Get your minds out of the gutters! My mom reads these posts!
I’ve been avoiding this in my blog for some time, but I’ve broken down and decided to write about it. The “C” words I’m talking about are Commission and Compensation. A few weeks ago, a colleague and I were commiserating about the topic. Seems we both are always asked about, “What’s the best commission plan, how should I pay my sales people, should I look at a 70/30 split, what about 100% commission” and on and on and…… We know people want answers and help, but it’s one of those topics where the only reasonable answer to a question is “It depends.”
Compensation and Commission issues are very difficult, and having a reasonable discussion can only be based on specifics of a situation, the company’s goals, strategies, the behaviors you want to drive. There can be many “right” answers, but there can be an overwhelming number of tragically “wrong” answers—not the one’s that put you out of business, but those that don’t help you accomplish what you want to accomplish, are just plain dull, or require a lawyer to interpret.
But every time someone poses questions involving the “C” words, I have to stop them and say, “Before I can begin to answer that, let’s start at the beginning.”
A part of the discussion that always tends to be left out is the business management or “affordability” side of the compensation and commission discussion. Without first discussing affordability, discussions about the “C” words are meaningless, they have no context.
Let me back up. I’ve been CEO, COO, GM of several companies or divisions of large organizations. In those organizations, I’ve had R&D, Engineering, Manufacturing, and a whole lot of other functions reporting to me. Conversations with many of those executives start at an interesting point—different from my conversations with many sales executives. The conversations always address the concepts of “affordability.” Stated differently, what are the investment or spending constraints that we have in “designing the solution.”
So I might be talking with a design engineer, and she has a “design budget” in mind. That is, “how do we develop a new product and fit within these budgetary constraints–both the expense of designing the product, and of the component parts themselves.” Conversations are something like, “We can afford to invest this much in GUI design, we can afford to invest this much in the core technology, we can afford to invest this much in testing.” Likewise manufacturing talks in the same way, “What is the target budget for this product? What’s the component cost? (Which produces those interesting conversations sale has with procurement) and so forth.
So the notion of designing and building a product have the concept of affordability as a constraint built into it how they design a solution. Products are designed to fit a certain design budget, manufacturing has to fit a certain manufacturing budget, and so forth.
So we need to think about the notion of affordability in designing our compensation systems within sales. Not only the overall sales budget, but when we look at the “C” words, we have to look at: “What can I afford to spend on a sales person, at plan?”
This is really the jumping off point for any discussion around compensation and commission. If we don’t establish a “budget” for the sales person (or organization), we have no ability to reasonably control our costs.
So the question, “What can I afford to spend on a sales person, at plan?” or “What’s the value of a sales person to me, at plan?” forms the constraints for how we design our compensation plans. Everything fits within that budget. So, if the answer is, “A sales person, at plan, is worth $100K to me, ” or “I can only afford $100K at plan,” then I have to design the compensation and commission plan to fit those constraints.
There’s lots of stuff that goes into answering that question, internal affordability, funding, comps with similar industries and other things. There are also different ways of looking at it, for example, fully burdened and so forth. so answering that base question is not easy. But it is the key question that has to be answered in order to build a compensation/commission system that enables us to drive the behaviors we want, lets us achieve our goals, and is affordable.
Once you answer that base question, then the rest of the design, is actually pretty easy. All you have to do is answer, “How do I want to pay that out?” This is where you look at various combinations of base, commission, bonus, SPIF’s, whatever. All of them, mixed together, at plan have to hit your budget number.
You design those components based on the behaviors, priorities, and so forth that you want to drive. This is where most conversations about compensation and commission start, and the right answer is always, “It depends.” But the one thing that is inviolable, is the budget for on target performance. The design has to hit that number. If it doesn’t, you’ve a bad–possibly tragically unaffordable design.
Sure, there are lots of other things to look at—how do we model/compensate underperformance, how do we model/compensate over performance, and so forth. We have to look at these in developing the compensation and commission plans. Again, all of these are constrained by the fundamental question, “What’s a sales person worth to me, at plan?”