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Pros and Cons of Different Compensation Plans
Joe Milevsky JRM Sales and Management
Every retail operation is unique. There is no one-size-fits-all model for sales compensation. This session will cover::
The different ways of compensating The pros and cons of each system How to determine if your method is effective How to determine the amount a salesperson should earn Stress-free ways to change the way you compensate
2017 HPBExpo Education
Pros & Cons of Different Sales CompensationsSales Compensations
Presented by Joe Milevsky
Introduce myself and JRM Sales and Management, Inc.
Seminar: Pros and Cons of Different Sales Compensations
Questions and Answers
Drawing fill out the registration card
See us on the trade show floor or call me personally to discuss your issues and concerns
EVERY COMPANY HAS COMMISSION EMPLOYEES
We call them owners
All too often all of the stress of performance is on the shoulders of the fewshoulders of the few
This decision is best made objectively and not driven by salespeoples fear or the fear of developing a predator-like environment.
Over the years as a business analyst and consultant I have seen every imaginable form of compensation for salespeople. Each client situation is unique and there is no one size fits all.
iff f i Different ways of compensating. The pros and cons of each system. How do you determine if it is effective? How to determine how much should a salesperson
earn? How to facilitate a change in the way you
compensate with minimal stress.
To illicit specific behavioral responses leading to improved performance.
If those responses are not clearly defined then conflict will likely arise. y
Those responses revolve around developing a company selling system and holding salespeople accountable for all aspects of it.
The incentive program should be designed to encourage salespeople to utilize the company selling system and to directly associate that behavior with positive compensation.
The advantages are: The simplicity to administer;
Th d t i i th ht t b li i t d The predator image is thought to be eliminated; Provides a more secure and predictable income for
salespeople; Generally it is easier to recruit
someone on salary versus commission.
The disadvantages: No matter how well salespeople sell there is no direct benefit. The people that are attracted to this type of environment may be the wrong type of people; Making a decision to hire additional salespeople must be viewed as a large additional expense and not truly based on what is best for your customers.When on salary, very often the better performers are not rewarded. Poorer performers are rewarded out of proportion to their actual sales contribution.
Often in smaller operations salespeople have additional duties and are unable to exclusively focus on sales.
This is not an ideal situation but in reality it extensively exists.
In situations like this some sort of salary may be required to address non-sales responsibilities.
The advantage is that there is at least some incentive for individual performance The main disadvantage is that the incentive is not great.
Example: Salesperson A has an hourly salary of $12/hour and is paid 2% on everything that they sell. The $12/hour is roughly $25,000/year. If they sell $400,000 during the course of a year, that is only an additional $8,000 per year. $100 in commission for a $5,000 sale may not get them excited.
The main Advantage is that they encourage teamwork.
The Disadvantages include the feeling that no matter how well I do as an individual, my team members performance may negate my efforts.
Such as the constant adjusting of salaries in reaction to previous monthly or quarterly sales performance. The advantages:The advantages:
It is ultimately incentive based; Salespeople tend not to get as upset about a lost sale since the
bigger picture is what will happen over the month or quarter; it may be easier to recruit with such a system over straight
The disadvantage is that it ultimately is a disguised commission and may lead to some issues of trust in ownership, etc.
(OFTEN SOFTENED BY THE USE OF A DRAW AGAINST EXPECTED COMMISSIONS)
The advantages include:
Direct correlation with individual effort and reward
Adding additional salespeople to achieve the optimum number of salespeople on staff is viewed as doing what is best for the customer and not an added expense
If I pay salary then the percentage goes up if sales do not proportionately increase as I add additional salespeople
Profit expressed as a percentage is:
Sales Revenue - 100%COG = 55%COG 55%Gross margin - 45%Operating expenses (includes sales payroll) 40%Profit = 5%
If I pay 6% of sales it will stay 6% of operating expenses regardless of volume
The disadvantages are:As consultants we encourage our clients to hire the best people they can find to fill their sales positions.
Do not rely on experience alone.y p
Therefore we often must look outside of the industry to find great people.
It makes it more difficult to recruit people from other industries that have become comfortable with a set income.
Throw in evenings, weekends, long hours on their feet, cancellations and the like and the difficulty to recruit strong people from other industries geometrically increases.
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Different rates of commissions paid for different levels of performance (typically volume or gross margin)
The advantage is that this type of incentive seemsThe advantage is that this type of incentive seems geared at specific corporate goals. The disadvantages include the fact that most
salespeople cannot seem to focus on these types of goals and there appears to be little evidence of their effectiveness.
KISS principle may be best
TO COMMISSION - OR NOT TO COMMISSION; THAT IS THE QUESTION
Commissions may be thought of as the lazy persons sales management system.
If you could have the best possible sales management system in place and were willing and able to hold salespeople accountable for your selling system processes, then in theory you would not need a commission system.
Our general experience is that our clients that utilize incentive programs that constitute a majority of their sales compensation, are considerably more successful than those that do not.
DETERMINING PAY SCALESDetermining the appropriate percentage of
commission to pay depends on many individual company aspects. The following examples explain this concept:
Company A is in downtown moderate-sized city USA. Its volume is two million dollars per year and the average
salesperson sells about $300 000 per yearsalesperson sells about $300,000 per year. Minimal income required to keep salespeople is $35,000 to
$40,000 per year. Incentives may have to be in the 12% area to maintain a
In order to be profitable the company must maintain high enough margins to offset higher salesperson compensation percentages.
DETERMINING PAY SCALES
Company B is in big city USA.
The company relies on low margins and aggressively promotes.
Its volume is $100,000,000 per year and the average salesperson sells $1,500,000 per year.
Minimal income required to keep salespeople is $50,000 to $60,000 per year. Incentives must be in 4% area to maintain a staff.
The lower incentive percentage is needed to achieve profit goals with lower company margins.
CONVERTING TO COMMISSION
JRM Sales & Managements clients are very diverse.
Although we encourage incentive programs, in most situations, there are times that we do not.
Your decision should be objectively made primarily based on what is best for your customers.
That in turn will be what is best for your company and ultimately what is best for your salespeople.
Converting to an incentive program can be very difficult if it is not done properly. Weigh