This week’s post is from Naviga’s partner Astron Solutions, courtesy of, Michael Maciekowich, National Director. Astron Solutions is a New York-based consulting firm dedicated to the delivery of human resource consulting services and supportive technology. They work nationwide to develop and implement human resource programs that support the strategic direction of organizations through the creation of a positive employee relations environment.
An age-old battle exists between organization needs and the desire of salespeople to enhance their earnings. Many salespeople, understandably, will take the road of least resistance in an effort to enhance their personal wealth. Unless there is a close Return on Investment (ROI) to the organization between sales goals and individual compensation, however, the process becomes a one-sided event. Case in point? When an organization is interested in margin and profitability, and the salesperson is focused on commissions based purely on sales volume.
In a recent client interaction this discrepancy became quite evident. The client had established a sales commission program based completely on total sales volume of all products sold, even though each product had different assigned profit margins. Initially, the organization attempted to address this issue by adding a special “high margin” bonus awarded at the end of the year to the salesperson who had sold the highest volume of high margin products. However, because the commission structure emphasized total volume over margin, the program had little impact.
In addition to this issue, the organization was providing a market competitive base pay, targeting the 50th percentile of the market average, regardless of each salesperson’s actual sales activity. There was no accounting for the base pay in any “cost of sales” calculation. In essence, the salesperson not only was paid competitive base pay from day one, but also given an opportunity to make an extraordinary amount in commission. Upon further analysis, the sales force’s compensation was averaging the 90th percentile of the relevant total cash compensation market.
The issues of commission structure and competitive base pay could no longer continue when the recent downturn in the economy arrived. This organization’s cost of sales, when salaries and commissions were included, was well above any competitor’s. Thus, the organization’s overall profitability had dropped dramatically.
How to address this untenable situation? The answer was to take a step back and re-examine the entire program and the current operating philosophy and strategy. Care had to be taken not to make too many dramatic changes, for fear of losing some key sales professionals who were “mission critical’ to the organization. But something had to be done.
The Astron team and our client’s sales leadership jointly addressed the issue through the following steps:
1. Conducting both a detailed audit of the overall cost of sales, including salaries and commissions, and an employee by employee cost of sales audit, to better understand individual profitability.
2. Making the decision to maintain competitive base pay rates at the 50th percentile of the market. However, it was further decided to link total sales volume to the value of base pay. In essence, the organization used its current program (commission on total volume) to offset the cost of base pay. Until the base pay had been offset on a quarterly basis, there was no movement until the next round of commission.
3. Realigning the commission structures. Once the base pay was offset the individual salesperson moved into the next round of commission, which was based on a matrix of volume and margin. Specific commission percentages were tied to various levels of volume and margin combinations. The organization opted for this alignment to be sure the salesperson was properly incented to focus on high margin products, while still having competitive total earnings if he / she focused on low margin products.
This process and the resulting changes afforded the organization a dramatic reduction in the cost of sales, and at the same time a dramatic increase in profitability. None of the designated “mission critical” salespeople left the organization. There was turnover among low volume producers, however, in that these individuals could not meet the base pay offset. While the change was at first scary for management and employees alike, the program quickly became a “win-win” success story.