Tl;dr - Industrial manufacturing is a complex process. Why do we create overly simplistic comp plans for capital equipment salespeople? Let's step back and understand everything involved in a comp plan and then properly engineer one that solves for the application....just like we do in operations and manufacturing.
What is an Optimized Sales Compensation Plan?
Sales comp plans are fraught topics. In a perfect world, they motivate sales reps to do the unpleasant and hard work required to deliver meaningful revenue.
Often, however, they engender resentment among the reps and colleagues who believe they are inadequate or excessive, respectively.
So how can a company design and articulate a capital equipment sales comp plan that incents the right activities and attracts and retains 2nd & 3rd standard deviation talent?
A sales comp plan should:
- consist largely of uncapped commission
- include accelerators for exceeding quota (monthly, quarterly, and annually) to encourage performance and accelerate sales cycles simultaneously
- tie to profit - either paid on margin or, if paid on revenue, incorporate variables that adjust for margin
- contemplate different forms of compensation to appeal to different motivation types (e.g. purely cash, donations to charity, or experiences, etc.)
- adjust for sales rep errors (e.g. reduce commission if oversights of routine information that fall to them result in project costs)
- assure most colleagues that the comp is appropriately tied to the effort and skill
- support strategically important corporate objectives (ratio of new to repeat business, develop product lines, support sales channel, enter new industries, penetrate target accounts, target key competitors for knockout, etc.)
- accommodate flexibility in helping new reps get running
- avoid behavioral distortions according to Goodhart's Law (e.g. sandbagging, or rewards for outbound activities that can be gamed)
- discourage (and penalize if necessary) any sale or behavior that is not legitimately in the best interest of the customer
- be easily calculated so that reps, management, and payroll administrators can all manage the numbers (that means that the data must be easily available and accurate)
- incent collaboration between departments (e.g. spare parts kits with a machine sale vs. post installation) and deter competition (service department selling a rebuild against sales selling a replacement)
- consider payments against bookings, down payments, revenue recognition, shipment, and payment receipt on long lead time orders
- protect the company (e.g. if one rep has a phenomenal year, but the rest collapse and the company is losing money)
- ensure that reps focus on selling orders, and distinguishes that from account management, customer service, and project management
That's a complex web. Let's look at how to structure a machinery sales compensation plan that satisfies as many of these as possible.
Stakeholders in Capital Equipment Sales Comp Plan Design
It's natural to think of the sales rep as the only stakeholder in designing a capital equipment sales compensation plan. That's a mistake.
While a comp plan most directly impacts the sales rep, it also impacts other employees, management, the company and its owners, prospects, and customers.
Sales Reps (and Their Families/Spouses)
We need sales reps to be successful and fulfilled. Sales managers should know their reps' personal goals and dreams, and work to help them achieve them. Whether money is their goal, or a means to their goals, managers should understand what makes them tick.
It's always been risky to assume that money was the sole driver for sales activity. We've probably each encountered reps who had subconscious ideas of how much money was a lot (often based on their parents' and neighbors' earnings and lifestyle) and would coast once they hit that number.
Increasingly, rep motivation (based on studies of >2.5MM reps) is evolving from extrinsic (money-motivated) to intrinsic (recognition and achievement-oriented.) That's a big change that needs to be accounted for in comp plans and understood by managers who may have developed in a world where extrinsic motivation was more common.
Families and spouses also greatly impact rep expectations and reactions to comp plans. Sales managers must understand these dynamics, too, to help motivate reps fully.
Compensation is an important factor in hiring top talent. If you're following a proper recruiting and hiring process, have tweaked a great job posting, and find that response is low, consider your compensation as a factor (in addition to your remote work policy and a poor Glassdoor rating.)
Interdepartmental & Colleague Resentment
It's common for other employees to resent what's seen as excessive compensation for sales with corresponding inadequate recognition of the contribution of others to the sales success. A typical situation in capital equipment sales arises when a rep, perceived internally as a lightweight glad-hander, nurtures long-standing relationships to win an appointment with a decision-maker. They then tag a technical sales/engineering resource to join the call and are seen as relying on them to make the sale.
Another common scenario is a weak rep who demands a disproportionate amount of management time and support, relying on a sales manager to close and manage most of their deals.
We're all humans; fallen and prone to emotional reactions, so some of this is inevitable. But performance, accountability, and compensation should be all be integrated and transparent enough to address concerns. Management should take steps to convey the value of work and consistent sales activities to create an environment in which the company wins, even with contributions from others. Shared compensation for technical sales and team selling is often appropriate, and under no circumstances should a culture of condescension toward sales develop.
The Company, Investors, Owners, and Managers
Obviously, the comp plan has to support the business. It must be a Goldilocks plan - neither too meager to attract the right people and drive the behaviors necessary to generate growth, nor too generous and sacrifice important profitability to reps.
Buyers, Prospects & Customers
The comp plan must also work to the benefit of the buyers. Machinery sales reps must have the latitude to work with complex buying teams on long sales cycle projects, to help them define objectives and quantify the value of projects. But comp should also incent respect for buyers' time, investing in qualified projects but limiting time spent on fruitless research.
Compensation (and culture) must discourage any attempt to sell anything not in the buyer's best interest.
Key Compensation Plan Design Objectives
The comp plan should be designed to support important business objectives.
- decreasing concentration risk - incentivizing sales to new customers and across product lines and industries so that the businesses' revenue is well diversified
- encourage profitable, sustainable growth - an appropriate blend of target and key account development (elephant hunting) with a consistent flow of "normal" projects
- margin preservation - discounting erodes perceived value and business vitality
- shortening the sales cycle - everyone benefits when deals move quickly to conclusion
- foster longevity - there are times when turnover in sales is a good thing, but if you've optimized your team, an optimized comp plan will help to retain them
Tools Beyond Compensation to Motivate Capital Equipment Sales Reps
Compensation, particularly monetary comp, is not the only tool you can use to motivate sales reps.
An effective sales team evaluation and sales candidate assessment tool should uncover a rep's motivation style. This is important information for management coaching and goal setting, but it can also help tailor a comp plan to meet a rep's preferences.
Extrinsically motivated reps focus on the cash opportunity. Intrinsically motivated reps will value the satisfaction and recognition of success, and altruistically motivated reps want to make a difference.
It's common to see reps who are primarily intrinsically motivated but with an extrinsic requirement. Your comp plan must provide an appropriately blended solution as intrinsic motivation becomes more common. You may also offer altruistically motivated reps opportunities to have charitable contributions made in their name as a portion of the comp.
Those are the carrots. Sometimes, you need sticks, too.
Accountability is a hugely important tool in keeping reps motivated and focused. Don't discount the value of simple, consistent expectations.
A sales improvement plan provides a more powerful nudge. When a rep isn't performing, it's the obligation of management to notify them. The plan should clarify expectations and required behaviors and activities, and provide adequate support for them to meet the requirements.
Common Errors in Machinery Sales Comp Plans
Markets change. Buyers change. Reps' expectations and mindsets change. Capital equipment sales comp plans need to be periodically updated.
Too often, counterproductive plans are left in place. While changing risks creating unhappiness, comp plans must address the needs of stakeholders outlined above. That requires periodic adjustment.
Other common errors in comp plans include:
- capping commission
- not tying commission to margin
- no new business emphasis
- a single plan for everyone (as opposed to a couple of options to recognize motivation style)
- bonus based on business unit (unrelated to a rep's effort or success)
- too complicated to understand and track
- quotas that are too easy or unrealistic
- criteria that create distortions in behavior (Goodhart's Law)
- failing to survey across a range of industries and rep skillsets (are your competitors in your trade association really the benchmark you should use for how to compensate exceptional talent? yet you also need to be able to justify to stakeholders why compensation is structured as it is)
Process Engineering and Complexity Are Familiar
Industrial companies make complex products using complex processes. They solve complex problems for customers. Complexity is part of their business; they carefully engineer and continuously improve processes.
There's no reason that the comp plans for industrial sales reps should be any different.
Maybe '24 provides a convenient excuse to revisit and redesign your comp plan to drive better business results.