Companies that have “grown up” on highly leveraged commission plans are running into a dilemma–they can change the plan and risk alienating some of their highest-grossing salespeople, or do nothing and risk lower overall sales growth. The situation is more common than some realize, and demands solutions that can balance sales growth with retaining salespeople.
How Did We Get Here?
Many startup and fast-growth companies have highly leveraged commission plans that begin paying from “dollar one,” giving the sales force a percentage of the sale starting with the first deal they close. Such plans can be effective in the early stages of a business and product lifecycle, as they attract aggressive salespeople. And start-ups need aggressive salespeople, if only because an unknown brand name can’t sell the product—so startups must rely heavily on their sales forces to build the brand.
But at some point, high-growth companies become mature, low-growth companies. At this stage, many of these companies employ salespeople who have done extremely well over time and are sitting on large territories, earning enormous commissions and not growing their territories due to the number of accounts they already cover. When a company has enough of these mega-territories with flat revenues, overall growth grinds to a halt. The dollar-one commission plan that served the company so well for so long has begun to limit growth.
But despite the limitations of dollar-one plans, many companies find it terrifying to even think of changing an incentive plan that made them so successful in the first place. In many cases, a salesperson has effective control of his or her territory and accounts. Moving from a dollar-one plan to one that pays based on quota performance may spark a revolt in the field. And in fact, many companies that have tried changing have backed down based on the field’s reaction.
A Tale of Two Industries
So what can companies do in this situation? In part, the answer depends on whether customers “buy the rep” or “buy the brand.” Reviewing the history of the high-tech and medical devices industries illustrates these situations well.
In the formative years of the high-tech industry, salespeople were usually paid 100% from commissions (some received a token base salary). Companies had little free cash, and as a result, salespeople were paid only when the company was paid. This was a highly successful strategy and helped propel many companies to great profits.
But as tech companies matured, they were faced with a choice: Change the commission plan to fuel growth or stay with the status quo. Salespeople who had been successful over time were sitting on large territories, and were usually not growing as fast as the rest of their company. Maximizing growth would entail evenly allocating a combination of existing and potential accounts, thus optimizing territories. Companies had to fundamentally change the plan and move away from commissions or develop plans that allowed movement of accounts.
Over time, the majority of high-tech firms switched their plans: In 2000, the most common plan designs were commission plans, but by 2009, “quota bonus” plans had become more common (quota bonus plans set a quota for all territories, and everyone in the same role is paid the same for hitting quota). In moving to quota bonus plans, tech companies made growth their clear focus.
High-end medical device companies (makers of cardiac implants and orthopedics, for instance) started out on a similar path as high tech. However, when it came time to decide whether to change their incentive plans, most firms stayed with a dollar-one commission-based plan. Why? Because for many high-end medical devices, physicians were “buying” the salesperson, not the brand. Physicians wanted someone they could trust in the operating room during delicate procedures, and for many product categories, physician’s trust in the salesperson far outweighed any perceived brand differences.
Studies have shown that in some categories, over half of an individual’s sales leave when that salesperson departs for a competitor. Since physicians were buying the rep and not the brand, most high-end medical device companies left the 100% commission plan in place and sought growth through other sales force drivers.
So how should companies reinvigorate growth when their salespeople are accustomed to a 100% commission plan? First, a company must test if its customers are buying the brand or the rep. Discussions with sales managers and examining territory sales for salespeople who have left can help identify what, precisely, customers are “buying.”
If your customers are “buying the rep” and you decide to realign territories for growth anyway, it is important to develop a transition plan for salespeople who may lose accounts. The transition strategy can be completely compensation focused, and could include strategies such as slowly reducing sales credit on accounts that are leaving them, or guaranteeing their pay for a period of time.
The strategy can also include elements that do not involve compensation, such as changing the sales force coverage model to reduce the likelihood that a rep will leave with his or her accounts in hand. This may include moving the account over time to another salesperson and double-paying both salespeople. It can also include adding less-senior personnel—who generally are less likely to leave—to assist with the account.
If your company has a dollar-one commission plan and is concerned about below-market growth, it may be time to take a hard look at your incentive plan. Do you have enormous territories that are growing slower than the national average? What might happen if you change the plan to promote growth? You may realize that your incentive plan is inhibiting growth—and is paying people largely for the business they developed in the past.