About ten years ago I was involved in a technology company that had a sales force of around 30 staff, selling the same range of products in geographically defined terrirories throughout Europe, and in other cases territories were allocated by industry.
If you’ve been in sales, you will immediately identify a common problem with territorial allocations – how to create a level playing field for the sales reps. Obviously some of the sales reps were selling to more promising regions in comparison to others that were trying to penetrate very difficult and unstable markets.
And in situations where there is discontent and disatisfaction amongst the sales team, people soon get demoralised, and you’ll see a high turnover of sales staff, particularly with those who had been allocated more challenging regions where sales were much more difficult to secure. After all, sales people still need to eat!
On the other hand, those fortunate sales reps who were working the more profitable areas stayed with the company for at least seven years.
How Do You Create A Level Playing Field For Your Sales Team?
It’s a question asked by virtually all companies all around the world that engage a sales team. Other equally challenging questions for such companies include:
- When their job security is dependent on reaching sales targets, and when bonuses are handed out to the top performers, how do you ensure that all your sales staff have fair and equal opportunities to succeed in your company?
- Do you know that commission payments can be very different between sales people in the same company even if they have made the same sales effort in a year?
- What is the attitude of the company, and its payment mentality in regard to incentive schemes for the sales team?
- Does the company want to pay sales people equally,
- whether or not sales people make similar effort, or
- when they bring similar revenues or
- when they bring similar successes
- How can Management reward sales people equally and fairly when they have different roles and dissimilar territories?
Sales and Competition
One of the biggest IT companies in its field hosts an exotic holiday for top achievers who have qualified for the President Sales Club each year. It’s a club exclusive to the sales reps who achieve the specified target, an elite club for the company’s top performers. It’s a highly sought after event, which can be out of reach for even the most highly skilled sales people that have been allocated more challenging territories.
Sales is a competitive environment by nature. Sales people are constantly looking to reach their allocated targets within the specified time frames. Often those sales targets help create an informal rivalry amongst the sales team, which can benefit individuals within the team as well as the company.
And some companies even encourage the internal rivalry by applying commission schemes that allocate commissions based on those in-house competitions, such as paying an additional bonus to the best achiever in a group.
Internal competition is also encouraged in cases where the company pays team incentives, for example, where sales people rely on each other and every single one tries to prove his contribution to the team.
Sales people need one fundamental thing.
They want to have an equal and fair opportunity in earnings. This means they want to trust that their earnings potential is similar to that of others and that they have the same chance as their colleagues to achieve that income.
A common challenge for many a sales manager is where sales people are complaining that they are not treated fairly. In some cases it may just be an excuse for their own lack of commitment or performace , though often a valid complaint is made in respect to the difficulty of selling in a specific territory, making sales targets often impossible to be reached, which then affects the commissions in that territory. Other justifications for missing the targets may include size of territory and lack of opportunity.
The skill of the sales manager is to ascertain whether these are valid concerns or simply excuses for not meeting the targets. It’s a challenge faced by almost every sales organization and a problem that the management should work on resolving.
The responsibilities of the sales person
Typically a sales person is allocated an area of responsibility and a territory to work with. He has certain products to sell and an annual or a monthly target to meet. To be fair to each individual, each member of the sales team should be assigned a fair territory and a fair quota, and it is the responsibility of each sales person to sell the company’s products to this specific region or territory.
These regions are not necessarily geographic ones, they may be allocated by industry or by size and targets for those zones. So the sales person has a clear understanding about which area of the business to focus on..
For example, a sales person may be given a target to bring in $20,000 revenue from existing customers, and develop 10 new client relationships, regardless of the value of product that will be sold.
A clean and straightforward target, such as $1million new revenue in a year, may be one of the first targets a sales manager gives to a sales person, after which the targets may be reviewed to suit the market and the territory.
Territory and Quota Allocation
We have already seen the challenges presented to both management and the sales team with allocations of territories and sales targets. And how setting sales targets that are out of reach can be counter-productive for the company and demoralising for the sales person.
1. While sales targets must be challenging and not easy to achieve, I believe that statistically about 70% of sales people shall be able to reach targets.
2. Assigned territories should also be challenging enough to keep the sales person on their toes, but not too challenging to frighten them away so feel they don’t have a chance of achieving success.
3. Whereever possible, the territories must be assigned in a way to give equal opportunities to sales people. If not, it can be a highly demotivation factor as a few sales people might be the privileged ones to get the best territories producing promising revenues, while others suffer and produce lesser results.
There will always be the risk that poor performance leads to higher turnover for the company. Here the management has a practical dilemma, where on the one hand they need to consider sales people are given equal opportunities, and on the other hand the management wants the company to benefit from having the top sales people managing the best and maybe the biggest territories.
As I said earlier, in some ways a big territory may have more chance of producing more revenue. And with a traditional incentives and commission scheme that pays, for example, 5% to new gross revenues, one that has a bigger territory has more chance to make more money.
Is this fair?
How is that going to affect the morale of your sales people?
Solving the problem
One of the first points to consider is that the company must decide whether people should be given the same opportunity of earnings. This is a fundamental question that needs to be answered from the early stage of implementing a motivation scheme. It’s a business culture question rather than a technical one.
Here’s a situation I came across recently:
When a large company with a well established brand name, decided to launch a new product, awareness of this brand and product was very limited
A sales person was hired to tackle the new market, and later the company realised this sales person had limited chances to make the same commissions that others were making by selling more established and recognised products.
How should a company handle this challenge?
If the company is willing to give equal revenue opportunity to sales people, although sales territories are different, there are technical ways to make earnings potential similar.
- One of the first principles in such an environment is to avoid having a system or part of the system that pays based on internal competition
- For example, the person who brought more revenues in the first quarter will get an extra $2k in his pocket.
- To apply such mechanics we need to make sure the responsibilities and the territories between sales people are of very similar dynamics.
- When territories are unequal, problems can be resolved, without touching the incentives scheme mechanics, but by optimizing the sales targets. Obviously a sales person with promising sales territory should have a more aggressive territory to the one that is covering, for example, a new market.
- Usually incentive systems, especially those that pay commissions, make payments based on the actual value of contracts. Instead of doing that, the company can pay on target performance.
- Let’s look at the following example as an illustration to understand how this problem can be easily resolved.
- Imagine John has a target of $1million, and Mary has a target of $2 million target.
- Under a traditional scheme that pays up to 60% of target a commission of 3% and then up to included 100% a commission of 8%,
The payments for 100% realization would be:
John: 600000 x 3% + 400000 x 8% = 18000 + 32000 = $50000
Mary: 1200000 x 3% + 800000 x 8% = 36000 + 64000 = $100000
Obviously the Mary will get more money in her pocket.
But what if they should be paid equally?
In that case one could pay them based on the target realization and not to the actual amount. The payment would be a percentage of the target incentive the job would pay.
Let’s say John and Mary have the same incentives target of $50000 for reaching 100% of target
The system could pay (for example) up to 60% of target realization, 20% of the target incentives, and then between 60% and 100% of target realization, it would pay 100% of target incentives.
In the above example with John and Mary both reaching the target, they would get paid the same amount.
- Another technique is to use a point system. More points can be assigned to the person that covers a more challenging territory.
Let’s use a quick example to explain this further, with pay based on a point system:
From 0-1000 points pays $1 per point
From 1000-3000 points pays $2 per point
From 3000 – 10000 points pays $5 per point
The point system gives for 1 dollar of sales 1 point to the sales person.
This same system can give 2 points for every dollar sold to that sales person that manages a difficult territory, hence his points are doubled.
- Finally, another technique is to associate the payment payout to the fixed salary of the sales person, provided that the target associated to each sales person is correct.
Then the company can pay a percentage of salary for 100% of target performance.
This technique uncouples the territory problem and pays according to target realization, based on the fixed salary and total compensation the company wants to pay the sales person.
- Finally, a more simplified technique is by using a bonus scheme rather than a commission plan, that pays according to dollar revenues a sales person brings.
A bonus scheme is more valid for dissimilar territories and roles, and has more subjective criteria for payment.
Here are some important considerations for almost every sales force.:
- Territories are not similar in terms of potential and revenue forecast.
- Sales people want to maximize their potential
- Sales people want to be treated equal
These points sometimes bring a headache to the sales management, though it is not the end of the world. Without investing a little extra effort to find a workable solution, you may create a situation of demotivation and disappointment, and consequently a high turnover.
Whereas, with a little “outside the box” thinking, you can apply some of the techniques we have covered in this article, to resolve the challenges faced in your organisation, to help create a level playing field that encourages and rewards the sales team at the same time benfitting the company.