Stop Believing the Pay Plan Will Ever Make Your People Happy
We bumped into Sean at the company headquarters where we had trained him four or five months earlier in the complex sale. He was applying his new knowledge religiously and had really upped his game. He was six months into the year and he had already achieved over 80% of his target.
Normally he was a really upbeat kind of guy, but that day he was looking a bit ragged. We asked what was wrong and Sean said, “I just got a target adjustment - from $7m to $18m.”
In the blink of an eye, Sean went from a terrific year - his best ever - already over 80% of target, to a little over 30% of target with his new number.
In a perfect world, pay plans for salespeople and managers would reward people for excellent achievement in a fair and transparent way.
Unfortunately, we don’t live in that world, and pay plans usually top the salesperson’s list of imperfections. We find that many companies do the following genuinely ‘stupid’ things:
Penalize top performers for being at the top by having their bonuses capped. They might sell four to five times as much as the next person, but make only marginally more in compensation.
Reserve pots of profit from the previous year’s sales to pay out the current year’s bonus plan - its value carries no relevance to the sales being made this year.
Claw back commissions for missing a margin target, a sales target, or experiencing a partially cancelled sale. It may be justified according to the fine print, but it is demotivating when it is invoked.
Create short-term comp plans that conflict with longer term company goals, causing salespeople to take smaller sales instead of creating larger deals that take longer to close.
When we ask them why they continue these self-defeating activities, they cite reasons such as:
‘People will coast and get lazy if we overpay them.’
Our go-getter top sellers will earn more than our senior managers or, worse yet, our CEO!’
‘An unscrupulous employee will game the system and screw the company.’
‘Someone will get ‘lucky’ and land a big deal just by being in the right place at the right time.’
They wind up with compensation plans that are lengthy, complicated, and over-stuffed with conditions and qualifiers. Their salespeople are confused and discouraged. As one seller said to us, ‘The plan seems designed to pay us as little as possible.’
Unfortunately, the care taken by a company to defend against moral hazard, ironically inspires people to learn how to game the system.
For example, putting a cap on bonuses or commissions can entice people to slow walk deals and then close them when they know they’re going to get paid. Or they might cut corners and make weak sales that will either unravel or end in customer dissatisfaction.
In our experience, the best pay plans are:
Simple - They have few moving parts, clear rules, and can be explained in one page or less. Ideally, your salespeople can close a deal and know exactly how much money they just made. Salespeople thrive on this kind of instant feedback.
Uncapped - Let your sales reps dream about making big bucks. Give them the opportunity to make more than you, or anyone else in the company.
Balanced - Design salary, commission, and special bonuses play complementary parts.
Provide a salary that is sizable enough so they won’t be worrying about paying the mortgage or putting food on the table.
Pay a commission so your people create the kind of lifestyle they want for themselves and the people they care about.
Offer special bonuses, which create a dose of variety, and another way to fund what your people care about, while achieving a special objective identified by the company.
Alternatively, if your salespeople are account managers who focus on the entire customer relationship, then pay them a salary that reflects the level of their responsibility. Provide them with a smaller commission and/or bonus so they are rewarded to grow the account, without neglecting their account management responsibilities.
The odds are that your plan needs improvement, and it may even have gaping holes in its fabric. Here’s what we suggest:
Stop defending an imperfect plan! Admit that it is not working and commit to fixing it. Keep your staff posted on your progress, and be honest about what it involves..
Push for simplification - and eliminate as many conditions and exceptions as possible.
Keep fighting for ways to reward and recognize your top sellers and the people who are doing everything right because they are your future top sellers. Even if all you can do is take them out to dinner, do it.
Your sales team needs you fighting their corner with senior management. It's important to remember that companies don’t often lose profit by paying sales people too much commission. They do lose profit every day by not paying them enough.
It's also important to remember that your team's compensation is never enough to keep them happy. Income is important, but your staff is more likely to stay selling for you because of the extra effort you make to develop their ability and create a team worth playing on.