November 26, 2014

Small Business Advice:

Make sure your sales staff is earning its own way

There is no more fascinating business in this world than that of selling. Without salesmen there would be little progress made. Selling is behind every successful enterprise of whatever character. ~ George Mathew Adams

Jerry Osteryoung | 9/17/2012

I have written numerous columns on the importance of sales and how every business needs to be sales driven. Profits are important, but they just do not happen without sales.

In order to have sales, you need an effective and efficient sales force. There is no question about that. However, just having a sales force is not adequate. You need to make sure that your sales force is compensated on actual sales and that they are measurable so you can appropriately reward them for their efforts.

Obviously, the best thing to do with sales compensation is to reward them based on actual sales. For many businesses this consists exclusively of sales-based commission or incentives. The disadvantage here is that the staff will focus only on making sales – which earns them their incentives – and neglect those other important tasks that support the sales function.

The best sales forces work together as a team to reach their sales goals, but an incentive program that rewards only direct sales undermines the team dynamic. People are not going to be excited to work together as, typically, only one person receives a commission.

I prefer a compensation structure that consists of a low-base salary and direct sales incentives. That way the staff is compensated for their individual efforts but is also paid for doing tasks that benefit the firm but not necessarily them individually.

An important consideration when determining how to reward your sales force is whether they are paying their own way. I was helping a firm that had two sales people. Including benefits, these employees were being paid $230,000 annually, with the majority of their compensation predicated on incentives. When we looked at the gross profit margin before sales incentives, the firm was only earning $150,000.

Obviously, in this case, the sales staff was not adding value to the firm. This could have been because the sales incentive was too high, the market just was not big enough for two sales people, they were asking them to do too many tasks not related to individual sales, the profitability of the firm was not adequately structured or a combination of these factors.

In this case, the firm realized that their sales commission was too high and they had to lower it. This can be very tricky as you are cutting the income of your sales force and it can appear as though the firm is just being greedy.

This firm decided to reduce the commission but, in exchange, picked up 95 percent of each employee’s health care premium. This solution was not a perfect quid pro quo, but it showed that the firm was trying to make up for the reduction in sales commissions. The staff did not like the reduction at all, but they did stay with the firm. The firm also ended up earning a whole lot more as the staff worked even harder to keep their income at the level they thought it should be.

Now go out and make sure that your sales staff is compensated in a manner that maximizes both their individual efforts and the return to the business. It is important to ensure that the total benefits package is reasonable and permits the firm to earn a fair profit.

You can do this!

Other small business advice columns from Dr. Osteryoung are here. Note: Articles older than 30 days require registration (it's quick and free).

Jerry Osteryoung is a consultant to businesses - he has directly assisted over 3,000 firms. He is the Jim Moran Professor of Entrepreneurship (Emeritus) and Professor of Finance (Emeritus) at Florida State University. He was the founding Executive Director of The Jim Moran Institute and served in that position from 1995 through 2008. His newest book co-authored with Tim O'Brien, "If You Have Employees, You Really Need This Book," is an Amazon.com bestseller. He can be reached by e-mail at jerry.osteryoung@gmail.com.

Tags: Florida Small Business

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