A long time ago in a galaxy far, far away there once lived a young lad named Henry. He sold technology day and night, happy for the chance to delight his customers and maybe collect a check at the end of the job. Everything was going swimmingly, but Henry wasn’t happy. Henry wanted more. Henry wanted to grow. He wanted to hire employees, buy vehicles, and puzzle over issues like writing employee handbooks and drafting standard operating procedures.
Henry hired his first employee and made sure he was a salesperson. After all, Henry knew nothing happens until you sell something, and he felt he could sell his way out of any jam. He took his new salesman under his wing and taught him all he could about prewiring, speakers, and the difference between a 14-inch and 28-inch Structured Media Center. Armed with his stellar knowledge of bent-metal cabling enclosures, Greg set off to conquer the world of production building with passion and élan.
Soon, Henry found he needed more employees to keep up with all the new sales. A whole host of new hires soon followed, including technicians and eventually a manager to run the whole crew. Henry couldn’t visit every job anymore. He wasn’t meeting each and every customer either. The company grew and stumbled every now and again, but for the most part, Henry stayed a central figure in the organization.
As Henry continued to grow his business, he met a man who bought and sold businesses. “Are you the center of the universe in your company?” the man asked. Henry thought about it and realized he was. While Henry had no desire to sell his business, the man’s question bored into his consciousness like a worm and Henry set about putting people and processes in place to make his company less about any one person and more about the culture and collective efforts of the team.
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Henry started more time wandering around different parts of the company. He’d spend a year with his installation team and work with them to resolve thorny issues. After he’d put out those fires, he’d leave a fire extinguisher behind and move on to another part of the organization, all the while trying to remove friction. Henry found himself inside the sales team for the third or fourth time and realized that he’d lost touch with how the company’s products were being sold, especially around profitability. He’d always paid sales commissions based on topline revenue vs. profit, mainly due to the complexity of reporting on gross profit margins each pay period. The sales team had grown substantially, and Henry discovered it was possible to sell projects below ideal margins while still making full commission. While he didn’t suspect intentional foul play, he wanted to implement an intentional process to ensure everyone knew the standards and aligned around them. He sat down and drafted this policy:
Sales Comp Policy 2023
In an effort to ensure and incentivize high performance across our sales team, the following shall apply effective immediately:
1. Quarterly Run Rate: Sales team members shall keep their trailing quarterly average for the previous two quarters closed won number at a ratio of 8 percent at or above their base compensation.
- Example: Tom’s base compensation is $45,000. Tom needs to keep his quarterly average run rate at or above $140,625 ($562,500 annualized) to keep his base salary plus commission program intact.
- Failure to keep closed won dollars at or above the correct ratio will result in the salesperson being put on a commission-only program (no base compensation) for the next quarter at which time another review will be done at the end of that quarter to determine whether or not the base compensation shall be reinstated.
2. Margins: Sales team members shall sell at or above the following margin targets:
- Residential — 40 percent gross profit with target mixes of 60 percent equipment (35 percent margin), 30 percent labor (50 percent margin), and 10 percent parts (60 percent margin)
- Commercial — 37.5 percent gross profit with target mixes of 60 percent equipment (35 percent margin), 30 percent labor (50 percent margin), and 10 percent parts (60 percent margin)
- Failure to sell at or above these target margins will result in the shortfall deducted from the salesperson’s commission or future commissions if the amount in question exceeds the commission due on a single project.
- Example: Tom sells a $500,000 project at 36 percent gross profit without obtaining approval from his manager. Tom is due a 4 percent commission but, in this case, has 1.5 percent ($7250) deducted from his check to account for the undersold scope.
- Exceptions to this policy may be granted but must be obtained in writing from the sales manager or another designated member of our leadership team.
3. Discounts: Sales team members must obtain written approval from their manager or designated member of the leadership team before discounting (with the exception of published promotions). Failure to obtain written approval will result in any unapproved discount granted being deducted from commissions due.
- Example: Tom offers a 4 percent discount to a client to win the business. He doesn’t get approval, and this results in Tom’s 4 percent commission being withheld.
What are you doing to erect bumper lanes for your sales team and ensure all your projects are sold within ideal mix and margin targets? Feel free to adopt our policy and use it in your own business.
Stay frosty, and see you in the field.