Variable Sales Compensation should be about the last thing you cut to save costs

There is an old saying that “good sales people can find a job anytime”. This is normally true, your competitors, recruiters, customers and business partners know who they are and would like them to sell for them. Retention of your best sales staff, engineers, etc. is critical to any company.

A few of the most common mistakes management makes is penalizing sales staff – after sales have been achieved. Some companies, or executives, believe that a sales person should never make more than some executive in the company whether it is the V.P., President of Sales, CEO or other officer.

I have seen, more than once, a large public company actually make a post sale decision on the maximum a sales director should make AFTER he made the largest sale in the company’s history. One of the deals, through a business partnership, would yield significant revenue for years. Everything was fine until after the contract was signed, after shipments began, and after they calculated his commission. They could have waited for the annual commission plan re-set to make adjustments, they could have “qualified” the deal before it was closed, but they probably thought that would have been a disincentive for the sales person to close the deal. Instead, they reneged on their sales compensation and commission plan after the sale was made.

What an incentive for the whole company and especially the sales staff (sarcasm)! While the sales director took it in stride, and remained at the company years later, I’m sure a number of top performers used the experience to begin to keep their ears open for new opportunities and eventually left the company.

While every company re-sets their compensation programs with some regularity due to a variety of issues including: “gaming”, salary, territory or margin adjustments, within plan changes should be implemented sparingly. Changes should be avoided unless there is an overwhelming situation, for example, extreme margin erosion. 

If the “big deal” is in the pipeline it can be qualified early on, and expectations can be set, so that everyone is on board should the deal close. There are blue-birds which may drop like a pay-out in the lottery, but those are typically very few and far between. In any case, they are also the company’s blue birds, as much as they are the sales persons, as the company reaps the sales, margin and cash flow.

Another common method for reducing commissions is reclassifying accounts as “house accounts”. While in many cases this designation is warranted, if the company is making their margins on the sale, management should consider a “buy-out” or bonus for the transition. If you want your sales staff to hunt elephants, in addition to filling their quota, you have to share the steak from the kill.

An important thing to remember is that every company wants to hire a sales person with a “book”, or list of customers, even yours. If another company hires away your star sales staff you can assume that your book of customers is potentially in jeopardy, even if the sales person went to another industry. Referrals and endorsements from former staff members can be critical to new sales and retention of existing accounts. I remember IBM in its glory in the late 1980’s; every departing staff member was considered an evangelist for the company. They were expected to be preaching IBM in the future without compensation and were happy to do so due to their positive experience with the company.

Variable compensation is just that, Variable. The last thing you want to do in this economy is to reduce incentives for sales, delay payment for sales (unless tied to collections), retroactively try to reduce your agreed sales compensation for sales already generated, or incent your best performers to look for other opportunities. As they say “Loyalty is a two way street and Money changes everything.”