Every single business exists to sell something, and without sales there IS no business. Compensating the sales team appropriately can make or break a business – it’s directly related to your overall company strategy and your bottom line, Unfortunately, many small businesses are flying by the seat of their pants when it comes to compensating their sales staff, and they are missing out on the chance to maximize their motivation, focus, and results.
We asked Liz Cobb, Founder, Chairman and CEO of Makana Solutions, to share some tips on creating an effective compensation plan, and explain how specialized software like their Makana Motivator can help.
Is there really a need for software to help know what sales compensation to pay?
Yes, sales compensation is often the 2nd highest variable expense for most businesses, and one of the most important levers a business has to drive strategy. However, senior managers often struggle with spreadsheets to create their sales compensation plans and frequently encounter a wide range of problems, including:
- Poor alignment with company strategy
- Most models don’t encourage teamwork
- Sales compensation is too complicated for sales to understand
- Sales compensation costs are not properly modeled leading to cost over runs that impact the bottom line
- There are many other unintended consequences such as incenting sales to sell the wrong product mix
Not only do spreadsheets provide less than optimum results, but they require significant time and effort to create – on average many managers have to put aside weeks of time to compile sales compensation spreadsheets. This is valuable time that could be spent doing other things.
There is absolutely a need for software that helps businesses know what sales compensation to pay their employees. Unfortunately, despite its direct impact on profitability, efforts to increase market share and other strategic goals, sales compensation planning remains misunderstood by the majority of small- and medium-sized businesses. Few are aware of related best practices – sales compensation planning is rarely taught in business schools – and most do not have the solutions in place they need to quickly see how plans impact budgets, morale and other factors that directly impact the performance of sales operations and companies.
Are all sales compensation software products the same? If not,what are the differences?
Most solutions on the market today are designed for larger companies and they only help with the calculation of payments. They often require costly implementations.
Makana’s solutions are unique in that they:
- Are self-service and don’t require any implementation
- Feature easy to use wizards that guide users through the process
- Help with the design of sales compensation plans as well as the calculation of payments. (The proper design of such plans is more strategic and provides significant upside in terms of revenue and profits.)
- Best-practice advice is built-in
- Focused on smaller companies
- Offer an affordable on-ramp – our $19 per month planning tool is designed to address the unique needs of SMBs. (Most small businesses don’t have the financial or IT resources required to implement software solutions designed for large enterprises. And most sales compensation solutions available today are designed for those much larger organizations.)
In contrast, Makana’s on-demand solutions require little more than an Internet connection and are offered at a price point that is accessible and empowers SMBs to utilize the software’s capabilities to achieve strategic goals, whether it’s to increase market share, motivate employees or increase the net profit on deals. Our sales compensation planning solution, Makana Motivator Express, is available for a monthly subscription of $19 at MakanaSolutions.com. And users can instantly upgrade to Makana Motivator Pro to add payment capabilities for an additional ten dollars per payee per month.
We’ve also designed our software to be exceptionally intuitive and to provide reps and management alike with powerful visuals that enable them to literally see how plans and attainment levels impact their efforts, as well as generate reports that reveal individual and team performance levels. Online “wizards” are also available to guide them through the entire process. For example, a business owner creating her first plan may wonder what ratio of commission to salary she should offer. Our solutions not only allow her to see how changes to the ratio impact numerous variables in the plan, but also provide her with tips and best practices that make it easy to find the right balance.
How does a sales compensation tool tie into a business accounting software (such as QuickBooks, Peachtree, Microsoft Accounting) or to a sales/CRM tool like Salesforce?
With regard to accounting software, customers can import their orders from any accounting software – Makana Motivator Pro will then automatically assign credit and calculate incentive payments on those orders based on the plans. The time savings over spreadsheets are significant. We’ve had customers who once took weeks to do their payroll using spreadsheets. With Makana they can accomplish the same thing in hours.
Makana Motivator has certified integration with salesforce.com and is available on the AppExchange. Capabilities include single sign on, access from a Makana tab and automatic import of sales teams and other relevant data.
Shortly, Motivator customers will be able to access their commission statements and team and individual sales productivity reports right from the Motivator tab within salesforce.com
For those basing their sales compensation on “gut”, what are they basing the figures on?
Most small businesses do not have dedicated staff to create new plans – it often falls to the head of sales or even the CEO or owner. With many other responsibilities, they do not have the time to build something new in their spreadsheet. What often happens is that they just use last year’s plans or plans from their previous company. In this scenario, they have little or no bearing on strategy or current business conditions.
In most cases, the gut assumptions that sales management makes are top line driven and do not take into consideration profitability, product mix, strategy, the total incentive costs at various levels of attainment, etc. And in many cases, owners regrettably base their sales compensation plans on feedback from their sales staff or the gross dollar value of sales they want the organization to achieve. If they are using spreadsheets, they rarely know how those plans actually impact the budget.
For that reason overpayment is a common issue – reps will never argue with being paid too much. At the same time, many plans de-motivate sales or incent them to sell the wrong products. Essentially, most are basing their “gut” calculations on educated guesses. They rarely work and it’s usually a painful trial-and-error process.
What are some of the key metrics that a business owner should consider when contemplating sales compensation?
Before a business owner even starts thinking of metrics, it’s important to first look carefully at job roles. Based on the company strategy, what customer facing job roles are needed? We included this ability in our software, because it’s crucial that compensation plans reflect specific job responsibilities. Sales representatives follow the money and business owners need to make sure they are incenting the right behavior.
For example, you don’t want those in “farming” roles such as account managers working off of a plan that offers a high ratio of commission pay rather than salary. At the same time, your “hunters” thrive on opportunities. Your plan for them should include a significant upside in the form of commission or incentive pay. Most importantly, your compensation plans need to complement one another to ensure that everyone works as a cohesive team.
Of course there are many commonly used metrics: revenue, profits, seats, units, customers, renewals, etc.
The metrics for each job role should be driven by these factors:
- What is the company strategy?
- Does this job role have influence on the customer for this metric?
- Is the metric measurable?
Each job role should have no more than 3 metrics – otherwise they will not know what to focus on. It’s also important to know whether these metrics are in alignment with other job roles.
Metrics that business owners absolutely should keep in mind include:
- What is the target for total compensation?
- What is the budget for incentive pay and commission and how will it be impacted at various levels of attainment?
- What was the reps’ compensation in the past?
- How much business can be realistically expected to stem from the territory? During challenging economic times it’s also important that business owners be realistic if they want their reps to succeed.