In addition to hiring the right person and clarifying the requisite objectives, tasks and responsibilities of the sales staff, another critical responsibility of the modern day sales manager is to develop a cogent and lucid compensation system that is easy to understand and rewards overachievers for their performance.
Since 1982, the sales salaries and commissions for the average North American equipment dealer has averaged 32.83% of the gross margin generated on new and used equipment sales. While this average compensation would appear to be higher than the desired compensation percentage of 25%, in reality, for many dealerships, especially smaller volume dealers where the dealer principal or the sales manager actively sell equipment, this average compensation percent is woefully understated.
The average sales compensation is calculated by dividing the sales salaries and commissions by the total new and used gross margin dollars. Using the Cost of Doing Business numbers would understate the average compensation level since the owner’s salary, and/or the sales manager’s salary, are classified differently than the sales salaries. On the other hand, any gross margin dollars that either the owner or the sales manager generated are included in the overall gross margin dollars. Based on a recent study the author conducted comparing “apples to apples,” actual salespersonnel compensation is significantly higher than 40%, and in some cases exceeded 50% of the gross margin dollars the salesperson generated.
Thus, when salespersonnel salaries and commissions were compared to only the gross margin dollars they generated, it was revealed that sales compensation as a percent of salespersonnel gross margin was in excess of 40 cents for each dollar of gross margin they earned. This is before fringe benefits, car allowance, cell phone, computer and other ancillary costs associated with maintaining a salesforce in an equipment dealership. It’s also significantly above the desired benchmark of 25% of the gross margin dollars.
Another reason many dealerships continue to have an egregiously high sales compensation percent is their reliance on a compensation plan that continues to reward mediocrity and perpetuate the status quo. Far too many dealerships continue to pay their salespersonnel on the basis of either salary or the cash difference that is drawn. Both systems are “tradition” based and both are inadequate for a modern day salesforce.
An ideal sales compensation plan should (1) reward salespeople for results; (2) control salespersonnel activities; (3) attract and/or retain overachievers; and (4) facilitate satisfied customers. As such, a well designed and administered sales compensation plan should meet the following criteria.
First, a well designed sales plan should be easy to understand. Each and every salesperson should be able to quickly and intelligently explain their compensation program.
It’s amazing how many salespersonnel in the equipment industry are incapable of explaining how they’re paid. Either this is an indictment on the intellectual capabilities of the said salesforce, or the plan is too complicated or recondite. Either way, changes should be made.
Second, another requirement of a well designed sales compensation plan is that it provides the sales personnel with a living wage in the form of a secure income. While a future column will address the various types of compensation plans, suffice it to say that for those plans, other than salary, salespersonnel should be given the opportunity to “draw” against their actual or future commissions, thereby giving them the “security” of a monthly income.
The third requirement of a well designed sales compensation plan is that sales compensation is commensurate with performance. The more you do, the more you earn. Age, tenure or nepotism has no place in a well designed compensation plan.
A fourth requirement of an actively managed sales compensation plan is that it’s consistent with the goals and objectives of the department and the dealership. The ideal comp plan will not only increase equipment gross margins, but will also improve equipment turnover.
The fifth requirement of an ideal sales compensation plan is that the benefits to the dealership far exceed the salespersonnel costs. As previously indicated, one way of ensuring this is to limit sales compensation to less than 25% of the gross margin dollars.
Finally, the last requirement of a properly managed sales compensation plan is that it should be designed and administered in such a way that salespersonnel are engaged in all aspects of selling, i.e., prospecting, profiling, calling, quoting, demonstrating and closing. Salesmanship is more than simply selling new equipment.
Well designed sales compensation plan will not only increase profitable sales, but also ensure that all facets of selling are energetically pursued and enthusiastically embraced.