We recently interviewed several sales compensation analysts across numerous industries, to gather stories of how sales reps cunningly find loopholes in their compensation plans and pull in a few extra dollars.
According to one analyst in the tech sector, when the economy is going well, sales reps sell, but when business is bad, sales reps scheme. According to the analyst, when sales are slow, sales reps spend half of their time selling and the other half gaming: analyzing incentive plans and looking for creative ways to maximize their payouts without regard to the good of their company.
In The Carrot, I’ll talk about some of these games that salespeople play, in which their company loses. The first is one of the most common: slashing price to close a deal, profits be damned.
A common way to exploit a plan is to game the metric, and the most common–and one of the easiest to manipulate—metric in a comp plan is sales revenue. When commissions are calculated based on top-line sales revenue, generating profits may not enter sales reps’ calculations in pricing a deal. On the contrary, they have an incentive to close a deal even if it loses money.
Companies that use sales revenue as a basis for commission thus encourage their reps to discount heavily. While most firms put guardrails in place (for example, a maximum 10% discount without manager approval), reps incented on sales revenue are not encouraged to present the best value proposition.
Rather, they are incented to compete on price and undercut competitors. If they close a $20,000 sale, they’ll make a commission, even if the product cost $25,000.
This tactic is common. What’s more, many sales managers are aware and don’t mind. In some industries, it makes sense to win a new customer, even at loss, as long as there is the potential for future revenue.
But sales reps who cut the price in order to make a sale may not only erase profits from a single deal, but force colleagues and competitors to do the same. And once buyers know how deep the discounts can get, it can be tough to raise prices later on.
In my next blog entry, I’ll focus on another gaming tactic: The Loss Leader Maneuver.