I’ve had many companies ask me the following question; “How do we incentivize our sales force?”. Now, there are many schools of thought, and some companies believe that low base salary and high commissions will do the trick. Some have bonuses, while others don’t. Some of those bonuses are worth the effort, while others are a complete insult. For those companies that use a low base and high commission approach, you can forget about getting good sales people. Instead, you’ll get the “snake oil salesman” who’ll do anything, say anything and promise anything to get the order. So, with all these approaches and philosophies, which is best?
Don’t Insult Sales with a Non-Competitive Compensation Structure:
First and foremost, if you want to grow your business, you must accept that only the very best people will do. There are a number of studies done on the impact of a high employee turnover rate, cost of training, etc. While I can’t go into all of them, I can promise you if you mislead, lie, or imply to your sales people that their compensation can be better than it actually is, then you’ll lose one sales person after another.
Your sales people are the front line soldiers of your business, and if they are professional and happy, then your business looks professional. Essentially, happy sales people are excellent sales people. However, if you have one sales person after another, come in an out of your doors because their base salary is so low, how do you think that looks to your customers? I am not implying you give your sales people everything they want, but I am insisting you make sure their base salary is competitive. This is the first rule of attracting good people and incentivizing them to produce.
Use a Sliding Scale on Commissions to Incentivize Your Sales Team:
There is one benefit of paying a higher base salary, and that’s lowering the commission percentage paid on sales. Those products that are easiest to sell, should have a lower commission, as opposed to those products that are new, that you want to grow business on, and that are essential to capturing market share. Your sales people must come to understand that the simple sales can’t possibly have the same commission structure as those items that are more difficult to sell.
So, the second rule is to use a sliding scale on commissions by product line or family of products. A good rule of thumb is 1.5-2% on easy sell products, and 3% on the higher ticket, more difficult products to sell.
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Make sure your sales people have a competitive base salary.
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Pay higher commission on more difficult sales and lower commission on easier sales.
Pay Commission on Gross Profit Only
Don’t make the mistake of paying commissions on sales totals. Your business should only care about gross profit and nothing else. Regardless of what the products sell for, if there’s no gross profit, then why sell it? Your sales people must also understand and begin to measure their performance on gross profit.
Make Those Quarterly Bonuses Worthwhile
Quarterly bonuses don’t have to be extravagant. They don’t have to be a quarter of a sales person’s salary. They just have to be worthwhile. Most importantly, don’t make it an “All or Nothing” bonus either. Instead, have a scale on your bonuses – as you do with your sales commissions. So, why is this so important? In order to answer this question, consider the following example:
Some companies only give bonuses if you hit 100% of the objective each quarter. At the end of the year, you might find yourself with a sales person who met one quarter, got a bonus, but then tanked the rest of the year. At year’s end, he finished by only meeting 75% of the objective. Meanwhile, another sales person consistently gets close to budget, doesn’t meet it, but ends the year at 90% of budget. Now, ask yourself who deserves the bonus in this situation? Is it the sales person who had one great quarter, or the one who ended the year with a higher percentage of the sales objective?
Make sure you have a sliding scale on your bonuses, and allow sales people to catch up on missed bonuses by year end. Paying commissions on gross profit ensures that your company has value in the sale itself.
After all, if there's no gross profit, there's no benefit to the sale. In addition, it ensures your company's sales team is always maximizing gross profit. However, the intention is not to maximize gross profit on one sale, but on a series of repeat sales.
Learn how to defend your pricing with these proactive business-to-business sales statements.
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