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HR Magazine - February 2002: Should You Adjust Your Sales Compensation?

By David Fiedler  2/1/2002

HR Magazine, February 2002

Vol. 47, No. 2

Should You Adjust Your Sales Compensation?

A sagging economy may cause some HR professionals to reconsider pay programs for sales personnel.

For the woman working in travel sales at AAA of Western and Central New York, moving from inside sales to a position as an outside sales rep seemed wise. She would be trading the certainty of an hourly rate (plus bonus) for the risk of commission-only compensation, but a quick review of the previous year showed she would have come out farther ahead earning commissions.

 She started her new job Sept. 4—one week before the terrorist attacks that brought the travel industry to its knees. “There are sales reps who didn’t make any commission the whole month of October,” says Hayley Schultz, HR manager at AAA.

Suddenly, commission-only compensation lost its luster for the new sales rep, who called Schultz to “complain that, as an employee, she must be paid at least minimum wage—even when she is not selling.” Schultz pointed out that salespeople are exempt from New York’s minimum wage requirements. “Naturally, she wasn’t happy to hear that,” says Schultz.

Schultz’s situation is not uncommon. HR professionals across the country are struggling to determine if they should adjust their sales compensation plans in light of the events of the past few months. Does the combination of an already slumping economy, shaken further by the fallout from Sept. 11, warrant an examination of the way compensation is calculated and paid?

“Generally, we haven’t seen a lot of companies changing their variable compensation plans,” says Rob Bentley, senior consultant in sales force incentive design for Hewitt Associates LLC. “When companies suffer, it usually means salespeople do, too.”

In fact, only 20 percent of companies plan to change the design of their incentive plans in any way, according to a November survey by Organization Resources Counselors Inc., a management and HR consulting firm headquartered in New York.

Take It Slow

Though sales reps may make a lot of noise about not achieving quotas, Bentley says companies should not adjust compensation for sales staff without a great deal of thought.

Mae Lon Ding agrees. “You should be very conservative in making changes to the compensation plan in mid-year,” advises Ding, president of Personnel Systems Associates Inc., an Anaheim Hills, Calif., consulting firm that specializes in compensation and performance management.

Before making a move, consider the extent and depth of the downturn. “If it is short-term—a year or less—don’t change a thing,” says Ding. “When recovery is expected in the economy for the second half of 2002, why make changes in the sales comp plan now?”

To determine if pay plan changes are needed, Ding lists several steps HR professionals can take.

First, perform an analysis to see if the plan is working as intended. “Assess what percentage of the sales force will receive no bonus this year,” she says. “If the company is profitable, at least 50 percent should make something in bonuses.”

The reverse is also true—companies that aren’t profitable shouldn’t pay bonuses, says Ding. Doing so shows that sales goals are not aligned with company objectives.

Next, get a feel for what other companies in your field are doing. “You definitely need to remain competitive within your industry,” says Ding.

Finally, don’t overreact. A pay plan, says Ding, “is intended to recognize individual performance, but it is also a way for companies to share risks, to acknowledge that ‘We’re all in the same boat.’”

Know Whom You Are Dealing With

David Cichelli, senior vice president for the Alexander Group Inc., a Scottsdale, Ariz., management consulting firm, says HR professionals must take into account exactly the type of sales staff they have.

“There are two types of salespeople,” Cichelli points out, “income producers and sales reps.” The two roles serve different purposes, and their compensation should reflect that difference.

“For income producers, their compensation is purely commission—always,” says Cichelli. “Their pay plans should not be adjusted because to do so runs counter to the basic principle that their income should be higher when times are good and lower when the economy is bad.”

The harsh reality is that an economic downturn should cause a reduction in the number of salespeople, says Cichelli.

Sales reps—who outnumber income producers—warrant more attention, says Cichelli. “A large component of their job is to represent the company and that product to the customer. The compensation equation for this group is created by the company and managed toward a targeted compensation level, achieved by combining a base salary with an incentive.”

Cichelli recommends adjusting objectives so that 60 percent to 70 percent of sales reps achieve their quotas. If necessary, he says, employers should add guarantees to protect these employees. “You don’t want sales reps to carry the uncertainty of the company.”

When Changes Are Needed

Many options short of a full-blown overhaul can help increase the profitability of your company and keep your sales force moving forward.

“If anything, now is the time to make compensation richer and to increase the incentive opportunity,” says Thomas McCoy, managing member of T.J. McCoy & Associates, a compensation consulting firm in Kansas City, Mo. “By reducing the base salary and increasing incentives, you are controlling cost to the company and encouraging sales staff to stay focused on what they need to be doing.”

McCoy acknowledges the possibility that employees will react negatively to such a move. He suggests “using intensive communications to get people to buy into this action and to avoid negative perceptions. The real challenge to management is to be very visible, in touch and personable in implementing these changes.”

Cutting base salary may seem drastic, but it might be the best move in some instances, says McCoy. “If the pain is severe, we have to take severe steps.”

Minor Adjustments, Big Payoffs

Other less dramatic steps also can help salespeople focus on specific goals, says McCoy. “You can adjust targets and thresholds to make [them] more relevant and to get people to focus on what they need to do, rather than on things taking place outside their control.”

McCoy points to special short-term incentive campaigns as another particularly effective tool. “These should be high-profile, high-visibility and short-term efforts. In your goals, you want something very specific, very basic and focused on driving and rewarding activity.”

Bentley says companies should seize this chance to make long-needed changes. “Take advantage of the opportunity,” he advises. “When the economy was great, companies often hesitated to make changes for fear of rocking the boat.”

Bentley points particularly to the need for an administrative provision that allows employers to change the compensation plan when necessary. “Every company needs this type of clause,” he says. “If you don’t have this, now is the time to put it in.”

Depending on the situation, Ding suggests offering a “consolation” bonus when sales goals are not met. “If the company will make money and salespeople have worked hard, I think this type of bonus is quite appropriate,” says Ding. “It will not equal what they would have made, but it does still recognize their dedication and effort.”

The Hard Facts

Risk is part of the sales equation and something that salespeople know up front, says Sherry Harsch-Porter, SPHR, founder/principal consultant at The Porter Bay Group, a compensation and rewards consulting firm in St. Louis.

“Especially when there is no cap on the money a person can make in the good times, why should the company pay up when they turn bad?” asks Harsch-Porter.

In some cases, offering additional compensation not tied to performance may harm the company’s recovery from the slump. “As long as the goals are still accurate and achievable, they should be left in place,” says Harsch-Porter. “It becomes a motivator for sales staff—they will work harder and longer to make up for the shortfall.”

The main test of whether these goals are still valid is how they are perceived by the sales force. As long as the goals motivate the sales staff to keep pushing, these targets should remain unchanged.

In addition, these goals should have been established with input from the sales staff. As long as they believe the goals are realistic, providing additional compensation won’t provide extra incentive.

David Fiedler is a St. Louis-based HR professional and freelance writer. He writes about a variety of topics, including compensation and technology/data privacy issues.

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