Insights into the forces shaping our industry.
Fallacy of Commissions
We’ve helped scores of clients identify quality sales talent over our 19 years of success. Our clients have a broad range of compensation models to support attracting sales talent;
● Fixed salary with bonuses tied to: individual sales, regional sales, company sales, company profits, etc.
● Salary with commission tied to: gross sales, incremental sales, GM’s, profits, etc.
● Commissions only; draw-based, or purely 1099 based, etc.
The underlining challenge is to attempt to create a compensation model that rewards high performers for their efforts. But ultimately there has to be a balance between paying a thoroughbred a disproportionately higher percent of their efforts versus the support staff surrounding them that has to manage that volume of business: inside sales, quotes, designers, technical staff, operations, administration, etc. It is generally assumed that sales people are in sales because they are more driven to make more money than their peers in corresponding levels of responsibility. We find that statement true largely borne out by our internal tracking of compensation programs across all functional disciplines. But we also find that commissionable efforts are not necessarily purely correlated to results for the overall enterprise. Let’s be a little provocative:
Salespeople deliver results that match their level of expectation; it’s only in harmony with the company’s goals if those levels of performance match expectations on both sides.
We have clients that regularly tell us they want someone who is hungry and driven to write business; and in exchange for that hunger, they want to offer them a minimal base salary, with uncapped upside incentives tied to some growth metric; as described above. They also typically couch that program in terms of needing someone who is ‘young’ and hungry; we equate that with wanting someone who is cheap, and hopefully effective. I think the belief that giving large upside potential to someone who will starve for several months while they identify customers, learn your products and value proposition and operate within your sales cycle parameters…is deeply flawed. Let’s explore those key points individually:
1. Upside potential. Everybody wants the chance to make unlimited amounts of money. Uncapped!!! The reality is, that the volume of sales or gross margins any individual salesperson can sell is capped.
a. There are a limited number of customers s/he can call on within that imagined 70-hour week of hard charging, hungry sales efforts.
b. There is a limit to the amount of support any salesperson can rely on to achieve infinity…quotes, inside order services/support, operations/shipping, warranty, finance/credit, etc.
c. There is a timeline to become efficient in any new environment; training, onboarding, team bonding and more.
2. Sales cycle. Every product line is tied to a sales cycle; if you’re selling MV transformers to utilities; that’s a sales cycle that can take longer than a year. Specification products that are tied to new construction, 1.5 to 2 years to be effective. Stocking products in distribution, maybe 6 months to see tangible results, but heavily dependent upon the marketing support behind the company.
3. The value of your products is always tied to the image in the market: are you a startup? Then, the sales cycle and proof of concept to switch vendors adds to the sales cycle. Are you a legacy company? Then, the expansion of sales for a hungry, aggressive salesperson is limited by existing salespeople and region, channel divisions or customer assignments will limit the ability to sell.
4. Salespeople sell to achieve their own internal level of success. If a salesperson is earning commissions of $100,000/year and they have an uncapped program; then logic would tell you that they either are restricted by the limits from above, or they’re restricted by their own value proposition; i.e. they weigh time versus value internally. Working 40 hours a week and making the amount they ‘want’ or need, is a great value proposition for them, why would they work 50% harder to try to get to $150K/year? The facts of sales is:
ALL sales people plateau.
When they meet their intrinsic needs for success…they plateau.
Egret recently conducted a deep dive survey of lighting reps, and of all the information we’ve documented, the one intriguing finding was that rep salespeople are more likely to be compensated on a fixed salary with a bonus program tied to company goals. The complexity of the sales process is much higher; the need for more support people blurs the definition of who’s ‘sale’ it is…it’s more of a team effort with multiple people handling an order from spec to cash. While any small business is motivated to push fixed expenses as low as possible; it becomes just as difficult to manage the cash flow of a thoroughbred salesperson who takes a disproportionate piece of the revenue and reduces the available cash that supports the larger staff that takes that order from entry to cash.
Our industry is becoming increasingly complex with the expansion of technology, new channels, new competitors and new threats. Complexity adds layers of support to handle the complexity; while tech may be perceived as the driver of efficiency, it rarely enables a company to reduce skilled, educated talent.
Would you like to discuss your sales compensation models? Give us a call!