Does It Make Sense to Cap Your Salesperson’s Income?
In the late 1960s, after completing my college education and after working my way through college selling door-to-door, it was time to begin looking for a career. My goal was to work for a national company that provided benefits, a career path and, of course, given the sales experience I had gained while in college, I hoped to earn good money.
My first interview was with the Burroughs Corporation. I was given a test to complete, which was followed up by an interview with the sales manager. At the conclusion of the interview, I was offered a position in sales. The position paid a salary, benefits, a potential annual bonus based on achieving corporate sales goals, a car and business expenses. At the time, I considered this offer an attractive offer. However, since I had already scheduled other interviews, I told the sales manager I’d get back to him with an answer.
My next interview was with IBM. At the time, IBM wasn’t nearly as big as it is today, but IBM had already earned quite a nice reputation and was an appealing company to work for. The interview with IBM went much as did the Burroughs interview. IBM explained the offer which included salary, benefits, a potential annual bonus, a car and expenses. The salary was about the same as the salary offered by Burroughs.
My next interview was with Xerox. That interview concluded about the same as the previous two. So after a couple of days of interviewing, I had a pretty good picture of what my potential earnings could be.
My last interview was with NCR, National Cash Register. At the time, NCR was the runaway market leader in cash register sales. No one was close. NCR was also competing with IBM in the then new computer business. Before discussing the pay plan, I ranked NCR right with the three previous interviews with the exception that the explanation of the training program NCR offered its salespeople added extra appeal to me. NCR’s training in my judgment appeared to be second to none.
The final portion of the interview was, like the others, a discussion of income. When I asked how much the salary was, the NCR manager informed me that they didn’t pay a salary. I was told NCR salespeople were paid commission and in the beginning were given a very small draw. I then asked if they provided a car. The reply was not only no, but worse, all NCR salespeople were required to purchase a station wagon to work out of. It was necessary, I was informed, so salespeople could carry cash registers to demonstrate to potential buyers. Wow, I thought, I am so not going to take this job.
Anticipating that I wasn’t exactly thrilled with what I heard, the sales manager asked me to take a walk through the building with him. I agreed purely out of courtesy. The manager led me into a sales room and once there pointed to one of the 15 or so salespeople busy working at their desk. “Lou,” he said, “you see that man right there in front?” He pointed at a man apparently in his late 40s. “Where do you think he is going once the sales meeting is over?” The man he pointed to was in casual, going-to-play-golf-today, clothes. “Based on how he is dressed,” I said, “I think he’s going to play golf.” The manager smiled and said, “You’re probably correct.” “And you know what,” he asked. “I don’t care. He is one of our top salespeople and he is on the very same compensation plan I’ve offered to you. And Lou, with that plan, he will earn five times or so more than the other companies have offered you including the potential bonus. You see with us,” he explained, “we don’t limit income by paying salespeople a salary and bonus. Because that is exactly what a plan like that does; the strong pay for the weak. We also don’t set a cap on income. We give strong salespeople an opportunity to earn as much as their sales skills allow them to make.”
I accepted the NCR offer and position and quickly became one of the top producers. My first year – and every year after – I earned far more than the salary the other companies offered. I earned every dollar, and I was proud of what I accomplished.
Three years after joining NCR the president retired and a new president was brought in. Soon after, he announced he was changing the compensation plan. He announced that the new plan would include a salary and bonus plan. He didn’t say as much, but reading the plan and how it paid, an automatic cap on income would be in place. The commission plan as I knew it was out. I did the calculation. Based on the new plan, assuming I achieved what I achieved the year before, plus a predictable increase, I would earn approximately one third of what I earned the previous year. Within a few months I resigned and so did many of the top performers. Not surprising, the weak salespeople stayed.
Today, most people reading this article have never heard of National Cash Register, NCR. I believe changing the compensation plan contributed greatly to the company losing market share.
Next I am led to ask, why limit a salesperson’s income? Am I the only one that knows and believes that it is human nature to slow down or even stop once realizing additional sales and effort no longer contributes to income? Think about it. Your salesperson is enjoying a great year. He has worked hard, made lots of calls, worked long hours, often well into personal time, and is literally kicking sales butt. However, as he approaches month eight of the sales year he realizes that he is already at or very close to the “capped income” the company set. He can’t earn any more money. Will he continue to work hard? Will he continue to forego personal time to close more sales? Or will he begin to coast, play a lot of golf or whatever activities he has been putting off in favor of work?
Not long ago, I worked for a Fortune 50 national company that understood that problem. So they announced to all employees that there was absolutely no limit on income. They instituted a tiered (called Plateaus) commission structure designed to reward production, to cause salespeople and the managers that managed them to work hard up to the very last day of the year. They made a big deal out of their “NO Caps on Income” policy. The “No Caps Plateau” plan produced phenomenal, record breaking results.
How did the “plateau” commission plan work, you ask? Let’s look at an example. Let’s assume a territory salesperson sold $3 million dollars of product this past year. (The amount doesn’t matter as much as how you arrive at the Plateau plan.) Let’s further assume that the projected production achieved quota or plan. Corporate would budget for next year’s sales prior to the past year end. Looking at “run-rate” we could determine quite accurately what the next twelve months production should be for the company and each salesperson. So let’s assume the goal is to grow 10% over run-rate.
The salesperson that produced $3 million in sales last year would be expected to produce 10% more in the New Year, $3.3 million in sales. That goal would be Plateau 1 production. Plateau 2 productions may be set at 20% growth and Plateau 3 may be 40% growth. Commission/bonus calculations changed by plateau. Every dollar of production over Plateau 1 earned a percentage increase in income, thereby motivating the employee to continue to push even after achieving Plateau 1. Even more important was the fact that once achieving Plateau 1, the employee received a higher, per dollar, income bump. The same applied to Plateau 3. The goal is to drive the salesperson/manager to continuously push to the last day of the company year.
Managers were charged with the responsibility of staying on top of every salesperson’s year-to-date production. If we saw that a salesperson was on track to achieve the highest commission plateau (Plateau 3) a month or
more before the end of the year, the manager would meet with the achieving salesperson to give him yet a higher Plateau commission plan, Plateau 4 or even Plateau 5. We hoped the salesperson would make record-breaking income by producing record-breaking sales. If he did, the word spread throughout the company causing other salespeople to work hard in an effort to earn top dollars. One year, at a corporate management meeting, our CEO, Dennis Kozlowski, spoke about the great results we achieved as a company the previous year. He attributed a lot of the success to the no-caps Plateau compensation plan. We had empirical evidence that the plan worked. He challenged us all to look for ways to motivate every employee in the company with a similar plan. He suggested everyone would contribute more, work harder, and produce greater results if they were rewarded when they did.
Now the bad news: The CEO of the Fortune 50 Company resigned and the newly appointed CEO decided the existing compensation plan was too rich. He decided a cap on income was appropriate. As the new policy was instituted, I couldn’t help but think about NCR and what happened to them after they did the same. Are the company salespeople and managers working as hard, producing as much as they did under the “no caps” plan? Will they continue to push for more sales after reaching the company “cap” in income? I would bet they will not. Only time will tell.
Limiting income leads to limited effort.
I often compare the sales profession to professional sports. In both cases, professionals are involved. Suppose the PGA announced that a ceiling will be placed on income and so no golfer will be allowed to earn more than one million dollars. Would the top golfers continue to play tournament after tournament once reaching the income cap? Suppose a similar cap was placed on football, basketball and baseball. Do you think a policy like that would result in players working as hard? No? Then why would anyone expect a salesperson or a manager to continue to work hard when he knows, because of the company No Cap plan, additional effort won’t result in commensurate pay.
If you want to drive your employees to produce, keep dangling a carrot of additional income in front of them and you will see production grow, I promise.
Lou Sepulveda C.P.P. is a 35+ year veteran in sales and sales management. He has managed very large and small sales teams selling in 30 countries around the world. Lou is a published author. His most recent books are “Selling Security Systems Like A Pro”, “How To Manage A Security Sales Organization,” and “Gerencia de Ventas Efectiva,”all of which are available as an E-Book or in paperback. His previous books are “The Formula for Selling Alarm Systems,” “Surviving in the Security Alarm Business,” and “Managing To Sell”. Lou’s company, Lou Sepulveda Consulting, provides consulting services, sales and sales management training, and motivation seminars designed to help companies grow. Lou’s web page is www.lousepulveda.com. Or email him at firstname.lastname@example.org.
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