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7 Essential Elements to a Sales Compensation System

Designing an effective sales compensation system can spell the difference between average performance and exceptional performance. Here’s seven considerations for getting it right.

1. KISS

Follow the KISS method. Kiss stands for “keep it simple, stupid.”  All to often managers try to get cute or complicated and the result is a convoluted compensation system that results in unintended consequences and/or makes it difficult for the salesperson to connect behavior with compensation.  As a general rule, keep things as simple as possible.

2. Beware Unintended Consequences

It can be difficult for a business owner to get inside the head of a salesperson.  Many salespeople approach the world from a big picture perspective, but a number take a narrow view.  This is the view you want when evaluation a compensation system.  Take a parochial perspective. 

For example, if you simply want more sales and give a salesperson pricing flexibility, do not be surprised if sales go up while profitability plummets because the salesperson start discounting or throwing in freebies to close more often.  The answer, in this case, would be to limit the salesperson’s ability to adjust prices or add extras without management approval.

3. Define the Fixed Versus Incentive Compensation Mix

A number of salespeople in the HVAC industry are 100% commission based. The best salespeople prefer this method because they are confident in their abilities and this gives them the best opportunity to maximize income. 

While there is much to be said for the full commission approach, it can also result in the gunslinger salesperson who does only what he feels like because he’s only paid for sales. Adding a small base or draw obligates the salesperson to conform to management requests and requirements.

4. Create a Progressive Commission Schedule

Set monthly quotas for salespeople based on company breakeven.  When sales exceed breakeven, overhead is already covered and the gross profit falls to the bottom line.  Pay a higher commission above breakeven to further incent highly profitable sales activity.

5. Pay More for Self-Generated Leads

Few industries are as generous as the HVAC industry in feeding salespeople leads.  In many industries, like real estate, salespeople are expected to generate their own leads.  However, because that has not been the practice in HVAC, salespeople need to be incented to generate their own leads.  It’s worth it when the cost of customer acquisition by marketing is considered.

6. Use Spiffs Tactically

Spiffs, or small incentives, are often used to encourage salespeople to push certain products, often system enhancements or accessories. Sometimes these are new offering and the spiff is designed to help the sales force become accustomed to offering the product. In other cases, the accessory is unusually profitable.

7. Consider Paying for Business Tools

Some contractors pay for mobile phones, computers, cars, and other essentials to modern sales. You may or may not want to include these as benefits. If you do, fully account for the cost to you and value to the salesperson. If you decide to take these back in the future, it can become a huge demotivator. As self-destructive as it is, I’ve seen HVAC retail salespeople refuse to drive more than 10 miles for a call after the employer pulled mileage reimbursements.

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