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Sales Comp Plans That Work

How to properly compensate and retain your sales talent.

[EDITOR’S NOTE: VITAL holds monthly CI Business Mastery Classes where it addresses important CI business topics via a webinar. Each class is supported by an industry brand. VITAL has agreed to share some of the information from these classes in a monthly column of highlights from its most recent webinar. The eighth CI Business Mastery Class was on sales compensation plans, and it was supported by DMF Lighting.]

Sales Compensation Plans That Work
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Today we’re going to talk about compensation plans for your salespeople, and we can’t talk about that without touching on some hiring best practices. Getting clear about who it is that you want to hire is critical, and what can help with that is utilizing personality profiles. There’s a fantastic one called Culture Index that we use, and there’s DISC, Meyer Briggs, and several others. They’re worth the investment of time, effort, energy, and money to make sure that you truly know who it is that you are going to hire.

Do you need a hunter business development person? Do you need a killer closer? Or are you looking for that unicorn who can do both? And I say unicorn without being light about that — finding someone who can do both is hard to find. Make sure you get clear about your business needs — what’s missing in the company — and fill that role with that person.

Most of you have most likely heard that a new hire has already decided whether they’re going to stay within the first week of starting a job. A lot of it is first impression, but they also get to know a ton about your company within that first week and that onboarding plan tells them everything specific to salespeople.

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We can’t always expect results immediately. So, our best recommendation for a salesperson onboarding process is to make sure that we are rewarding activity. Reward the activity that you’re looking for that will produce the results you need because if they’re able to execute that activity, the results will come or you’ll determine that they might not be the right fit.

This leads us to our next point: have a very clear threshold of success for the first 90 days. It needs to be clear to you and your salesperson if they are making the grade within the first few months. We commonly see salespeople in our industry underperforming in a significant way, yet the owners have not truly created the expectations and management structure, and they hang on to them for a long time until they eventually figure out that this person’s just not the right fit. Don’t let it take a year to figure out whether that salesperson’s the right fit. It’s way too costly for both you and that person and it’s not fair.

Paying Salespeople

What do we want to accomplish with our salesperson comp plans? Of course, they should motivate them, but we can’t go nuts with paying our salespeople. Yes, they are very important to our growth, but we cannot put our business in dire straits because of what we’re doing with our salespeople. We want to make sure on both the administrative side and the sales side that these comp plans are simple and fair. If you have multiple salespeople, you need to be able to ensure that they can work together, or pass leads off. All of that needs to be fair and make sure that you take everybody into account.

So, what should be in your comp plan to make this work? You should have a salary or base to help cover those non-selling duties. They should have a starting base salary that should be just enough for your market. If it’s too much, then you have less of that performance-based component involved.

Of course, our favorite salespeople — the ones who consistently produce great projects at a high margin — are typically motivated by some kind of performance-based compensation. They’re in this for the money, they’re in this for the satisfaction, and they ultimately want to get that hit when they close the deal. But we should also have a profit threshold in our comp plan. We want to expect that because it can be very complicated for a salesperson to understand all of the nuances in gross and net profit, but it’s uncomplicated for them to look at a proposal system and know if they hit the Gross Margin target.

Having a gross margin threshold is good — in fact, it’s critical — but we do not want to compensate based on it. Managing gross margin is management’s business — do not overcomplicate the process of selling by having your salespeople have to deal with this highly variable gross margin compensation calculation. Have them look at their proposal system and ensure that they’re hitting those gross margin targets. The rest of it is up to you as owners to manage your team to the implementation goals of those projects.

Your overall compensation target for a salesperson is about 8 percent on the first million dollars and 7 percent after $2 million. The absolute high watermark is 10 percent of overall revenue in compensation. Of course, there are some areas of the country where you’re going to need to breach that recommendation to be able to pay them what would be considered fair compensation, but as a general rule, 10 percent is the highest you should go.

Motivation Do’s and Don’ts

Salespeople are typically looking for that dopamine and serotonin hit, and they want to get that hit when they close the deal. You want to reward those exceptional results in a way that’s clear, objective, and on time. The salesperson should know exactly what their commission’s going to be on this job and when it will be paid.

What doesn’t work? Nebulous and subjective plans that are in a cave of secrecy. We have seen many of them. We’ve asked salespeople how they are paid, and they frequently don’t know. They know they are paid on commission, but they don’t know how that commission is calculated. And if they’re paid on margin, they don’t know how the company arrives at that margin. Don’t do that. Simpler is better. As owners, we want to check off all the boxes and reduce our risk, but that often leads to overcomplicated compensation programs that don’t hit the mark for anyone.

Random timing on pay is even worse: “You’ll get paid when the job is complete.” As a salesperson, I probably don’t have a whole lot of say in when that job gets done, so that is random timing as to when I’m going to get paid.

Key Takeaways

Who you hire is the most critical factor bar none. Make sure you know who you’re looking for and get that person. Keep his or her overall compensation below 8 percent — 10 percent max. That’s the highwater mark. Anything above that, be leery — he or she may not be the kind of productive salesperson you’re looking for.

Keep your whole compensation program simple, quick, and fair. Don’t get too far into the weeds. You will know when you have a great salesperson. They will perform when your compensation plan is simple, quick, and fair. Of course, as you grow, make sure that you’re constantly looking for opportunities to distribute these non-selling tasks among the team so that your salesperson can grow in their overall productivity.

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