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Sales Commission Structures In the Office Equipment Industry
By Allan Erickson
Originally published in the July 2001 issue of Copier Marketplace
Compensation is always a thorny issue in the effort to build and grow a sales organization. A compensation plan limiting opportunity aggravates personnel turnover, itself a costly problem. A stingy comp plan will drive off sales talent, positioning the organization for failure. An excessively generous plan will carve too deeply into profit, likewise a prescription for systemic collapse. Crafting a balanced compensation plan is therefore critical to near-term and long-term success.
In this industry, average sales compensation as a function of salary and commission is about 9 to 10 percent of the gross revenue on a deal. So, if a sales representative sells $100,000 in equipment in a month, average compensation in terms of salary and commission is about $10,000. (Commissions on service and supply agreements, if any, are a separate issue.) According to our research, some organizations are paying 5 percent, others 12 percent, some higher. No matter the structure -- salary/commission, a percentage of gross profits and revenue combined with a draw against the commission, a straight percentage or unit bonuses and salary -- the average seems to come in consistently at 9 to 10 percent.
The Win-Win Proposition
In the new digital age, successful sales professionals must employ a greater skills set than their counterpart of the analog days. Therefore it is reasonable to assume that compensation should be increasing. For the sake of balance it is also reasonable to expect more articulate salespeople to sell at higher margins so owners can afford higher compensation.
Independent dealers offering above average compensation, coupled with other benefits and rewards, create a formula for consistent growth and a win-win for employees and owners alike. For the overall plan to be well balanced, many owners have found true benefits in going the extra mile for sales people. These owners stimulate more business, encourage higher levels of customer service and reduce expensive turnover.
Balance is achieved more fully when employees, likewise, go the extra mile for the sake of the organization's overall health. Salespeople who realize that owners are being generous are more likely to put in extra time and effort; again, a win-win for everyone. The cumulative effect is a more enjoyable workplace, a more profitable enterprise and more income for sales people who embrace the model. These are the more desirable sales people anyway: the long-term players with fire in the belly who are interested in maximizing income and opportunity for themselves and their employers.
We recently conducted an informal poll of owners and managers on how they structure their compensation plans. Along the way, we also interviewed several of these leaders to understand the philosophies behind the plans they've created.
Most everyone agrees that it's a competitive market and that finding and hiring the right people is an art in itself. Keeping good people can also be a huge challenge. Some owners are going so far as to offer equity positions for top performers and managers, all in an effort to attract and retain great people. The managers we interviewed generally agree that while compensation is important to sales people, other issues may rank higher on the list of considerations, including workplace environment, opportunity for promotion, daily activities, micromanagement, benefits and territory or vertical market potential.
Attracting, hiring and keeping sales people certainly is more than an issue of compensation. Still, compensation is central. One key is building various incentives into the plan to stimulate both short-term and long-range growth. This can be difficult if you are also trying to keep it simple, another goal many owners and managers mentioned.
One important consideration throughout is the topic of "cost of goods." Sales people are very attuned to this issue, especially when gross profit on a deal strongly influences commissions. Owners who "pad" landed costs shrink gross profits and reduce earnings opportunities for sales people. This also puts sales people at a disadvantage, making them less competitive when it comes to pricing. In this light, compensation as a function of cost of goods can impact the competitive edge of the company as well as dramatically influence internal morale. Again, determining reasonable cost of goods figures is a balancing act. Many of the cutting-edge entrepreneurs we spoke with are opting for a starkly crafted cost of goods approach, and then use that as an employee recruitment sales point.
Another critical issue is salary. Many competitive sales organizations in the business-to-business environment are offering generous salaries, upwards of $80,000, even to college graduates. Our industry traditionally offers the lower salary/higher commissionable opportunity approach. The difference between the two cultures is often defined as "farmer" versus "hunter." But as we all know, a successful sales organization embodies both high levels of customer support and active prospecting.
Thus, the distinction between the hunter and the farmer often blurs. In today's climate, many owners are increasingly open to offering better salaries, or "bridge" money, and signing bonuses to remain competitive in attracting sales talent. Large organizations are offering $2,000 to $3,000 per month even to entry-level people.
Lease rates present another opportunity for sharpening the overall competitive edge. Large organizations are sometimes inflexible when it comes to negotiating rates. With the majority of transactions now being leases, a better rate can often mean the difference between victory or defeat. A company's ability to shop rates and negotiate to meet the customer's monthly payment requirement has tremendous positive impact on revenue, gross profits and sales compensation.
Quota performance dictates income levels of course. With territory and named account, the quota range runs from $20,000 to $60,000 per month or more, depending upon market characteristics. Here too it is extremely important to set reasonable quota expectations. The quota must be challenging, but attainable.
When it comes to expenses, it is an open field of discussion. Some outfits do not pay any expenses, others cover the gamut: pagers, cell phones, gas, lunches, laptops. The middle ground appears to be $300 to $400 per month or .35 a mile, whichever is greater.
In addition to regular sales contests, performance bonuses, spiffs and rewards, incentives are often built into various compensation plans, either in whole (and applicable to the entire staff) or in part (specially designed for a new person or senior level individual). Here are some of the concepts we discovered in the area of incentives.
A graduated schedule of commissions based on quota performance, as a function of percentage of gross profit:
25 percent for sales below quota in a given month.
35 percent at quota in a month.
40 percent if quota exceeded in a given month.
45 percent if quarterly quota exceeded.
Quarterly bonuses based on either gross profit or revenue performance. However, note noting that revenue-driven bonus programs can work against maintaining good levels of profit. Sales reps, in striving to hit revenue targets, will sometimes drop prices prematurely just to get the deal, especially at the end of the month, quarter or year.
Annual bonus for dramatic performance, e.g., 150 percent of plan. Often this is computed as percent of annual sales revenue (.5 percent, 1 percent or 2 percent).
Participation in a service/supply contract annuity based, tagged to sales performance, or not.
Ability to buy into the business and build an equity position over time, or ownership percentage based on performance over time.
An Easy Formula
There are no easy formulas to help an owner or manager design and institute a sales compensation plan. There are just too many variables -- organization-to-organization, and region-to-region. However, in view of the rapid change in the industry, large companies coming on hard times and independent dealers enjoying growth -- coupled with the changes in technology and the shift in the profile of the
successful sales professional -- owners and managers are finding it more profitable to err on the side of generosity. Sales people should likewise see the wisdom of giving the extra five percent effort to ensure that their companies remain in a growth pattern. What shakes out under these circumstances is a win-win for employer and employee alike.
How does your sales compensation plan compare?
What follows are versions of compensation plans that CopierCareers.com discovered recently in various regions of the country, from Los Angeles to Atlanta, from Seattle to Florida, and from New England to the Midwest.
Keep in mind that these are compensation plans for territory (or named account) salespeople. For major account reps, strategic account executives, digital, color and high volume specialists, it's often a different story both in terms of salary and commission structures.
Sink or Swim: No salary, draw against commission (with cap) for 90 days only. Benefits start in 90 days. Commissions paid in the month following the transaction at a straight percentage of gross profit on the deal. No service and supply commission available.
Under this structure, if a rep sells a piece of equipment at $10,000 with 15 percent gross profit in the deal, he earns only $450 in commission.
A sales revenue of $100,000 per month would only yield a commission of $4,500 or 4.5 percent, clearly far below industry average.
If that same rep was working on 20 percent margins, the picture is better: $600 per $10,000 in revenue, or 6 percent, but still far below average of 9 to 10 percent.
Working with margins below 15 percent is obviously a disaster. Under the terms of this plan, for a rep to achieve the 9- to 0 percent average income on a deal, he/she would have to be selling at gross profit margins of 35 percent. While this is not impossible, it is highly unlikely. Customers often feel gouged at a 35 percent mark up. This sales rep likely will sink, not swim.
Anti-KISS: Salary + commission + benefits + bonuses + your first-born + the kitchen sink.
Some plans are so complex, one needs ask "Why?" These plans are especially puzzling when the outcome is very similar to simpler plans, i.e. overall comp at about 9 to 10 percent of revenue. The plan at one company involves salary, commission, benefits and expenses.
The commission portion is a function of the type of transaction (cash, lease or cost-per-copy all inclusive) and the amount of gross product in the deal. All of these figures are laid out in a complex schedule of percentages based on the parameters. A big problem here is the time reps and managers and administrative personnel spend trying to figure out compensation every month!
Simple & Straightforward: Salary at $4,000 per month, commission at 3 to 5 percent of revenue.
With this plan, at the upper end (5 percent), a rep again is bringing in $9,000 in overall income at $100,000 in monthly revenue at 15 percent margin. Incentive is diminished for some reps (depending on their individual drive, personality etc.) given the higher salary, although the higher commission rate is tagged to performance above quota. Another potential problem is that gross product can suffer if reps focus on revenue to the exclusion of profit.
No Free Lunch; Salary of $1,500 per month, benefits in 90 days. A draw against commission, if needed (with management approval), and commission paid at 50 percent of gross profits. Some expenses.
Here a rep selling $100,000 in a month at 15 percent margins makes $9,000 per month, or $108,000 annually, a 9 percent overall return based on annual revenue of $1.2 million.
However, if this same rep is also allowed paid commissions on service and supply agreements, the picture brightens substantially. Let's say the rep sells service agreements at a penny per copy. If she places 120 machines in the year, each doing 40,000 copies, the service revenue is $48,000. If the commission is 10 percent, first year only, that's a one-time commission of $4,800.
Mix & Match: Salary of $2,500, benefits in 90 days, 10 percent of gross profit, 5 percent of revenue, quarterly bonuses.
Here, if the rep sells $100,000 in a month, at 15 percent margins, the monthly income is: $9,000 (the same as above with lower salary, higher percent of gross profit, and no percent of revenue.)
Performance Salary + Commissions: A performance salary -- 5 to 6 percent of last quarter's average monthly revenue plus expenses and commissions on gross profit and leased revenue.
Obviously the built-in incentives are designed to drive consistent revenue and lease business. Under this plan there is also a quarterly bonus of 1.75 percent of revenue if quota is maintained. Commission on gross profit is 20 percent and on lease revenue is 3.5 percent. At $100,000 revenue monthly, gross profit at 15 percent and estimating 70 percent leased revenue, the compensation would be:
$5,000 = Salary (5 percent of $100k)
$3,000 = 20 percent of GP
$2,450 = 3.5 percent of lease revenue
(70 percent of $100k)
$10,450 = Total
This then is at the upper end of compensation plans, a $125,000 opportunity at this level of performance. In addition, quarterly bonuses could amount to another $20,000. With bonuses, this becomes a $145k position. Measured against annual revenue of $1.2 million, that's a 12 percent return.
© 2001 Allan Erickson. All rights reserved.