Labcast: Developing a Sales Business Plan & the Best Compensation Structure for Your Company

In this week’s Labcast, sales management strategist and talent management expert Lee Salz, founder of Sales Architects and CEO of The Revenue Acccelerator explains why sales managers should adopt an “investment philosophy” when it comes to managing their reps.

sales compensation structure

He also explains the importance of developing a solid sales business plan, and the most important questions they should ask themselves before setting a new or first-time compensation structure in place.

Kevin: Hello and welcome to this edition of Labcast, I’m Kevin Cain, and today I’m joined by Lee Salz to talk about establishing a sales business plan and appropriate compensation structures for sales teams. For those of you who don’t know Lee, he’s a leading sales management strategist and talent management expert, who specializes in helping companies build scalable, high performance sales organization. He’s also an award-winning author and the founder and CEO of Sales Architects. Hey Lee, thanks for joining us today. How’s it going?

Lee: Wonderful, Kevin. Thanks for having me.

Kevin: So as I mentioned in my introduction, we’re talking today about really kind of what comes down to a matter of on-boarding and so far as you want to build the right team when you’re looking at your sales organization. Part of that is around having the right sales business plan and part of that’s around compensation, right?

Lee: Absolutely.

Kevin: So my first question for you is really about this whole concept of adapting an investment philosophy when it comes to managing reps, what do you mean by that?

Lee: Well, let me explain it in context with a story.

Kevin: Sure.

Lee: So, imagine a sales leader last night woke up with this incredible idea to grow sales for the company. So, he goes running into the CEO’s office first thing in the morning, presents the idea. The CEO says, “Wow, that’s really interesting. What’s it going to cost to implement it?” He says, “$25,000.”

The CEO almost falls off her chair and says, “Okay, here’s what I want you to do. I want you to run some analyses on this, focus group studies, talk to colleagues, search the net, get client feedback, etc, etc., and somewhere around six months from now we’ll be able to make a decision on this.”

Sales leader, just as he’s about to walk out of the office, turns back to the CEO and says, “Oh, by the way, I have a candidate for inside sales team, looks really good. Did you want to meet him?” CEO says, “No, that’s okay. What salary were you going to offer?” He says, “$25,000.” She says, “No problem.”

Kevin: Okay.

Lee: What so many companies miss is it’s the same $25,000. Here’s your sales leader saying, “I’ve got this great idea to grow revenue and it’s going to cost $25,000. We want to bring a sales person on for a salary of $25,000″ no one gives it a second thought.

Kevin: Right.

Lee: So when you look at a sales team, there’s no greater investment that the company is making in revenue than the sales people that they’re bringing in. But they don’t think of it that way. But when you think of it in terms of an investment — and it’s in investment in revenue — how you evaluate talent before you ever make an offer, very different, how you on-board them into the role, very different, and how you manage and compensate them, again, very different.

Kevin: So why do you think people have that sort of block to thinking about it that way?

Lee: I don’t know if it’s necessarily a block because whenever people hear this, I have yet to have someone come back and say, “That’s absolutely ridiculous. That whole concept of investment makes no sense.” No one has ever come back to me and said that. Maybe this will be a first. Someone will hear this interview and come back and say that. But when you put it in that context, it’s just so logical for people. But for some reason it doesn’t naturally come to them that way, not in most cases.

Kevin: Okay, so let’s say everyone’s on board with that and can accept it. How would you recommend that managers kind of apply all of that and use it to develop a sales business plan?

Lee: Well, the manager wouldn’t be putting together the sales business plan. What they would be putting together is a template.

Kevin: Sure.

Lee: Because, again, let’s keep that whole investment in revenue theme, you don’t have sales people. What they are, is each, individual revenue investments made on behalf of the company. The management team represents the investor group, and so the concept of this plan is to sell me as an investor on your business. Why I should continue my investments in your business, because there are only so many dollars the company has to invest. Why should I invest in your business?

So, during on-boarding, you’re taught your sales methodology. The plan should communicate how the sales person is applying that methodology in their territory with corresponding metrics. In other words, what’s the strategy to get a meeting with a prospect and how many prospect meetings do you need to hit your revenue goal?

Kevin: I was just going to ask, are there sort of other metrics along those lines?

Lee: Sales is a lot like baseball. There are numbers everywhere. So figuring out what are the right ones to focus on is really your challenge, and there are four criteria that I’ve put together that I look at. The first one is is that the metric is meaningful. That it really does tell us something about the business. It’s not just a number that’s out there that we want to look at.

That it’s measurable, it’s not gut that’s telling us something, that it’s quantifiable. Third that it’s goal orientated, because if it does indicate something and it can be measured, we should be putting a goal towards it. The fourth is that it’s trainable. So if the sales person is not adept at that particular aspect, that we can put some training in place to enhance their skills.

For example, if we were to look at a business and one of the indicators of success was scheduling in-person meetings with prospects. So, we would model that out and say “Okay, how many meetings do we need to get one sale? How many sales do we need to get to our revenue goal, etc.? So, we would want to first focus on that first indicator, which is getting the meetings. Because if we’ve determined that if there’s no meeting there’s no sale, then that’s where our emphasis should be. That’s where we want to focus.

So, for example, one of my clients is a minor league baseball team. We determined that not only was there this focus on having first meetings but there was a certain timeline of when those meetings needed to occur. So, we didn’t have conversations around revenue because you can’t do anything about revenue. You can only do something about the behaviors that lead to it. All of our discussion was around conducting first meetings, because we knew if there were no meetings there were no sales, and that was our emphasis. If the quantity was there and we were having those meetings and we weren’t getting the outcome, then we would go back and work on the proficiency and what was
occurring in those meetings. But our first indicator was those first meetings.

Kevin: That was great. But switching gears a little bit, kind of getting back to compensation for a minute, one of the things that you’ve talked about a lot, I know, is this whole idea of the equilateral triangle model for developing compensation plans for sales. Can you talk about that a little bit for our listeners?

Lee: Absolutely. So the equilateral triangle, by definition it’s three equal sides of the triangle. Those three sides are represented by your clients, your company, and the sales people. When you look at your compensation plan, if anyone of the sides is over or under-rewarded by the plan, then the law of unintended consequences kicks in.

See, sales is one of those professions where you may have this tool called the job description, but it’s meaningless. The only thing that’s going to drive the activity, the behavior of your sales people is how they get paid. So, you can yell, you can scream, but nothing is going to affect behavior more than how your sales people get paid. So, I’ll give you an example. Have you ever needed an attorney, Kevin?

Kevin: I have, yeah.

Lee: Well, they get paid by the hour.

Kevin: Well, yes, by the hour, of course.

Lee: Okay. Now, when you need an attorney, what’s your objective with that attorney? Get out of trouble as quickly as possible, right?

Kevin: Sure.

Lee: Okay, so your goal is, as few hours as possible, and they get paid by running up the meter. See a problem?

Kevin: Yep.

Lee: So, we’ve got a disconnect. If you ever look at recruiters, right? Recruiters, they’re under contact with a company to go find sales talent.

Kevin: Right.

Lee: Most of them don’t get a nickel unless they place a candidate. The amount of money is oftentimes a function of salary that that sales person is going to receive coming in the door. So the recruiter, who if I’m the company, is supposed to be representing my interests, gets paid more money if they represent the interests of the salesperson.

Kevin: Right.

Lee: Again, it’s another example of compensation that’s gone awry.

Kevin: So it’s all about the proper incentivization, right?

Lee: Well, you have to look at what that message is that the compensation is communicating. What are the behaviors that it’s driving?

Kevin: Sure.

Lee: So, I’ll give you a sales example. Many moons ago, I worked for one of the larger health club chains in their corporate sales division. I was brought in by the CEO to evaluate the corporate sales division and make recommendations. So, I came in and I looked at the model that was in place and it worked something like this. The health club sales person would talk to members and generate a lead for a corporate salesperson.

A corporate salesperson would call the company and say, “Hey, we’d like to offer discounted memberships to your employees and we’ll send over a flyer,” and they would do that.

Kevin: Yep.

Lee: Then, folks would come into the club and sign up and get a discount. Here’s what’s missing from that.

Kevin: Right.

Lee: Both the health club salesperson and the corporate salesperson receive full commission on a heavily discounted membership. See a problem there?

Kevin: Yeah, a little bit.

Lee: Okay. Then I was calling several of these companies that set up these plans and said, “So what benefit did you get from this program?” They thought I was nuts, “Benefit? What do you…” didn’t think anything of it. So, here’s something that’s heavily discounted, the client company sees no value in it.

So, if you come back to the equilateral triangle, where you looked at the clients and you looked at the salespeople and you looked at the company. Sales people were tickled pink because they were getting a full commission on something that was heavily discounted.

Kevin: Right.

Lee: The company was miserable because there was no margin for them. And the clients saw no value in it. So, again, if you put your compensation plan together, you challenge yourself with that model and say, “What’s going to happen to these three entities if we put that compensation plan in place?”

Kevin: I was just going to ask, what other factors there might be or questions that leaders might want to consider?

Lee: Well, so when you’re talking about putting a compensation plan in place, there’s this old expression that’s been around sales forever. It’s you’re only as good as, what? Did you ever hear this expression? You’re only as good as…?

Kevin: You give.

Lee: Your last sale.

Kevin: Oh, your last sale. I’m not a sales guy. Sorry, Lee.

Lee: Okay. That’s okay. You’re only as good as your last sale. You’ll hear this mantra in companies. You’re only as good as your last sale. Well, if you’ve ever tried to sell a company, no one buys a company for yesterday’s news. They buy it for what’s coming, what’s in the pipeline. So, the better statement or mantra is you’re only as good as your next sale.

Kevin: Ah, sure.

Lee: So often in a B2B sales environment, you’re paying a commission today for something your salesperson did right six months, a year, a year and a half, two years ago. So you’re not driving any futures and that’s one of the keys as you’re looking at compensation is back to the investment theme. So, how does the further investment I’m making by paying a commission help me get more of the sales that I want in the future?

That’s the challenge that you have. Now, traditional compensation is just a salary commission model. I challenge organizations to take a different slant and say, “What if we pull some of those dollars back from the commissions and say we’ve identified what those right behaviors are that lead to sales?” Pay some of those monies up front to salespeople for doing the right thing at the right frequency level that will lead to sales. Remember I said you can’t do anything about sales, but you can affect the behavior that leads to it?

Kevin: Yep.

Lee: Bring some of those dollars forward. Make the investment in the behaviors that lead to the sales, because you can’t do anything about sales.

Kevin: Absolutely.

Lee: So, that’s one of the challenges. Then there are three foundation questions. If someone would try to guess one of those three, they’d say, “Well, how much do we want our salespeople to make if they hit goal?” Well, that’s not a foundation question. It’s an important question, but that’s not one of your foundation questions.

The first one is what is our corporate business objective and what role do the salespeople play in achieving it? See every company has defined objectives. The question is figuring out what is the contribution needed from the salespeople to make that happen? Given that, the second question is, what are the key sales behaviors that are needed that we get from the sales people and with what level of frequency? So, what do we need them to do and how often do we need them to do it?

The third is, given the expectations we have of the salespeople, relative to sales behavior, what’s the right incentive model to keep sales activity aligned with our business objective? Remember, like I said before, you can yell. You can scream. Nothing affects sales behavior more than how these folks are getting paid, and there are lots of ways to structure a sale compensation plan and the right one for you company may not be the right one for another company. So you want to be very creative.

Kevin: Oh, that’s great. Lee, I really appreciate your time today talking about all this stuff around sales compensation and this whole investment philosophy with developing a sales business plan. Before I let you go, can you just give our listeners a sense of where they can go to find you?

Lee: Sure. They can go to salesarchitects.net. As a matter of fact, there’s a free eBook on the site called Sales Compensation Best Practices. So, if you found today helpful download that eBook and you’ll get the full methodology to put that in place in your organization.

Kevin: That’s great. Thanks so much for being with me today, Lee.

Lee: Thank you so much, Kevin.

Kevin: Take care.