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Building a Better Commission Plan

11 Dec, 2006 By: Norman McConkey imageSource

Building a Better Commission Plan

With the end of the year fast approaching, it’s time for most owners and
management teams to put together a business plan for 2007. An important exercise
is to audit your current plan and evaluate whether or not you hit your Key
Performance Indicators (KPI) like sales revenue; profit; units sold; and gross
Margins. How many of you think you hit your KPIs in 2006? If you didn’t achieve
your targets, then it’s time to unearth the causes.

The trouble with setting most KPIs is that they tend to be what I call
"rearview mirror" measurements of your success. Sales is a classic example. You
reap what you sow, and when it comes to sales, you reap sales in January with
what you planted in the previous two or three months. If sales hit quota in
January, then your team didn’t execute in October, November or December. The
reaction to a missed quota is to blame the sales representative or the sales
manager. Show me a company that has a new sales manager, and I’ll show you a
company that didn’t "make plan." The trouble is, sales reps and sales results
are like the tip of the arrow with everything going on to help a sales team
being the wood behind the arrow.  Generally speaking, arrows  miss, but not
because the point wasn’t sharp. They miss because the feathers, wood and even
the bow were lacking. Firing a sales manager because of a missed target may be
akin to treating the symptom and not the cause. And, did the sales team all of a
sudden get lazy, or even stupid? Were they not the same guys that got you the
numbers for the last five years?

The truth is, it’s easier to fire a sales manager than to look at the root
cause of the problem. Maybe, if you’re an owner or senior executive, your
strategy is no longer on target.  Sales people simply execute your strategy. And
when it comes to sales reps, at  least  the great  ones I’ve worked with,
execute on their commission plan.  The most tragic example is when a sales rep
makes plan, but you miss your corporate goals. How can that be? Well, it happens
all too often. I know of a sales rep who made 100K in commission last year, but 
the  company barely turned a profit!

Let’s add the customer into the mix. It is also a common occurrence where a
sales rep makes plan, a company loses money and the customer is upset because
they feel they did not get value. Here’s a classic example of how this happens
in the copier channel. A copier company loses money on hardware sales, but makes
money, in theory, on the recurring revenue of service and supplies. Ninety-nine
percent of all commission plans in the copier industry involve some measure of
hardware sales: sell more iron, get more commission. The more iron in the field,
the more supplies and service annuity; therefore, the more profit, so commission
the reps to sell more iron, right?

Consider this example. A rep goes into an account. They are great soldiers
and they’ve read the commission plan. They win you a deal for twenty new 80-page
a minute copiers, then go back to the office, “ring the bell” and high five it,
later, cocktails with the team telling war stories of how they beat the
competition. All praise to the almighty sales rep.

Here’s the issue. Those 80-page a minute MFPs are designed to do 50,000 pages
a month. Since the rep didn’t displace any other laser printers, or competitive
devices, they only get 7,000 pages per month. The devices still break down just
as frequently (let’s say every 45 days) but the revenue you get is only 15
percent of what the business logic has planned for. Suddenly, they are not a
great deal. Worse, the customer begins to realize that they are not hitting
minimum monthly volume, and what was supposed to be $0.013 cents per page is
actually costing them $0.06 cents a page. How do you know? Because the customer
just called you and said a competitor just did a print analysis at the account
and they told the CFO that they are being robbed at the account. You just blew
up your advocate.

Changing Compensation

That could never happen, could it? Fire the sales rep. What for? They did
what you asked, and then some. The truth is, neither you nor the company wants
to maximize hardware sales. What you really want is to maximize the number of
pages you get from a customer, ideally 100 percent of the output. What the
customer really wants is to keep users happy, and have pages produced somewhere
along a continuum of the most convenient workflow or lowest cost. What a sales
rep wants to do is make a lot of money. Here’s how to align all these goals.

Pay your sales based on the number of pages produced on your managed hardware
each month. At first glance, this is simple. That’s actually a good thing.
Salespeople are simple; if you tell them that they get an incentive of $0.0005
per page printed at accounts they manage, they will quickly pull out their
calculator and tell you that for every one million pages printed, they would
earn $500 in commission. So far, so good. And for every 10,000,000 pages
produced in a month, they would get $5,000. If you averaged $0.015 cents per
page as the billing rate to your customer, then you would generate $150,000 in
revenue for 10 million pages. In a mature business, sales compensation as a
percentage of sales varies wildly, but most companies are content at 10-12
percent. So, if you added base and car allowance, etc., you should be in the

To view that 10 million pages another way, the average device generates 3,684
pages per month. So, the sales rep that wants to make $60,000 per year in
commission will need to manage 2,714 output devices (10 million divided by
3,684) that will earn you $150,000 x 12 months = $1.8 million in revenue. So the
revenue/commission structure works well for you and your sales representative,
but what about your customer?

First, remember the small issue about selling too much hardware? A sales rep
under this plan would be less inclined to sell too much hardware to the
customer. They would likely find that they should really look to ensure that at
accounts where the pages were split amongst copier dealer, supplies dealer, and
others, began to migrate toward devices you managed.  How could they do that?

  • Ensure your device performs better uptime.
  • Replace the odd underperforming but high output device with one of your
  • Speak with users and IT about their out put requirements and propose
    document management solutions and other enablers to ensure users migrated
    devices amongst the fleet.

I’m going to guess that this would make the company happy. Keep in mind as
well that if the devices you managed broke down more often, the customer would
not allow the migration to occur, but that’s the hidden beauty of this approach.
The customer knows that you would do everything to make sure your devices were
performing. They also know that since you lose money on every piece of hardware
sold, you would only advise the customer to do so if it were absolutely
necessary. Ding! You, your customer, and your sales team are aligned. When you
win, they win, when you lose, they lose.

What you will need

And, here’s the pitch. At a bare minimum, you will need to be able to
accurately track the pages being printed at the customer site. This likely means
some form of remote management/remote page collection. At any point, a sales rep
should be able to see where they stand vis-a-vis commission during the month.
You need to track this, and since you are aligning the customer to a CPC model,
they need to see their page volumes as well. Going further up the value chain,
you and your customer need to minimize downtime. You can of course go around a
company every month and count pages, but in 2007 there are way too many software
packages that fit this bill.

So, as we close 2006 and reflect on our strategic plan for 2007, let’s ensure
that we all see how a page-based strategy is more likely to meet those KPIs than
simply pushing iron. Your revenue, commissions, and your customers’ expenses all
become predictable as you strive to manage 100 percent of your customers’ pages.
By doing this, you will need to provide excellent service and uptime, which
means your reputation will soar, you’ll gain new customers, and yes, you’ll
place new hardware as well. But at this point all you need to ensure is that
your customers are printing, and they can take care of that themselves.

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