Incentives Can Decide Life or Death of a Salesman
Sales compensation is all too often overlooked as a key factor in market success
P> If it isn't already a business school case study, it should be. Kenneth Olsen, Digital Equipment Corp.'s legendary founder and longtime chief, had little but disdain for sales. His was an engineer's company -- and he prided himself on eliminating the concept of sales commissions entirely. All salespeople were paid salaries.
But the emergence of personal computers began eating into the Maynard, Mass.-based company's sales, and it eventually dampened Olsen's idealism. In the mid-1980s, when Digital's proprietary systems began losing ground in an open systems world, Olsen changed the sales plan. The top 10 percent of Digital's sale force received an annual commission of $4,000 to $12,000; the amount depended on how much the employee exceeded his quota and where he stood against the rest of the sales team. The problem with this program -- besides giving commissions that were probably too small -- was that Digital sales reps did not know where they stood in proportion to the entire sales staff, especially because some sales reps negotiated lower quotas.
Olsen was gone before he figured out how to correct his mistake.
"It's important to give sales[people] sufficient incentives," said Jim Hunt, managing director for systems integration for Price Waterhouse LLP, Bethesda, Md. "There's a delicate balance between base salary, commission and/or equity. The best sales[people] usually are the ones who are willing to work under highly leveraged plans."
Processing power continues to double roughly every 18 months, accelerating the emergence of new computer products. Just as this relentless timetable quickly renders products obsolete, so too does it affect sales strategies.
Cray Research Inc., the Eagan, Minn.-based supercomputer manufacturer, has changed its commission structure to reflect these realities. According to company spokeswoman Mardi Larson, the company has more than tripled its customer base since 1990. Because the sales cycle on the multimillion dollar high-end systems it traditionally has sold can take up to two years, the majority of sales reps earn a high percentage of their income from salary, with some commission.
But as the company reaches into new markets with lower-priced systems, sales volumes will increase and the company will become more dependent on indirect sales channels. So Cray is placing those sales reps on a smaller base salary, with a higher percentage of commission. "In these new markets, we expect to sell many, many systems," said Larson.
Well-established manufacturers such as Digital, Hewlett-Packard Co., Palo Alto, Calif., and IBM Corp., Armonk, N.Y., pay many sales reps who make their quotas $80,000 to $100,000 per year. These companies have a large installed base of customers, and with their marketing muscle, they have substantial channel presence. For better or worse, these companies know that one or two sales reps will not make or break the franchise, and so there are limits on how much the salespeople can make.
At Microsoft Corp., Redmond, Wash., sales reps act more as marketers, working on marketing to channel partners, such as distributors, independent software vendors, integrators, resellers and retail stores. As a public company with a dominant presence in many markets, the company can afford to put its sales reps on salary with stock options -- rather than pay outs -- for strong performance. Stock options help to retain employees, and they also keep employees focused on company performance instead of their own sales territory.
Hot companies plying higher-end markets -- such as UNIX vendors Silicon Graphics Inc. and Sun Microsystems Inc., both of Mountain View, Calif. -- give their best sales reps a base salary of $35,000 to $60,000. Those who reach their quotas can make $110,000 to $135,000.
Salespeople taking orders over the phone can make $40,000 to $55,000 per year at computer resellers such as $617 million Government Technology Services Inc., Chantilly, Va. Other sales reps at such companies -- who usually have less supervision -- can make $60,000 to $80,000, with a higher percentage of their salary coming from commissions.
A Cyclical Phenomenon
But these are average figures for one of the more volatile areas of managing a business. Companies -- eager to get the highest yield from a promising harvest and to give their employees incentives -- usually raise quotas and divide the territories of the most successful sales reps among eager up-and-comers. It's a cyclical and usually unavoidable dilemma for companies: To crank up sales and penetrate new markets, they must dangle very large carrots -- in the form of commissions. Once quotas are met, they must be raised again the next year. Sales reps then must work harder to receive the same amount of money.
This process can only go on for so long before salespeople burn out and higher salaries begin to eat into a company's top and bottom lines. At this point, cost-conscious executives begin to realize they may be able to get the same or more from salespeople at lower base salaries and commissions.
The feeling of dissatisfaction is often mutual; established sales reps feel they have to work twice as hard to make the same amount of money. A parting of ways usually follows, allowing the company to restructure its sales force.
The trick, however, is for a company to survive this often tumultuous process without losing market share or even, sometimes, getting mortally wounded. Factor in accelerating technology product cycles, and the challenge becomes even greater.
Take the example of Verity Inc., a supplier of search and retrieval software based in Mountain View, Calif. The company had one sales rep in the Washington area with a single, albeit lucrative customer -- the CIA. The representative made $150,000 per year. When the company fell on hard times in 1991 and 1992, one of its first moves was to recommend slashing the price per seat of Verity software tenfold -- from $1,500 to $150 -- to spread the company's core technology into new markets.
That did not sit well with sales representatives, who had a vested interest in keeping prices high to protect their commissions and high salaries -- without having to chase new business.
"They were abusing the customer because they wouldn't reduce the price," said CEO Philippe Courtot, who had to revamp his sales force in 1993 to take on new, lower-margin markets. The company rebounded, but not before facing the inevitable exodus of disgruntled employees to competitors.
So how do salespeople avoid becoming victims of their own success? Sales reps are known for their resourcefulness, and crafty ones can make changes work to their advantage. Lee Raisly, vice president of sales and marketing for EdgeMark Systems Inc., an $18 million integrator in Gaithersburg, Md., recalled that when he worked for Silicon Graphics, such a change actually helped him.
"In 1990, I had most of Montgomery County, Md., for SGI. They told me they were going to divide my territory, but that I could keep four customers of my own choosing." With some analysis, Raisly found four customers accounted for approximately 90 percent of his sales, and the other 38 constituted 10 percent. Raisly no longer had to service accounts that did not produce much revenue, freeing him up to look for bigger customers.
Terry Miller, a government contracting consultant, recalled a friend who had worked as a salesman for a high-end vendor that did nearly all its business with the government. The salesman, the top performer in the sales force, once achieved more than $2 million in sales one year to earn more than $200,000. Before he received his commission, though, the president of the company told him he would not pay a salesman more than the company's chief engineer, who made $150,000.
"You're the boss," answered the salesman, who promptly quit the company and went to work for a rival vendor. The first company went out of business after losing their best salesman. "They learned their lesson too late," said Miller.
More Skill, More Pay: Some Selected Pay Scales for Sales Reps
Distributors, low-end reseller$40,000-$55,000
Old Line Manufacturer$80,000-$100,000
(e.g. Digital, HP, IBM)
Newer Manufacturers (SGI, Sun)$110,000-$135,000
Source: WT Research
Spiffing Can Motivate Employees But Also Create Problems
Many distributors and resellers offer sales employees a specific form of commission -- known as spiffs -- paid by manufacturers who want to promote their products. Spiff is a slang term for a controversial practice sometimes conducted under the table, but other times done overtly.
To gain leverage with distributors and increase market share, manufacturers pay sales representatives a special commission for promoting their products to resellers -- similar to the "payola" controversies in the record industry when record companies paid DJs to play their label's songs. This special commission motivates the sales rep to give prominent mention to those products, rather than the thousands of others the distributor might have in the warehouse.
When spiffing is done overtly, the manufacturer usually obtains some of the commission. Craig Jones, government channel marketing director for personal productivity products for Texas Instruments Inc., Dallas, said sometimes resellers can get out of hand in their desire for spiffs.
"We refuse to deal with some resellers who, in effect, become 'spiffaholics' and will not promote our products unless we give them a lot of 'soft money,' or spiffs and co-op funding," Jones said.
"Spiffs can sometimes create a rift between the charter of the reseller -- to make money -- and the interest of the sales representative -- to make more money through selling spiffs. This occurs in cases where sales reps spiff products that are not as profitable for the reseller as other products," said Jones, a 22-year TI veteran.