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Monday, June 02, 2008

Sales: What are you paying for?

If you are looking for a quick, easy, and universally valid approach to compensating your sales team, you are in risk of falling for a con artist or blundering badly -- because answers to this question depend on many elements. I just pulled the first placed listing in Google images for the key words "sales compensation" in seeking a graphic for this posting and came up with Incentive Compensation Management - Root Causes from Syngy Sales Performance Management.
This provocative and insightful posting on the thread "The rules our sales guys live by" from Vinny of Roccies Asphalt Paving in Fairfield, CT, is worth posting in full:

IMHO a heavily salaried materials supply sales person is, to some degree, more often an order taker than a sales person, especially at that salary. I'm sure there are times a good sales person in that capacity can bring in more dollars or make more sales via being a "sales person" but for the most part they are order takers.

Long term relationships producing repeat sales from the same client are more likely to be the result of the company providing outstanding product and or service as opposed to the sales person repeatedly reconvincing the same client to buy time and again.

I have this exact scenario in place at my own business. We take in about 1/2 of our revenue from home owners (one time clients as a driveway will last 20 to 30 years) and 1/2 of our revenue from repeat clients such as landscapers, G.C.s and excavators in need of a paver guy.

I do not, and will not pay a commission on those repeat accounts. I pay a small salary to cover this activity because I can get a monkey to measure a job and use my price list to give a number. I will pay a sales person a commission if they bring an account in that will become a repeat account but I pay it once only.

After that it belongs to me. Then its my company, and the way the account is handled that keeps it in house. If they leave over a price issue then its probably not a price issue really and something the field staff did or didn't do. And if it is a price issue, we don't want that account anyway.

As far as commission goes, I pay it on the gross ticket for a new client (property owner) sale. To me a professional sales person is someone that can take a prospect that has some interest in your product or service but needs to be convinced your company is the one for them. The professional sales person can get that prospect that said "I gotta think about it" to "YES".

If that sales person can't do that, why do they deserve a hefty salary that may be half of their annual income while your field staff is laid off waiting for them to become a "friend" to the prospect. We need sales, not friends.

Vinny's point is well taken. In case you are wondering what provoked this post, we'll go up a few entries to this one from "Dick", a Masonry Consultant in Minnesota:

Those rules and wages may be fine for the retail/boiler room/short term quota system, but all you get is the run of the mill people to accomplish what you want.

A revolving door runs in 360 degrees. Of those that go out, some go down and some go up. A good salesman will be gone quickly.

It takes little management skills if you use quotas and rules and that is why there are so many average to slightly successful organizations. I would never hire a person for such a low salary, because the numbers just do not work if you want real profit
instead of some volume.

Any decent salesman in the construction industry will never work for less than about $75,000 ($60,000 bases plus at least $15,000 incentives for an average performer) for a start. He should also have the potential to make 150K/year or more.

The short term (3 to 6 months) is baloney unless you want to replace with someone else for so-so sales. Management is what makes sales and profits.I would love to have a salesman make $150,000/year because that means profit if the incentives are structured properly for the future.

In a second posting, Dick elaborated on this salary vs commission theme:

My salesmen sold materials and called on established contractors and not on the public using referrals. They had a reputation to build and maintain, so the time frames were different. Because of this, pride, success, friendship and accomplishment became very important. They were also a part of a team, so the two of them were not the only reason for $12,000,000 in annual sales.

When we were sold out, one was told to use his golf membership every day (avoid problems), but he still ended up on jobs we were supplying and on jobs supplied (poorly) by competitors in order to be ready for the next year or two. The other did not want to entertain customers, so he went fishing on the customers boat.

Both sold by making money for the contractors after they got the jobs and by getting them new jobs.They had a more difficult separating business from pleasure on their expense accounts than I did when it came time to approve them.

When I used the term 'professional salesman", I was not being critical, but defining the position. On one $400,000 project that we were not the low bidder on, one salesman and my self did some work and justified getting another 15% from the GC due to labor savings. After the agreement and five minutes of talk, the salesmen tore up the revised agreement and got another 5% from the G.C. that felt it was worth it. - That is a salesman!

So, who is right here, Dick or Vinny?

The simple (and easy to offer) response is both -- the sales model that works well for one organization won't work for another, so comparing apples to oranges is unfair. Vinny's argument is that salespeople should be measured and compensated for bringing in new business -- relationship development is a company-wide thing, and huge salaries for playing golf with your buddies is hard to justify. In any case, a well-run business would never want these relationships to be the 'property' of an individual salesperson -- they should rest with the owners who perhaps can 'earn the commission' for playing golf with the key long-term commercial and repeat clients.

Dick, meanwhile, is applying the 80/20 rule with a vengeance. A really good sales representative, working with your best clients, can easily increase profits and revenue with seemingly little effort -- but at great benefit to the company. That thoughtful five minute conversation that yields hundreds of thousands of dollars in additional revenue is contrasted to the door-pounding, canvassing, grinding approach of selling each residential driveway, one by one. Should the representative who seemingly does very little work be well paid for his or her work, if is so valuable?

I would argue that reps with the ability to build and maintain high level relationships -- if these skills are real and not BS (and there is plenty of that in the world of business) should be respected and compensated accordingly. They are candidates for an equity interest in the business. If you don't want that type of 'power' threatening your own equity/position, you have a difficult choice -- because causing these types of representatives to leave invites them to work for your competition, or even worse, start their own competing business. Best solution here: Sell them a stake in your business, or help them set up their own enterprise, and take a stake in it yourself! Or prepare for a long and grinding competitive war. I speak from experience.

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