From: TomCrouser@aol.com
Date: Mon, 3 Jun 1996 00:04:32 -0400
Subject: Sales Compensation


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***** ***** ***** ***** ***** ***** *****
Sales Compensation
Transmitted from Charleston, West Virginia

Sales compensation is a prime function of sales management. Problem most
print shop owners have is we don t perform the necessary tasks of sales
management, let alone get around to trying to understand the nuances of
appropriate sales compensation. In many cases, I find small press printers
paying exorbitant fees to sales people, while in other cases, find that are
grossly underpaid. So, I undertake in this issue to set forth some guidelines
I have used over the years and to answer the question posed by one commercial
salesman in North Carolina, 

Is this plan fair? I also must note that there
are many good folks who spend careers devising sales compensation plans for
big corporations. I think most are relatives of the fine folks who prepare
price plans for the copy machine industry (er, excuse me. . .the document
industry).  So, it is a complex question which is asked, but to answer, I
must start with some basics.

DEPENDS UPON THE GOAL AND STRATEGY: The goal of all plans is to reward
outside sales people for doing what is best for the organization. I sometimes
describe this as a plan which will get the sales person to do exactly what
you would do, if you were in the situation rather than the sales person.
Unfortunately, most of us owners have never figured out what we want done
besides having the sales person sell stuff.

It may be the goal of the company to increase the customer base. One company
I visited last week is heavy into hospital printing. That s great and
provides a lot of sales. However, hospitals are doing a lot of consolidation.
If your hospital customer buys another hospital, you win. If someone else
buys your hospital customer, you may lose. So, maybe this is a threat to the
print shop and maybe the print shop should be diversifying its portfolio of
customers within its region. Or perhaps, the print shop should be extending
the reach of its hospital printing to other hospitals in other towns. That s
a decision for management, and, depending upon the approach taken, would
affect how one would construct a sales compensation plan.

Another company has a broad base of customers. However, the customers are not
buying nearly as much as they could be. Should management decide to penetrate
specific accounts, this would lead to possibly a different sales compensation
plan.

So, the first thing to realize is one plan will not suit everyone within the
industry. In fact, different sales people may be compensated differently
within the same company: it all depends upon the organization s goals and
strategy..

GOALS CHANGE OVER TIME: Changing goals and strategies require different
compensation plans over time. So, when constructing a sales compensation
plan, remember it is not permanent and make sure your sales people are aware
of this. 

Most companies should adopt annual sales compensation plans as they should
adopt an annual budget. But, since most print shops don t budget, I guess
wishing for an annual sales compensation plan is speculative. So, let s start
by describing standard plans:
***** *****
STRAIGHT SALARY: Pay a person a salary and have them perform the function of
outside sales. While may seem ridiculous at first glance to many, it is
sometimes very appropriate for sales people. The issue is control. Under a
salary, management has complete control over what a sales person does and
when they do it much as if the person were any other worker. If one has a
very large customer (a 

house

 account), or a base of customers which need to
be serviced regularly, then a straight salary is sometimes very appropriate.
For instance, our printer with the large hospital might use a salaried
outside sales person to service that one account to supplement the owner s
account oversight. (Have the sales person call on them every day, write up
jobs and take care of the details while including the owner on such regular
activities as taking the buyer to lunch and maintaining other high level
contacts.) Frequently, management fails to put a sales person into these
large accounts for to do so would require payment of a large commission. Not!

 Some might suggest such a plan would not be incentive for a person to do a
good job. I disagree. Proper leadership, oversight (supervision) and
discipline has more with people doing a good job than does their 

incentive


pay. Much of incentives, however, is a quest on behalf of management to get
people to do what they are 

supposed

 to do without having to involve
themselves with supervising. But that s another topic altogether. My
recommendation: Straight Salary has some applicability to our industry, but
is NOT the most useful Sales Compensation Plan for the average shop.

STRAIGHT COMMISSION: This plan would pay a commission to the sales person on
all sales. The sales person would work all week, and then be paid, say, 10%
of what they have sold. Generally, I see some very small shops trying to
implement such a plan although it is not very prevalent. Why? Would you work
under such a plan? No. Most people need real money they can count on to pay
their bills. So, this type of sales compensation does not attract the caliber
of person needed, even for the very smallest shop. There is also the issue of
control. A print shop owner who wants the sales person to do specific things
in support of the goal such as call on accounts in a certain area of town,
will find the sales person reluctant to do so unless it is really paying off.

SALARY PLUS COMMISSION: Pay the sales person a salary and then pay them a
commission on top of that. Every Salary Plus Commission plan I have ever seen
was a big disaster. Why? Print shop owner, who knew nothing about sales, pay
the sales person too much salary and then paid them too much commission on
top of that. Preferred would be the Guaranteed Draw Against Commission
following.

GUARANTEED DRAW (SALARY) AGAINST COMMISSION: Very typically we would find a
small press printer using a salary against commission. Generally, we pay a
salary, say of  $1,500 per month. This is netted against a specific
percentage of gross sales, say 10%. So, in month one, the sales person sells
$14,000 of small press work, then their commission is $1,400 which is not
above the $1,500 guaranteed draw (salary). So, the sales person keeps the
salary of $1,500, we wipe the slate clean and begin all over in month two.

In month two, the sales person sells $20,000, so the commission is $2,000.
They have already received their 

draw

 or salary of $1,500 during the normal
pay periods of the month, so a special check is cut prior to the tenth of the
next month which pays them the remaining $500 of their commission.

HOW MUCH DRAW? Depends upon typical sales. Salesman selling $300,000 (which
is good for sheet fed small press shops) could have a $2,000 draw per month.
But don t start out your raw recruit at that level unless you really have
some faith. Large market car salesmen, for instance, are still guaranteed
about $1,000-$1,500 a month although many make $40,000.

HOW MUCH SALES CAN YOU EXPECT? $20,000 a month for a small press shop sales
person is not untypical for an experience person, although most of this
depends upon what the printer can produce. First few months with a new
salesman will see $4-$5,000 a month. $10-$15,000 a month by the end of the
first year. Will see shops with more capabilities selling more. (See the
following letter from a commercial printing salesman to gasp at what they can
end up selling.)

ACCRUAL OR CASH BASIS SALE? Accrual counts the sale as a sale when it is
billed or invoiced. A cash basis counts the sale as a sale as the cash is
actually collected from the customer. Practically all plans I see count the
sale as a sale when it is invoiced to the customer. While the cash plan has
some theoretical appeal, it is usually harder to administer because of the
record keeping requirement.

BAD DEBT CHARGE BACK: Usually I see an accrual based plan with some sort of
charge back provision. That is to say, if the customer doesn t pay the bill
within 120 days, then the sale is 

charged back

 to the sales person and
deducted from their current month s sales. Usually this is more than
sufficient.

WRITE UP OR ASSIGNED ACCOUNT: One method is to count the sales that the sales
person actually writes up. Another method assigns them specific accounts and
pays on the purchases of those accounts. Generally, I recommend assigning
specific accounts and keeping the sales person focused on those accounts.
Write up tends to keep the sales people hanging around the counter and/or
telephone and cherry picking sales. However, there are sometimes when write
up would be preferable based on your goals and strategy.

NEW SALES OR REPEAT SALES? Should you differentiate between 

new

 orders and


repeat

 orders. Some do. Some pay, oh, 10%-12% or so for new sales, and 7.5%
for repeat orders. What you should do would depend upon your goals and
strategy and your ability to track such matters. However, be cautious of what
you ask for, because you might get it. One large business forms manufacturer
use to pay 10% on new orders and 7.5% for exact repeats. What happened? They
never got those exact repeats for their salesmen spent a lot of time making
sure the customer wanted to change at least a little something on each job.
That, of course, created more operating problems for every job had changes.


Customers just don t seem to want simple repeats, anymore!

 the business
form management would say.

SPECIAL INCENTIVES: Plans could include strategies which would promote new
products, new services and/or new equipment. Generally not done in the small
press shop because of the difficulty of tracking sales. When done, I have not
seen it particularly successful because it is done in lieu of sales
management (supervision).
***** *****
So, generally I see small press printers using a draw against commission
sales compensation plan based on the total purchases of assigned accounts as
the jobs are invoiced and using a bad debt charge back. The specific draw
depends. Commissions I see are in the 10%-12% range with another 3%-5% being
spent on sales. No differentiation is typically made between new jobs and
repeat jobs. Now, let s hear from a commercial printing salesman with the
sales compensation plan blues.
***** *****
Subj:	Please Help
From:	Sleepless in North Carolina
To:	TomCrouser

Hi Tom.  This is Tom from your Keystone Printer days (an early client - he
now works for another printing company in the same town).  Hope you are doing
well.

Saw your article on inventory and it made me think you might could help.  I
have something I want to bounce off of you. I need your expertise on a matter
near and dear to my heart . . . (my) compensation.  My company is changing
our sales compensation plan.  The current plan is as follows:

Base salary:  $25,000 which requires $400,000 in sales. Beyond that, the
sales person receives an increasing percentage of each additional $100,000 in
sales of 7%, then 8% on the next $100,000, then 9%, then 10%. In addition,
the salesperson receives a 3% bonus on volume increases over the previous
year.

Example: Gross Sales - $900,000 = Base of   $25,000 plus

      100000 @ 7%    $7000
      100000 @ 8%   $ 8000
      100000 @ 9%   $ 9000
      200000 @ 10% $20000
      Total Income     $69000 
    
In addition, if this $900,000 was an increase over the previous year of
$200,000 then an additional bonus of 3% (or $6000) is paid in addition to the
above. So, in this scenario, the sales person would earn $75,000 on $900,000
of sales. Now, to date, all sales compensation, to date, has been based on


gross sales

 without consideration of margin.

Now,  management has presented us with a new plan. The new plan is as
follows: Base Salary goes up to $30,000 and that requires $500,000 of sales.
Beyond that, for every $110,000 of additional sales, the sales person
receives the 7%, 8%, 9% and 10% add ons. Now here s the tricky part. The
company will now consider a margin of 9% break-even.

Clipped some discussion of calculating margins - Tom

Margins - Historically the sales rep has not been responsible for margins,
high or low.  We can affect them, of course, by billing at a higher rate but,
here s the rub. If I sell a job where the estimate is discounted 15% the
company says that is a 9% margin.  However, that doesn t matter because the
margin is not figured on the estimate. The final margin figure is figured
after the job is produced . That is, if production does their job correctly
and efficiently  the margin may be 9%, but, if the quote was off or
production blew the job and had to reprint it . . . the margin may be much
less.

In the future salespeople will be rewarded or penalized based on production
performance not sales performance.

This new plan works OK for a well established rep who can bill his customer
at the cost sheet instead of the quote.  (If the plant runs well the customer
pays less, if the plant does a poor job the customer pays more.) 

(Tom s note: What the writer says is true. Under this type of system, the
better the plant prints, the less money it charges which does not increase
sales for we are engaged in Monopolistic Competition not Perfect Competition.
In general, I see this system lowering the prices to customers in general
and, then, when there is a problem job, management lowers the price as an
accommodation. End result: less cash and no additional business. But, that s
another issue.)

 It doesn t work well for a rep who has to quote and win each order in the
competitive marketplace and then depend on production to turn the order
without cost overruns.  

In addition, there is no incentive plan in place for production employees.
 They have been hounded to make sure their chargeable time is up.  Thus,
their goal is to put their time on a job.  They have no incentive to beat the
quote or anything like that.

In your opinion, what are the advantages (if any) of a plan such as this from
a sales rep s point of view.  How does it compare dollar wise with the
previous plan?  Does it seem fair?  What changes could make it fair?   Please
look at both plans and let me know 

what you see

.
***** ***** *****
Hey, Sleepless. Glad to hear from you.

I see your question in two parts. Part one is the changing of the hurdles
(dollar values, for instance, from $100,000 to $110,000). I really don t have
a problem with this since budgets are always changing. Part two is the
addition of the margin requirements. In general, I don t have a problem with
this, but I see many difficulties in the application. From what you describe,
I do think sales people will be rewarded or penalized based on production
performance not sales performance under the new plan. So, from a sales rep s
point of view, it holds few advantages.

Generally, the owner is trying to control 

profitable

 sales for I assume
management thinks sales reps are now compensated for unprofitable sales
(which I assume is true). Trying to assure profitable sales is not an
unhealthy approach because you, as a sales rep, do not want the company s
assets tied up in producing unprofitable sales which prevent you from getting
your profitable sales produced and your profitable customers satisfied. The
problem comes in how one actually controls 

profitable

 sales and, further,
how do you measure it.

The thrust of this margin plan will be to pit sales against production.
Instead of stepping up to the responsibility of supervising estimating and
taking appropriate risks on pricing, management is trying to hold the sales
person accountable for profitable estimates (assuming the sales person does
not estimate their own jobs as in most large shops). The determining factor
of profitable estimates, however, is the supervision of production workers.
This will lead to many unnecessary conflicts between sales and production.

Management is responsible for setting a price. The sales person then applies
the price or turns the complicated job over to an estimator who applies a
price on behalf of management. It is this person s responsibility to estimate
adequately on behalf of the shop.

There can be a situation in the estimating stage where the sales person is
asked to have their commission reduced, but that should handled on a case by
case basis and should be known up front. In short, exceptions are okay if
everyone agrees up front.

Now, I know many commercial printers use a margin splitting approach (buy it
for $1, sell it for $2 and the sales person take 50 cents and the company
take 50 cents or some version of this). I find this most appropriate in
brokered work. If brokering is a large part of the business, then possibly
margin splitting would work for this .

However, margin splitting where the printer is manufacturing the job and
applying arbitrary cost standards (a Budget Hour Rate is an arbitrary cost
standard) is done, the whole issue of how the cost is calculated and,
further, supervision comes into play. Problem with this approach is that it
sets up a constant confrontation between management, production and sales
over 

costs.

 Much 

quibbling

 is encountered and many small decisions, some
fair and some unfair, have to be made. Few people end up happy. (Although I
do know of some very successful printers doing it. I also know very
successful printers not doing it.)

So, my view is the company should set the price and the sales rep should sell
it for that. Should accommodations be needed from the estimator s calculated
price, the sales rep can appeal to management. Management can then decided on
price and perhaps even reduce the sales reps compensation on a job by job
basis. This means I would favor a gross sales type of commission in general,
although there are possible exceptions. Anyway, hope this helps and hope to
see you again.

Happy Trails. Tom