There was a time when almost every leasing company paid their sales representatives based on a simple formula. They were paid a percentage of volume generated. Over time, more and more rules have been put in place regarding rates, structure of deals, types of accounts, etc. but this basic formula has been used for many years and continues to exist for many companies even as our business becomes more and more complicated.
Compensation based solely on volume has its advantages. Most prevalent among them is that it is simple. Because it is simple, your sales force knows what they have to do to earn more – more volume. However giving them only one goal, although easy to monitor and understand, means you have to have a number of rules they need to abide by and the means to police the rules you put in place. These rules run from minimum rates required to limiting deal structuring to limiting of waivers of standard fees.
There are many problems with this type of compensation plan. Foremost among them is the fact that your company will often be leaving money on the table with certain leases and accounts. If you are paying someone to generate volume and pay him a percentage of volume originated as long as it meets your minimum rate standards, what is his incentive to get even higher rates when the situation would allow it. The answer is none and, therefore, he will not do it. I have often heard sales reps under volume compensation plans state that they could raise rates but have no reason to if it doesn’t get them anything. While you may think that you have a better handle on your reps and their accounts so that it is not happening to you, it doesn’t take much for this to have an effect on your bottom line. Someone passing on a possible 200bp increase on a single $20K lease probably causes you to lose about $1,000 in income depending on your profit dynamics. That is for one deal!
Volume based compensation also does not fare well for the more complicated programs that many vendors are insisting upon today. It just doesn’t work well with features such as progress payments, residual sharing, fee sharing or partial recourse programs let alone more complicated programs such as those involving profit sharing or stock options. To attempt this you will find yourself putting so many unique rules in place that suddenly the program isn’t so simple anymore – the main benefit in the first place.
These problems associated with simple compensation programs point to one undeniable conclusion. They force you to keep essential transaction and account decision-making further from the customer than optimal. This will either limit you ability to grow as your management resources get spread thin or cause you to forgo profitability while you lose touch with individual accounts.
Solution:
My solution may seem idealistic but is attainable and really is not as complicated as you might think. Your goal for sales compensation should be as follows: Match your sales compensation incentives to your company’s strategic objectives. This sounds difficult, but remember, in today’s world the traditionally simple plans aren’t so simple anymore. The idea is to articulate what you are trying to achieve as a company and then provide incentives to your sales force to develop transactions and accounts that more closely meet those objectives. Don’t sell your sales team short, they typically have more of an ability to manipulate the business they bring in the door than you might think.
Examples of strategic objectives that may drive your company are as follows: profitability, growth and market share, customer/account retention or even employee retention. More likely, though, your strategic objectives are a combination of those and maybe others. The most challenging part of all of this is to accurately identify what it is you are trying to achieve as a company. Once you have accomplished that you will find it is not that difficult to structure your plans to effectively motivate your sales team in that direction.
Say for example you want to maximize growth and profitability but you realize your cost of acquiring new vendors is excessive so you want to prioritize vendor retention. To maximize both volume and profitability you should pay your team on a profit per transaction basis. One example would be to pay them on a net present value basis with a discount rate set by you that would enable them to make the compensation they strive for if they reach the values you strive for. You should then set up a system that either penalizes them for reduced fees or rewards them for fees left on accounts. To prioritize vendor retention, you could put incentives in place to reward both your sales rep as well as the vendor for certain volume and profitability levels. Allow the sales rep to help determine the level of incentive the vendor would need. Not only have you now left the decision making on little things like fees up to your sales person but you have also given her the ability to allow low pricing on individual transactions to help your vendor in a competitive situation in order to keep the account happy with your company. At the same time, when she faces an account that is not price sensitive she will jump on it to maximize the volume for your company. More savvy reps will find ways to structure transactions to make them less price sensitive.
All of the above may make sense to you but maybe you have a problem with employee retention that you are trying to solve. First, try and understand why you have lost key employees. This may tell you a lot. If you have lost aggressive sales reps it may be because they have found a company where they can use their talents to earn more. This is another reason why you have to constantly think your incentive plans. You must make sure you enable them to maximize their potential. Don’t be afraid to allow them to make a lot of money, just make sure if they do, you benefit from it.
Other ways to ensure employee retention center on longer-term incentives. Many people have annual award programs. Of course, these don’t do a lot of good after the award is issued. You could consider longer-term incentives. Many leasing companies have residual sharing programs with their vendors. Why not have some with your sales reps? It would induce them to stay on for the next three to five years and motivate them to write more of the profitable FMV transactions that most of us are looking to write. Another way would be to allow your sales reps to participate in upgrades. Depending on the type of business you write, upgrades can be a lucrative part of the business if done correctly. Of course, the way to accomplish this is to understand the situation and to have a feel for the upgrade amount you should charge and the rate and structure for the new lease. The sales person who is handling the transaction probably knows these issues better than anyone. If you enable him to participate in any upgrade amount received over a set minimum you would generally receive higher upgrade amounts than if you used a set formula for each lease. Also, with upgrades, the new deals are often less price sensitive than normal deals because it is not as easy for the vendor to compare you with your competitors. Make sure your sales person is ready to take advantage of this. Knowing that he can participate in these types of situations with deals already on the books is added incentive for him to stay longer term with your company.
I know what you are thinking. All of these are important to me but I can’t just begin to pay sales people for every facet of the business that is important to me. I will be paying exorbitant commission amounts. You don’t have to. Remember that the key to all of this is to understand what it is you are trying to achieve as a company. You may want all of the objective mentioned above (and more) but some have a higher priority than others do. You are also closer to attaining some of them than others. If you already feel that you are achieving results in a certain area without the need for their help then place less emphasis on this area in the total compensation plan. Decide what you want to achieve, decide which are more of a priority and provide the necessary incentives to your sales force to achieve them for you. I believe that if you do this accurately you will find that you are currently rewarding people for things that are not that important to you. If you are having trouble believing that, go through your transactions completed last month and you will almost certainly find that you paid commissions for leases that you would just assume do without and paid too much for leases that are not that rewarding to your company.
Once you have decided on an incentive plan you must now explain it to your sales force and get them to buy into the plan so they are motivated to get the results. This may not be easy, especially if you are taking away part of their current package. One way to smooth the process is to have some of the staff work with you on developing the plan, preferably some of your higher achievers. It is key that they must understand the program and what they have to do to increase their earnings. Odds are that if they have a good perception of what is needed from them they will increase their earnings.
Conclusion:
I have demonstrated here that the old rules for sales compensation, while they may appear simpler, are not getting you to where you want to be in the most efficient manner. You will not maximize your company’s potential with these methods and you will spend too much time setting and policing rules that force you to stay involved in too much of the decision making process.
Your goal should always be to match your sales compensation plans as closely as possible to your company’s overall objectives. If you do this properly you will be able to pay your sales staff a lot more because you will be enjoying the benefits. Never be afraid to pay commissioned people a lot of money. Just make sure you get what you pay for.