How to Motivate your sales team

Hang around sales professionals long enough and you will hear them complain about their pay.  Complaints are based on what most sales professionals see as a myriad of problems.  Their quotas are set too high, so there is no way they hit their On Target Earning (OTE).  Their territory is sub-par, limiting their ability to sign new accounts.  You can even hear them complain about fairness.  Even the reps that are hitting their quota and making good money complain that the “lazy” or “Amateur” sales rep who is only hitting their goal because of the good territory.  If you are a sales manager, I am sure you have heard all of these complaints and many more.
Sales professionals are not the only ones who are obsessed with how they are paid.  Many companies and their executives are focused on it as well.  Executives are looking for ways to motivate reps with the assumption that it will boost revenue.  Others are looking for ways to increase the return on investment in these sales reps.  If you have worked at different organizations, you most likely have seen many different compensation plans.  Some base it around trying to match OTE to a certain percentage of revenue generated or managed.  Others base it on activity completed, client satisfaction surveys, pipeline accuracy or some behavior they are trying to encourage. 
Because of the work I did during my MBA, I have always had in the back of my mind a desire to find a way to maximize sale rep performance as well as return on the investment made in sales professionals. 
Researchers who have study sales force compensation have long been guided by the principal-agent theory.  This theory, drawn from the field of economics, describes the problem that results from conflicting interests between a principal (a company) and an agent hired by the principal (a sales rep).  For senior executives, the principal-agent theory is supposedly solved by stock options for the C-suite by attempting to align the interests of the principal with that of the agent.  For sales professionals, commission plans are the recommended answer.
Sales professionals were paid by commission for centuries before economists began writing about the principal-agent problem.  Companies chose this system for at least three reasons. First, it’s easy to measure the short-term output of a salesperson. Second, field reps have traditionally worked with little supervision, thus commissions-based pay gave managers some control, making up for their inability to know if a rep is visiting clients, playing golf or home on the couch.  Third, studies of personality types show that salespeople typically have a larger appetite for risk than other workers, so a pay plan that offers upside potential appeals to them.
There is a lot of research about what type of compensation plan to deploy.  Some argue that a straight forward plan that pays a set percentage per dollar sold is the best.  It appears to be fair…you sell more, you make more.  It is easy to administer.  You sold X, you get Y.  While a very simple compensation plan such as the above can be appealing, both to the principal and the agent, many companies opt for something more complex.  The reason for more complex compensation plans is based on the fact that each salesperson is unique, with individual motivations and needs, so a system with multiple components may be more attractive to a broad group of reps.  In fact, to get the optimal work out of a particular sales professional, you should in theory design a compensation plan tailored to that individual.  Some people are more motivated by cash, others by recognition and still others by non-cash rewards like a ski trip or gift cards.  Some respond better to monthly or quarterly bonuses, while others are more driven by obtaining a yearly quota.  The downfall to these plans is they are extremely difficult and costly to manage, and companies fear the gossip or water-cooler effect.  This is where sales reps share information about their compensation plan with each other, which brings back the concern of fairness and leads to resentment. 
Aside from the concern of fairness, there is also the concern of luck.  I still remember when I was with Black and Decker, one of my teammates was responsible for the state of Florida.  During that year, three different hurricanes bashed the coast of Florida.  During the run-up to every hurricane, he was able to sell multiple truckloads of DeWALT generators.  His sales were outstanding because of the Hurricanes.  DeWALT would have sold those generators no matter who was in the territory.  He got lucky.  Likewise, luck can take a bad turn.  Deals have been lost, not because a sales rep did a bad job, but simply because of bad luck that was out of their control.  So finding a way to lower the impact that luck has on compensation is another component that organizations look at. 
To create the right compensation plan you need to perform 5 key steps. 
Step 1: Set the pay levelThis is crucial for attracting and retain the best talent, to low and you never get a chance to hire them.  This is looking at the On Target Earnings or OTE.  OTE means if they hit their goal or quota for the year, how much should they expect to make
Step 2: Balance salary and incentives The proportion of earnings that comes from salary and from incentives determines the riskiness of the plan.  The proper balance varies by industry and sales cycle and is often based on the degree of certainty that a salesperson’s efforts will directly influence sales.
Step 3: Design the planThe plan needs metrics, a plan type, and a payout curve.  The metrics: Most companies are still paying sales professionals a commission based on gross revenue.  The rest pay on gross profits.  Plan type: You can supplement salary and sales-based commissions with bonuses based on exceeding quota, activity-based bonuses, and contests.  Payout Curve: Caps on earnings limit the pay of top performers and flatten the payout curve; accelerators or over-achievement commissions ramp up the pay of top performers, creating a progressive structure. 
Step 4: Payout periods Companies can set quotas and bonus structures to cover periods ranging from weeks to an entire year.  Research shows that shorter payout periods help keep low performers motivated and engaged. 
Step 5: Additional elements Not all reps are motivated solely by money.  For those that like the non-cash rewards and the recognition awards, you need to add those additional elements into the plan as well.  This could range from contest to reward trips like President club. 
Once you have your comp plan designed, it is perfectly ok to take the lab out into the field and experiment on how to develop the right plan.  If you do that, make sure you include your sales professionals in the experiments.  Include those with longer tenures, varying degrees of success, and those in different life stages.  A sales professional straight out of college has different motivations than one with a spouse and children. 

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