Sales compensation is an important part of motivating the sale team and boosting revenues. To serve its purpose, an effective sales compensation plan must be built to keep salespeople on track to meet their goals and sales targets. It should also ensure a steady stream of new and repeat business for the dealership over time.
Unfortunately, most sales compensation plans work against the organisation that set them up. Too much focus on the connection of compensation to particular quotas sometimes lead to unmotivated and unproductive sales teams, which sell only if commissions keep increasing and price keep falling; this is unsustainable in the long term.
Although earnings, in terms of commission and compensation are important to the salesperson, they should not be the only consideration in the design of an effective sales compensation plan. The sales quota system can sometimes become a trap if it is built on increasingly thinning margins because of higher incentives to motivate the sales team to
meet quotas. There are several ways to overcome this problem and develop a comprehensive sales compensation plan that benefits all involved; the salesperson, the company, and the customers.
Offering competitive terms
If a compensation plan is not competitive or uninspiring, it can be a challenge
to motivate the sales employee to achieve reasonable targets. Unless your competitors are offering worse terms, you may find it difficult to keep good sales employees or attract star candidates to work with your organisation. Although there are other factors influencing sales, such as brand equity, product quality, competent sales managers, and price, sales compensation is the direct factor that affects sales employees’ motivation and morale. Here are some effective steps that you can take to improve your sales compensation plan.
- Define the desired results and related behaviour: A purposeful sales compensation plan is created with only one goal: to affect particular behaviour. If product A has a higher profit margin than product B, then the focus should be to sell more of product A. So how can you adjust the commission schedule so that the sales team will put more effort and focus on selling product A?
- Effective use of precursors and consequences: Precursors come before the required behaviour, and are intended to motivate or inspire desired behaviour. They set the stage for a favourable outcome; examples include putting in place the right price, having the right products, etc… Consequences, on the other hand, are the results of a particular behaviour. Both should be correctly applied to achieve a desired outcome.
- Defining roles associated with the desired results: Desired results might require modifying both the compensation plan, and the structure of your sales team. If the key desired result is increased customer satisfaction and retention, incentives to achieve sales targets (acquisition) may be reduced in favour of achieving a higher customer satisfaction index. An adaptive compensation plan is able to achieve various behaviours or results instead of just focusing on sales volume.
- Determine the “right” quota: Quota is still an important structural element of the compensation plan. The usual sales compensation plans should provide compensation equivalent to the base salary if 100% of the quota is reached. Beyond the quota, “accelerators” should be built-in to encourage over performance. To be effective, commission periods should not be too long, and keeping it simple will help the sales representatives understand the compensation plan.
- Managing change and enlisting the sales force: Effective sales managers encourage and create a culture of over performance. Open communication and a nurturing (but competitive) workplace is part of a successful formula; goals, expectations, and compensation are clearly defined and understood. Occasional boosters that could affect commissions (for example, reducing commission to reduce price) should be discussed and buy-in achieved before implementation. Open, team-oriented, communication will help built trust and encourage teamwork and loyalty.
- Finding and hiring the right fit. Sales managers should align the characteristics of the sales team so there is synergy and cooperation. There is nothing more self-defeating than a “looking out for No.1” mentality where colleagues only care about themselves or undercut their teammates to achieve sales quotas.
A different approach for automotive dealerships
Traditional commission-based compensation plans were designed to increase sales but nowadays, customer loyalty and advocacy is becoming more important to a dealership’s long-term success.
Incorporating other departments, such as the Service, F&I and Parts department, is a good way to generate repeat business as there is now less focus on acquiring customers (new sales) and more on retaining (service) customers. Some suggestions include:
- Build an integrated sales process: An effective compensation plan may include incentives paid to other departments who help acquire new customers. Whether through referrals or advocacy, if every employee in the dealership views a customer as “my” customer, the sales team will have a much better chance of success in the long term. Similarly, if the sales team have a vested interest in returning customers, they are less likely to keep a short-term view and close a deal at the expense of customer satisfaction and repeat business.
- Extending the sales process to include continuing ownership experience and not just buying experience. Most dealerships and manufacturers are only concerned with what happened at the point of purchase, and CSI incentives are paid to dealerships who did well when the customer bought. Even Service measures only the experience of the first service. But for the customer, satisfaction is measured by the continuing relationship with the dealership. Every service, every call and touch point constitutes a part of the continuing sales process. In today’s market, the sales process ends when the customer leaves permanently, not when they sign the contract.
- Sometimes, the compensation plan is not the problem. Sales managers who are frustrated that salespeople not focusing on the new model may not realise that maybe incentives and commission for other products are better. Or the new model may be more challenging to sell and salespeople prefer to promote what is easy in spite of higher commission for the new model. In such situations, increasing sales incentives or reducing the price may not be the solution. Perhaps it is better to focus on creating brand awareness or giving prospective customers more time to accept the new model.
Working backwards from the company’s goals
If a salesperson is expected to achieve $250,000 in sales revenue, and the typical deal is $50,000, then five sales are needed to achieve that goal. If the salesperson usually has 10 opportunities a month and closes one in four opportunities, then there are 2 things that salesperson can do to meet the shortfall:
The first is to ensure that they create more opportunities (at least 20) to meet the $250,000 target each month. This means modifying the compensation plan to include incentives for the salesperson to meet more people and make more calls.
The second is to focus on improving the closing rate so they consistently close 2 out of 4, in which case 10 opportunities would be sufficient. This means modifying the compensation plan to include incentives tied to closing ratio or investments in training and development.
Once the parameters are in place, it is easy to determine which outcome is more likely to help the dealership achieve its targets and align the overall compensation plan to support the objective.
Create a compensation plan modelled on an equilateral triangle
The equal sides of the triangle constitute the need to ensure that each of the following is equally important when building a compensation plan: the salesperson, the customers, and the distributorship. If the triangle is off balance, it will create undesirable consequences for all involved. The purpose of an effective compensation plan then is to create and maintain this balance.
An example is when the compensation plan rewards the salesperson for acquiring new deals but not for providing continuing service. As a result, the salesperson gets paid all the money upfront and there is now no incentive to support the customer. Service suffers, and customers are lost.
Or when a dealership continually reduces sales commission to increase margin. While this benefits the company initially, the salesperson eventually finds that there is no motivation or incentive to provide any kind of service and subsequently, service suffers and customers are lost. In both cases, everyone loses.
The indicator of a good sales compensation plan
A good and effective sales compensation plan will benefit all parties in the transaction. The salesperson receives a fair reward based on the behaviour that the dealership would like to encourage, the customer receives good and consistent service not just from the salesperson but from everyone in the dealership, and the company receives consistent profit and loyalty from both the customer and sales employees.