that the competition is not providing?
It’s often not what you “think” they want. Many leaders miss the boat here – collect the facts. Survey your current sales talent and post-interview the sales talent that turns you down to understand how your offering compares with the competition.
It might be centralized estimating, work-life balance schedules, bird-dogging assistants to track orders and walk job sites, technology that increases their volume per hour worked, trips to Hawaii, training and development, a sales manager to hand over new business leads, or career path growth. You can offer less compensation if you have the right mix of these types of offerings.
4. What is the amount of sales volume/gross profit dollars the business model can deliver per sales professional?
Most OSRs are already working the maximum number of hours, from their view. The question is how many gross margin dollars can be generated with each hour worked with ABC Company vs XYZ Company?
Taking steps to increase the amount of gross margin dollars a salesperson can generate in your business will decrease your compensation offerings and increase your talent level.
More effective purchasing programs can have a major impact.
Business development, estimating and logistics processes can create opportunities.
5. What percentage of gross profit dollars are paid to the sales professional?
Most solid OSRs are highly money-motivated. The rubber meets the road at gross margin dollars sold divided by compensation paid.
Beyond these 5 points, OSRs are humans and will only conform to the incentives and structures laid out in front of them. Activity-based costing (ABC) analysis, leading every OSR to annually turn over the bottom 20% of their accounts to junior sales talent, keeps their business development skills sharp and improves the health of the overall business model. ABC is effective in helping the senior OSRs improve their compensation per hour worked. If you don’t want a sales team that won’t leave the nest waiting to be fed – quit treating them like baby birds. Compensation is not a silver bullet solution for poor leadership or a non-competitive culture. Owners and Presidents must ultimately take responsibility for the sales performance as they are accountable for the pace and culture.
If you are interested in more compensation ideas specific to your situation, please reach out.
With every breath keep growing! -Tony
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