By David J. Cichelli, Senior Vice President, The Alexander Group, Inc.
With more customers ordering goods and services from the
Web, questions are being raised regarding sales commissions, account ownership and quota allocation.
Will sales compensation become an e-relic of the 20th
century? With the rise of e-commerce, the sales department looks slated for
decommissioning. Why employ a salesperson when customers can use a mouse to
point and click their way to purchases?
While the volume of business that is sold through the
Internet will soar to almost incomprehensible levels, the death of the sales
department is a premature assumption. Even dot.com companies are finding they
need to hire salespeople to help promote their products. In fact, one of the
fastest growing sales employment segments is advertising sales representatives
for Web-portal companies. These companies have learned that when choice is
available, uncertainty is present and risk is inherent, a salesperson can help
guide customer decision making. Thus, the two criteria for sales compensation
use are customer contact and customer persuasion. Therefore, selling will
continue into the 21st century, as well as the use of sales compensation.
However, employers need to be prepared for major challenges to sales pay
programs. Consider these issues:
- Should the salesperson receive sales credit and thus
incentive payment for orders put through the Web?
- Who owns the customer -- the salesperson or the
Webmaster?
- Should salespeople encourage their customers to use the
Web to order products?
- What sales compensation practices should be avoided in a
Web-enabled environment?
These questions currently are being debated within sales
departments. Compensation managers can expect to have some of these issues land
on their desks. What follows are key concepts and suggested perspectives to
assist the sales team in sorting through these issues.
The (Sometimes) Mysterious World of Sales Management Subsystems
As a pay program, sales compensation is connected to
several -- and sometimes mysterious -- sales management subsystems such as
account assignment, sales crediting and quota allocation. Evaluation of the
sales compensation program can not proceed without concurrent examination of
these complimentary supporting systems. While most of us are very familiar with
the typical features of a sales compensation plan -- target compensation, mix,
leverage and incentive formula -- it is the operation of these sub-systems that
dramatically affect payouts. The rise of e-commerce, generically known as a
sales channel, will require significant revisions to these subsystems. Make
these changes correctly and the sales compensation pay system will continue to
operate successfully; make a mistake and the pay plan will fail.
A Web Site Held Hostage:
Point and Click Meets Brick and Mortar
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The president of a major furniture retailer explained
her predicament. “Look, I know the Web site can give me access to new customers,
but 20 percent of my customers account for 80 percent of my revenue. And, my
in-store decorating sales counselors own those relationships.” She added: “If I
don't give them sales credit from Web sales, my best sales producers will quit.”
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Should salespeople get sales credit for Web sales for out-of-region sales?
What about sales from first-time customers?
Should salespeople get full credit for these non-store new Web customers?
How can the Web support itself, if it must bear the burden of commission credits back to the sales counselors?
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The president was adamant. She will not risk the
ire of her best salespeople. “Unless, I give the credit for sales over the Web,
they will complain that I am taking money out of their pockets.” Yet, still
unresolved are the following questions:
Which salespeople get what Web credit?
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These and many related questions need immediate
attention. Ultimately, she will have to decide if the Web site is a sales
counselor tool, or a separate sales channel. Perhaps she needs two separate Web
locations: one for value-added services provided by sales counselors and a
second Web site for unassisted purchases.
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Start with the Role of the Salesperson
To investigate all of these issues, begin with a
reconfirmation of the seller’s role. Answer this question: What is the
salesperson expected to do?
- Get new customers
- Sell new products to existing customers
- Keep existing customers happy with their on-going
purchases
- Provide customer support and order fulfillment
help.
What about the salespeople? Are they expected to do one,
some or all of these activities? Sales compensation plan design is related
directly to the content of the sales job. For sales jobs with more individual
initiative and persuasion, more at-risk/high upside variable pay should be used.
Conversely, jobs that focus on more reactive duties such as customer service and
order fulfillment should have less variable pay.
A Simple Rule: Pay for the Point of Persuasion
In sales compensation design, the rule of thumb is “pay for
the point of persuasion.” In other words, pay a salesperson for the job of
persuading the customer to act. This is where sales compensation fits. Not
following this rule gets many sales compensation plans into trouble. Such sales
compensation plans have too many performance measures, incorrect measures, or
provide rewards or punishment for results outside the influencing scope of the
salesperson. Finally, many sales compensation plans simply become obsolete over
the passage of time. For example, in a start-up company where the selling role
is 100 percent persuasion, the pay system features a high risk/high reward
design. As time passes and the sales rep develops a large embedded base of
business, the pay program needs to migrate to an account management model with a
higher base salary component. The mistake is to leave the high risk/high reward
pay plan in place -- an all too common occurrence.
How E-commerce Will Affect the Sales Force
The primary role of the salesperson is to persuade. If
other resources such as the Web site can handle re-orders, then a salesperson
should not be distracted by these duties. If a customer already knows what he or
she wants to buy (a standard product with little uncertainty), then there is no
need to involve and reward a salesperson. In such cases, it’s appropriate for
the customer to order the product via the Web, without the involvement and
reward of a salesperson.
Now comes the challenge: How should account ownership,
sales crediting and quota allocation be handled?
Making Adjustments to the Sales Management
Subsystems
As noted above, the sales compensation program is more than
just a payout formula, it depends on the effective application of critical
subsystems such as account assignment, sales crediting and quota allocation.
Note how sales management must augment these subsystems under the following
e-commerce conditions:
- E-commerce is primarily for order fulfillment of
products sold by the salesperson. In such cases, the salesperson is acting
as the persuading influence; therefore, the account “belongs” to the
salesperson, and all sales placed through the e-commerce site are credited to
the salesperson for compensation purposes. Quota objectives include all sales
volume placed through the Web and contribute to quota performance
accomplishment.
- E-commerce is used primarily by buyers who do not need
sales advice. These accounts should not belong to the salesperson, nor
should such volume contribute to retiring quota and, of course, no compensation
credit is given for such sales.
- E-commerce is the primary sales link with the customer,
but customers must be convinced to “sign-up.” This is known as
“matriculation selling” and the compensation program needs to reward sales
representatives for getting customers to use the Web site. These accounts belong
to the company and the salesperson receives an incentive for “signing up” a new
customer. In such cases, management defines the quota by the number of new
accounts matriculated on the Web. Additionally, a compensation value is often
placed on the amount of sales volume the new customer places through the Web.
Larger volumes mean higher payouts. However, this adjustment has a time limit.
Therefore, after this pre-defined period, no additional revenue is credited to
the salesperson thus encouraging him/her to find and matriculate new customers
-- the salesperson’s primary role.
As with all sales compensation design issues, look for the
point of persuasion. Reward those efforts where the salesperson can successfully
affect customers’ buying decisions.
What to Avoid
The following are noted sales compensation design errors.
Be on the lookout for the following two most common errors:
- Landlording. A common, but mistaken, philosophy
that promotes the view that the “salesperson owns everything in their territory”
and should receive sales credit for all sales in a territory whether or not they
affect the sale. Not true. Such a mistaken perspective creates high payouts
without corresponding effort or contribution. And, unfortunately, the sales
person spends excessive time auditing sales credit reports from various sales
channels. Now, the persuasion resource has become an accountant! This is a very
ineffective use of the sales personnel’s time.
- Appeasement pay. Many sales leaders believe that
they must credit all sales generated through the Web site to the salesperson to
ensure their cooperation. Known as “appeasement pay,” such a practice avoids the
inevitable. While some token reward system may be necessary to provide initial
positive support for the Web site, the double cost of such a practice will prove
prohibitive over time.
Finally, employers should be prepared to help the sales
management team make changes to these critical subsystems to ensure continued
effective use of the sales compensation plan.
About the Author -- David J. Cichelli is Senior Vice
President of The Alexander Group Inc. Contact him at dcichelli@alexandergroupinc.com.
© 2000 American Compensation Association (ACA), 14040 N. Northsight Blvd.,
Scottsdale, AZ 85260 U.S.A.; 480/951-9191; Fax 480/483-8352; www.acaonline.org;
E-mail aca@acaonline.org
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