How should a sales exec be paid?
One of the great things about being in sales is that you’re able to make a significant impact on the results you achieve.
If you’re able to laze around all day and achieve great results, fantastic. Except that you won’t. In reality you’ve got full control over the two core factors that influence your success – your skills, and how well you apply them. Of those, you can enhance your skills over time, but they’re hard to affect supersonically. But how well you apply your skills – how hard and how effectively you work – will impact phenomenally what you achieve.
A sales person should live or die based on the results they achieve. Poor results should mean being shown the door (ok HR people, we’ll waste a month or so trying to help them turn their results around first, then show them the door). Conversely, great results should mean appropriate financial reward.
So how is it that sales bonus systems are so frequently failing to reflect this? Some even reward the poor performers. Some stop great performers earning rewards commensurate with their results by putting a cap on payments. Crazy!
Only too commonly bonus systems are designed lazily and without thought, for example basing it on a straight percentage of sales or gross profit. That’s ok for someone who’s on a commission only basis, but assuming that we’re talking about professional sales people on a basic salary plus bonus, it would mean that if they achieve only 50% of their target they’d still receive 50% of their bonus!
There’s a base level of sales that has to be achieved in order to justify a basic salary. Otherwise there’s no account taken of the enormous damage a weak sales person inflicts on your business. It’s not just the lower sales achievement, it’s the lost sales that you’ve spent marketing investment in attracting, and it’s the increased revenues achieved by your competitors so that they’re even stronger.
In simple terms, to recruit high calibre sales people you have to offer an attractive basic salary. They then need to perform in order to justify that salary – to maybe 50-80% of a realistic and achievable target. Then the bonus can kick in – best is usually a straight percentage of gross profit or sales revenue, dependent on the business model – with no cap, so astronomical results = large bonuses.
If you can, base payments on cash received rather than sales invoices – it prevents the bonus causing a cashflow issue, and it keeps the sales person focused on selling product that meets the customer’s needs and making sure that quality product and service is provided. Preferably pay bonuses frequently e.g. quarterly, rather than annually, so that achievement and payment are more closely associated, but cap payments during the year at say 120% in order to reduce the risk of overpaying for early results that aren’t maintained throughout the year.
And if the sales person isn’t performing, don’t use the bonus system to manage them: just fire them – it goes with the territory.
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