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| Monday, 16 May 2011 18:47 |
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Taylored Comments Creating Sales Performance through by Larry Schulze, Co-founder and Principal Consultant On my previous blog, I mentioned there were three areas you
Salaries For us to determine appropriate salaries, we must first define the sales positions we have within our organization. Do not create just one sales position. Create a hierarchy of positions for the sales person. Create a career ladder for them to climb. Create an opportunity for careers not just a job. We recommend the following structure for our clients’ sales teams:
The salary and associated gross profit quota will increase as the sales person climbs the ladder. Before they can be considered for the position above them, they must be achieving that quota level for a period of time, say six months. Once they do, they receive the salary associated with that position. By the way, if a sales person does not perform at the quota level for the position they are at for a period of time, again let’s say six months, they get moved down to the level that matches their quota performance. We strongly suggest that you create a hierarchy of positions regardless of the number of sales people you have on your team. Hopefully, you will be hiring additional sales people to help you grow your business and it is easier to implement this structure when you have one or two sales people than it is once you have five or six. One other thing, when you hire a sales person, don’t fall for the temptation of placing them at the top of your hierarchy just so you can meet their salary demands. Make sure they truly belong there. A sales person who is requiring a large salary is a sales person who is generally not confident of their ability to generate commissions. This is a major red flag when interviewing. Be aware! As we just mentioned above, salaries should be commensurate with the role and quota of the sales person. However, it should not be more than 50% of their total expected income at 100% of quota. To be more effective, we suggest that the salaries be 40% to 45% of the total expected income at 100% of quota. You want your sales people depending upon their success in generating profits to earn them their real income through commissions and bonuses not their salary. Commissions Commissions are generally based around gross profit and are paid on a monthly basis. This is very common throughout most of the compensation packages we review. Gross profit should be one of the major key performance indicators of your sales people. Obviously, the more gross profit the sales person generates the better. Or at least it should be if the gross profit is being generated around the products and services indicated in your business plan/corporate objectives. Here are some other considerations to think about when it comes to gross profit commissions. First, do not pay commissions on the first $10,000 of gross profit. The sales person must pay for themselves before you begin heaping commissions upon them. The first $10,000 pays for their salary. If they do not achieve $10,000 in gross profit, they do not deserve any commissions. Next, pay different percentages of gross profit in commissions as they generate different levels of gross profit. In other words, create commission accelerators as they produce higher levels of gross profit. The following table is an example: Gross Profit Level Percentage of Gross Profit $10,001 -$15,000 7.5% $15,001 -$20,000 10% $20,001 -$25,000 12.5% $25,001 and up 15% Once the sales person hits a new level, pay them the percentage of gross profit on dollar one. For example, if a sales person generates $16,000 in gross profit for the month, pay them 10% on the entire amount of $16,000 which would generate $1,600 in commissions for the sales person. Utilize accelerators to encourage them to push for a higher gross profit amount each month. When considering service for commissions, the standard de facto we see is 40% for a gross profit margin. Thus, if a sales person brings in $1,000 of service revenue, they would receive $400 in gross profit credit towards their monthly commissions. Another tidbit we recommend is to not pay commissions on an annuity basis. The primary example of this in today’s terms is Managed Services. We do not want to create an environment where we have sales people getting commissions this month based upon something they have sold two years ago. At some point in time, they will have created enough monthly annuity commissions to meet their personal objectives and not be as hungry as need be to find new business. Instead, we recommend you pay in advance. Yes, there is some risk but we believe that the reward is worth the risk. We suggest that you front load the annuity sale and give the sales person credit for the first year’s revenue and gross profit. Take for an example a Managed Services sale that generated $1,000 per month. We would recommend you give the sales person credit for $12,000 in revenue and, at 40%, $4,800 worth of gross profit as part of their gross profit generated for the month. If the account would leave before the year has elapsed, then you can go back and recalculate what the sales person should have received and retrieve the ill-gotten commission from the next commission statement. But, from that point forward, the sales person does not receive any additional commission from that Managed Services agreement. That does not preclude receiving any project or remediation revenues and gross profit from that client. The sales person, as long as they created the opportunities, would receive credit for those new sales. There is another benefit to front loading annuity sales; the sales person gets a bigger upfront pop then spread out over time. It gets their attention and getting a sales person’s attention is the key to success! Bonuses Bonuses are where you can directly tie sales compensation to your corporate objectives. Bonuses can be very powerful incentive directives. One such bonus is Gross Profit Margin. In developing your corporate objectives, gross profit margins should be a primary consideration. Our suggested target for sales people is 25%. That is an overall monthly gross profit level we want sales people to reach considering all product and services sold. Recall the recommended gross profit margin for services is 40%. In order for the sales person to hit 25% overall gross profit margin, they must sell a substantial amount of services knowing the lower rate of margin for product. The selling of services must be a corporate objective. This bonus will encourage sales people to sell services to reach this threshold. If they do, we recommend a 2.5% to 5% of the overall gross profit as the bonus. They, of course, must first sell $10,000 worth of gross profit before this bonus can come into effect. The other bonus type we suggest is a “spiff” type of bonus. These spiffs must relate to your corporate objectives and are not much different than the spiffs offered by different manufacturers. What are your focuses identified in your business plan/corporate objectives. Is it VoIP? Is it Managed Services, printing services or a vertical software solution? Whatever they are, choose the top three or four and pay a separate dollar spiff each time they meet the objective. As an example, if you are focusing on Managed Services, for each Managed Service sale made in excess of $1,000 per month, offer an additional $350 spiff. This is in addition to the commissions the sales person earns. This will focus the sales person on the products and services you have targeted for your business. We recommend no more than three spiffs being offered at any time. Remember, we want them to focus. We also recommend that you change the items being spiffed every three to six months. This will keep your bonus plan fresh and your sales people on their toes. One last consideration before you put these three compensation components into effect is that your business’s financial resources are a major determining factor on the compensation plan you create for each position. By creating a budget, you will know what your financial resources are and the performance level required justifying the compensation. Base your pay plan around that. Do not pay more than you can afford and that can be produced. We strongly suggest you create a commission calculator to determine the effectiveness of your compensation plan. Develop your plan so that the total compensation paid including salaries, commissions and bonuses provides around 70% of every gross profit to you and 30% to your sales people. These percentages will be especially applicable once the sales person is in excess of $10,000 in gross profit. For our clients, there is a commission calculator along with job descriptions for each position mentioned above found in our Resource Center (login is in the upper right hand corner of this website). But most importantly, write your compensation plan that adheres to the two reasons for creating compensation plans. Create a plan that will guide your sales people to help you become more successful! Comments (0)
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