Compensation Strategies: Successful Selling
By Sam Allman
Leaders and managers are responsible for creating an environment in their organizations that is conducive to employee productivity. While it is debatable whether you can actually motivate others, you certainly can demotivate them by the environment in which they work. My message to leaders or managers is that if employees are not more productive because of your presence, then you are a cost to the system and are not needed.
One of the outcomes expected of leaders or managers is productivity. Profitable companies are always looking for ways to cut costs, especially costs that bring no value to the organization. The measure of a leader or manager is results. Productivity is one of those results. It’s a scary thought that you, as the owner, may really be just an expense to your company.
Typical managers, when productivity is not where it needs to be, will point fingers and blame their people. You hear, “You just can’t find people who want to work anymore” or “If I could only find people who care like me.” Sounds like what is really needed is a boss-ectomy or an owner-ectomy. Great leaders and managers understand that when productivity is not up to par, it is not an employee problem. It is a leadership problem. When leaders claim the problem, they can take action to create the solution. Effective leaders and managers use leadership tactics to create an environment conducive to peak performance. Why do some CEOs command multi-million dollar salaries? They produce results—not just results, but optimal or extraordinary results. Effective leaders know how to influence the workers and the environment in which they work to enhance productivity. The most basic of tools or tactics that he can use to accomplish this is compensation.
When was the last time you studied your compensation system? Is it helping to produce the results you desire? Are you sure? Are your people more productive because of it? If you haven’t paid attention to it lately, you may want to. Compensation is the basic factor that affects productivity and profitability. I might add here that I do not believe there is one best compensation system. Every system has its strengths and weaknesses. In addition, I will hopefully prove to you that any system you choose has to be supported by other fundamentally sound leadership tactics that reinforce the expectations desired.
Compensation is one of the first areas we investigate as we help to improve the profitability and performance of our clients. One of the main reasons a company approaches business failure is that the wages of the employees, as a percentage of sales, begin to increase. We look at the wages of each person in the organization and compare it with the results they produce. We believe that each person in an organization should produce results commensurate with what they are paid. Our rule of thumb, at least for salespeople, is that they should produce three to five times their salary in gross profit. The actual number may vary depending on whether the person functions in inside or outside sales and how much help is needed for them to acquire customers.
When results and wages are not congruent with expectations, we have to ask, “What is being rewarded?” According to Michael LeBoeuf, a professor of management at the University of New Orleans, the greatest management principle in the world is “things that get rewarded get done.” In other words, we get what we reward. As a parent, I found that if I gave in to my children every time they whined or made a fuss, I rewarded and reinforced the very behavior I was trying to squash. It wasn’t until my wife and I said “enough is enough” that our children’s behavior changed because we discontinued encouraging behavior we didn’t want.
That’s why many of the sales managers and owners with which I have worked say that the only way to pay a salesperson is on straight commission. Sometimes I agree, but not always. Everyone is different and is motivated by different reasons. Just because you are motivated by money doesn’t mean everyone is. I have personally seen salespeople who quit the last three months of the year because they had earned what they needed. Remember, when a need is satisfied, it no longer motivates.
If you incentivize salespeople, you have to be careful what you reward and be clear with what you want. I am intimately aware of a company that pays its salespeople on sales, and so that is what they get. Since the company does not allow lowering margins without management approval, margins are not affected much. However, it has created a dog-eat-dog environment with salespeople fighting over customers and refusing to help customers that are not theirs. Sales are being rewarded at the expense of customer satisfaction. I am reminded of a visitor in a mental health institution who became alarmed when he found that there were only three guards watching over 100 dangerous inmates and asked, “Don’t you feel these people will overpower the three of you and escape?” The reply was, “No, lunatics never unite.” Do incentives create lunacy?
You have to decide what you want: customer satisfaction or sales; teamwork or sales; margins or sales? You may reward one at the expense of others. I know one company that changed its compensation system from a percentage of sales to a percentage of profit, and within a few months its margins went from 35% to 43%. Decide what you want, then create a system that delivers it. Commission-based compensation systems work for people who are driven for monetary rewards. What about those who are more worried about security and a consistent income? Maybe a salary system will work better for them.
Some struggle using salary systems because of what is rewarded. What do you reward salespeople when you only pay them a salary? You reward them for just showing up, because all you are doing is paying them for putting in time. So that’s what you get unless your system is supported by effective leadership tactics. A salary can be effective if it is accompanied by clear expectations (quotas for specific desired results), performance metrics and a system of accountability. A salary plus a small commission for sales, margins or a share in company profits will improve the effectiveness of a salary system. You may have different systems functioning in your business at the same time, because you may want to maximize the performance of each of your people. Employees are all different, and they all have different needs.
Incentives, commissions and recognition are examples of extrinsic rewards or, as they are also called, carrots. Again, the problem with carrots is they only motivate you if you want them. In his book, Drive, Daniel Pink reminds us of decades-old research on human motivation that proves that humans are at least as strongly motivated by intrinsic satisfactions that come from learning, playing and being curious as they are by carrots or even by the fear of the stick (punishments). Salary systems work because some workers need a certain baseline of comfort and security, so he claims that additional external rewards actually serve as de-motivators.
In fact, as Pink compellingly points out, humans are naturally autonomous and self-directed toward contributing and engaging in life. What’s interesting is that he reminds us that most leaders are completely oblivious to this scientifically accepted fact. Reflecting on his treatise, I consider those who like to work but play harder at things that are important to them. I refer to my son Jim. He is a triathlete. He works hard at staying in shape so he can participate in triathlons. When he works out, he swims, bikes and runs. Amazing, he doesn’t get paid for it. Why couldn’t I get him to work like that when he was a kid? I even offered to pay. Every one of us has passions that tax us and require us to exert ourselves. We don’t get paid for doing them, and most of the time we have to pay to do them. Maybe we should make work a game and more of our people will more deeply engage. We can buy our employees hands, but we can’t buy their hearts.
Pink reminds us that we all want to be paid fairly for our efforts But we also want to do good work, challenge ourselves, get better at something that matters and make a contribution. He says money is a motivator, but it is also a form of feedback. Monetary rewards are important, says Pink, because “the workplace is one of the most feedback-deprived environments around.” Feedback is the “breakfast of champions.”
He shared a story about a CEO who made the decision to eliminate commissions. He raised base salaries and increased end-of-the-year profit sharing. Personally, I like profit sharing because it gives everyone a stake in results produced by the whole organization. The CEO found that the sales reps collaborated more because they were no longer pitted against each other. Total sales went up and so did customer satisfaction, making it a win/win for all stakeholders.
Pink proposes a motivational system that is based on three pillars: autonomy: the urge to direct and be in control of our own lives; mastery: the desire to get better and better at something that matters; and purpose: yearning to do what we do in the service of something larger than ourselves—it is our ultimate need, the need to contribute. It’s the motivation that causes people to work hard and donate their time and efforts to causes they believe are worthy.
Whatever commission system you choose to implement, you have to monitor it and be aware of the results it is providing. Remember the importance of fairness. If people aren’t getting paid fairly relative to other people in your organization doing comparable work, then that’s a motivation destroyer. If your employees feel that they are not being paid fairly, they will justify slacking or, even worse, stealing.
Finally, critical to your system is the support that you give it using other leadership tactics. Even Pink asserted that it is important not to eliminate that support in any type of commission system. Those tactics include: communicating clear performance expectations; monitoring the important performance metrics; and an accountability system that requires your employee to report back on the progress you expect. You need to inspect what you expect! Consider your compensation system; is it helping to increase productivity? Do you need to support the system more effectively or do you need to change it? You decide.
Copyright 2013 Floor Focus