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Compensating Salespeople Can Be Tricky Business

4 Oct, 2005 By: Howard Meltzer imageSource

Compensating Salespeople Can Be Tricky Business

salespeople is one of those hot button topics guaranteed to create heavy
discussion and strong opinions whenever dealers meet.

You would think that after more than 50 years of trial and error, someone would
have come up with a magic formula that works. There has been no such luck
however, unless either magician David Copperfield or mastermind economist Alan
Greenspan want to offer their services.

Making things more difficult is the fact that there is simply no single answer
that fits every management situation. Without the magic bullet, we are left with
a finite selection of tools to mix and match into programs that fit company
structures, personnel and objectives.

Let’s start with the most basic tools that everyone in the industry grasps:

• Salary

• Draw (recoverable/non-recoverable)

• Revenue share formula based on either total sales or gross profits

• Both earned incentives and bonus structures based on various combinations of
unit sales on all or specific products, revenue, connectivity, percentage of
quota, or any other defined objectives. These bonuses can be paid monthly,
quarterly, annually, or in various other combinations. Sales rep recruiting and
retention should also be included in all manager compensation plans.

One of the axioms of our industry is that far too many sales managers and
representatives do not really understand their compensation plans. They simply
go where they perceive the dollars to be. So, if the game is based on
perception, the key to satisfying their needs is to load up their plan with
rewards that are simple in design, loaded with multipliers and viewed as

The Structure

You need to put together a structure to generate the revenue and profits needed
to develop a successful compensation package.

According to the Tom Johnson financial model, dealers should maintain a hardware
gross profit of 35 percent. Based on that formula created by the Global Imaging
CEO, sales expenses should not exceed 25 percent of hardware revenue. Ideally,
that 25 percent total should include 14 percent to the sales reps, 6 percent to
sales management, and 5 percent to other areas of the company.

The real issue here is that dealers must maintain a 10 percent space between
hardware gross profit and selling expenses. With that as the baseline, if
dealers can increase hardware to 40 percent gross profit, then sales expenses
can move up to 30 percent.

Conversely, if hardware gross profit goes down to 30 percent, then sales
expenses should go down to 20 percent. However, with selling expenses on this
sliding percentage scale, a major variable creeps in when competitive deals
force hardware gross profit down, yet the manager’s compensation remains the
same. This has a major and immediate negative impact on the bottom line.

The most common reason for this imbalance is that dealers tend to pay managers a
relatively high base salary, which is a fixed cost that remains the same even
during a low revenue or low gross profit percentage month. In short, available
gross profit is on a sliding scale while a high amount of sales expenses are

There are, however, two techniques that dealers can apply to generate a gross
profit cushion against those fixed costs:

1. Although this should be self evident, many dealers are still not building in
enough margins between actual product costs and the costs of the sales force. In
highly competitive situations where pricing makes or breaks those must have
deals, margins generally take the hit. Lower margins multiplied by “X” deals
should directly reduce the incentive package budget. Unfortunately, that is too
often overlooked and the company profit takes a direct and unnecessary hit.

2. The dealer sales mix has evolved into a leasing game made up of increasingly
creative programs. It is also an opportunity for dealers to develop an interest
point delta between what the leasing companies charge the dealer and the rates
that the sales force is allowed to sell. Obviously, the more points, the more
profit, thus the more gross profit to plow into variable incentive programs for
sales managers. The “points” bump to lease rates should be scaled from a minimum
of 5 percent.

We find that our most successful dealer clients have developed a sales manager
compensation balance between salary (fixed), revenue and unit objectives
(variable). But whatever the incentive formula, there are two things dealer
principals should be cautious about:

1. Be very, very careful when considering any change to any compensation
program. Adjustments to a compensation package are viewed as negative and can
immediately become de-motivating, lead to discontent, and then cause turnover.
Conversely, changes that are simply and clearly explained with logical
reasoning, provide appropriate lead time, and relate to company objectives work
very well.

2. Short or long-term incentives should not include too many variables. For
example, if the incentive program is exciting in concept yet requires additional
hurdles like “X” number of color units or “Y” number of obsolete product types,
the initial reaction will turn sour immediately and be viewed as self serving to
the dealer with little chance to hit the jackpot.

After talking with several successful dealers with stable sales management in a
variety of markets, there is no doubt that they have points of commonality in
the way they approach and structure sales management compensation.

The overriding principle in each of their programs is balance; a weighted
combination of salary, draw, and a percentage of team revenue with incremental
volume gates. Of course, they all have both margins built into their product
costs and “points” added to their leasing rates. The only variable is that a few
of these dealers also use assigned manpower objectives and gates to control
non-variable costs.

No matter what combination of methods a dealer believes in and implements within
his or her company, the two most important elements that we have found are the
management of the 10 percent rule between gross profit and selling expenses, and
creating a balance between fixed and variable compensation for the managers.

It may not sound magical, but it could make many of your compensation problems

Howard Meltzer is the Managing Partner of Pro/Point Management Services, Inc.
which provides goal oriented sales management consultation and on-site sales
training to office equipment dealers nationally. For detailed information on the
company’s programs and methods, contact them at 904-285-8542 or e-mail at sales@propointservices.com.

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