Does money motivate you or are you more driven by a need to see your ideas come to life? A lot of entrepreneurs will tell you that they do what they do not for the money, but because they feel that what they are attempting will help people. Some will say that they are driven by wanting to see their ideas to come life. Others might say that the only way they could get a job was by building their own company because they could never keep a “regular” job. And some, yes, they will say it is about building something that they can then sell.
How about your sales team? What motivates them?
Compensation plans and structures are one of the most misunderstood parts of a business. The concept of “overpaying” a salesperson because they sold a lot is a common uncomfortable situation for many owners. Why? Well, you usually hear, “Why should I pay that person more than I make?” or, “If I pay them that much, I won’t make money!”
Both statements come from a place of not knowing if your business is making money. The first step in these cases must be to produce and review a reliable set of financials. Does your company make money? Does it produce returns on your investment? Only way to know is to have monthly financial statements.
In the book, “Simple Numbers, Straight Talk, Big Profits!: 4 Keys to Unlock Your Business Potential,” Greg Crabtree and Beverly Blair Harzog provide a clear and simple to understand definition of the money making jargon – profits, margins, EBIDTA, etc. They also provide a set of good “rules of thumb” to follow in your business. For example, as an owner, you should get paid as an employee based on the role you take on in the business. Maybe you are the CEO of the company, well you should get paid as the CEO. What most people do, however, is simply pay themselves whatever is left over at the end of the month. That is usually taking cash that might be needed for funding next week’s operations, not a good situation.
Paying yourself as an employee makes it impossible to figure out if your business could make money without you. How much profit do you make after paying the CEO and is that enough money for the owner to live comfortably?
A business that understands its costs, both Direct and Indirect, its Administrative Overhead costs and Sales costs can quickly determine if it is making money. It is a simple concept, you should charge your customers more to deliver a product or service than what it costs you to produce or deliver that product or service. Whatever is left over is then the profit for the business and potentially the big payout to the owner.
For the purposes of this post, let’s just say that you have a clear understanding of your business’s numbers. You know your Price, your Direct and Indirect costs, and so you know your Margins. You know your overhead, so subtracting that from your Margins you now know what your profit will be and so you have a good feel for what should be left in the bank at the end of each month. In a later post, we will explain what all these terms mean and how they are related.
So, how do you pay your sales team? Sale’s function is to find customers, convince the customer to buy your products or services and set a price for said sale. The salesperson will likely need to negotiate a bit on price, so they should know how much Margin is left over based on what they are selling. Notice I said Margin and not Profit, that is because at the end of the day the overhead costs is something the Sales person cannot and should not control. You as the owner should set a range for the Margin and tell the salesperson something like, “I would like you to sell at this price because it gets us a Margin of 40%, but you can lower the price down to this and we get a Margin of 32%.” That is about all you need at that point because the salesperson/team now has enough information to negotiate a sale, but how will you motivate them to sell at a higher price.
The variable compensation part of Sales says that the higher the Margin the higher the commission on the sale. For this example, you as the owner know that at 28% Margin you are breaking even. Your overhead cost, which includes your own salary is covered, but there is no profit to give to the owner. At 30% Margin, there is profit and so the Salesperson could get some of that profit. After all, you as the owner are getting paid a salary as the CEO so your personal compensation is part of the overhead.
You don’t want to give all the profit away, so you decide that a Salesperson will only get a commission if they sell at 32% Margin. Their commission will be a percentage of that Margin, say 5% and as the Margin increases their percentage gets better. Maybe they make 10% if the Margin is at 40%. Now, that is 10% of the Margin, not 10% of the sales price so don’t think you are losing money. You are simply giving the sales team a more generous portion of the profit.
OK, ok, I know, there is a lot going on in this post. There are a lot of numbers and if you read one of my other posts, math is not usually the owner’s favorite subject. What should you do? Hire someone to work out what your compensation plan should look like. There are hundreds of case studies and consultants out there that just do compensation plans. They are structured to give the sales team the feeling that they are in control of their own pay, “the higher price I get the more in my pocket.” And if you still feel that a Salesperson should not make more than the owner, you are not considering that as the business grows the value of that business increases. That means that as the owner, your overall return on investment has gotten better.
Want to learn more or maybe have someone look over your numbers and tell you if you are making money and how to pay people? Just send us an email at rick@gramatges.com and we can set up a time to make it all happen.
Gramatges Consulting 