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“I m tom simpson and welcome to av matters in this session. I want to to talk about sales commissions 101. Many of you have some sort of a sales or bonus program in your organization. But a lot of you don t.
But it s becoming more and more important as you start to understand how to grow your business. So a lot of the phone calls. I m getting are asking about the basics of doing sales commissions. So let me give you my take on it because some of the traditional things that we ve been doing in our industry.
Aren t very good examples of a good sales commission incentive program. So it was you talk about incentives commissions and bonuses. I want you to think about the tines of the kinds of behaviors that you re trying to encourage and the ones you re trying to discourage within your organization think about your best salesperson. What are the qualities in that individual that you like what are the results that they re delivering that you would like other salespeople to do and then you re gonna think about your worst salesperson.
What is it that they are doing that you would like to discourage now sometimes. We can t make behaviors go away just by telling people to stop doing them. But we can create carrots. That will pull them to the right solution and discourage the wrong one and commissions and bonuses help us do this now not everybody s motivated by the same thing.
If you ve got five sales people you ve probably got six different ways that people like to be motivated. There s three things that are most prevalent. Though we have people who are interested in security. We have folks who simply like money and we like other people who really enjoy the recognition of a job well done so as you think about commissions and bonuses think about what it is your team is actually looking for on an individual basis.
You don t have to have the same commission and bonus plan for everybody in your company. Though. I know most of us would like to and we think it s simpler to administrate the fact of the matter is you might get better results. If you individualize your incentive program based on the person you re trying to coach.
So. The basic elements of a commission plan in sales first of all there are three pieces to the to the way that i propose that you do incentives. The first incentive is salary i encourage having a salary at any level whether somebody you re gonna pay somebody a small salary and a huge commission or a huge salary and a small commission. You always need to have a salary.
There s a certain part of the person s job that you want them to do regardless of whether they have a lot of projects or sales dollars on their books. We want them to keep up with our clients. What we want them to do account management. We want them to continue to learn for themselves about new ways of doing things and our salary is going to do this for us so some portion of your incentives have to be salary based now we also want to have some sort of commission base and a bonus base and i treat commissions and bonuses as two different things so commissions are based often on some sort of financial result.
The most typical one is gross profit bonuses as we ll talk about in a minute. I often base on top line revenue. And we need both of these and i ll explain why so if we understand that a commission is something that s based on gross profit. We need to understand that gross profit.
Some of that money belongs to the organization. A very typical mistake and common mistake that we ve been making in our industry. For years is paying salespeople commission on 100 of the gross profit. Whatever that number is some portion of gross profit has to be a minimum or a floor.
So if your organization for example regularly does a 30 gross profit and that s your benchmark number. I don t know if that s good or bad for your organization. But let s just use it as an example my floor gross profit therefore needs to be 30. Because if i want to incentivize.
It our salespeople to sell more profitable projects than anything above 30 gross profit is more profitable. If i set 30 as the floor therefore. I m not going to pay commission on anything that s below 30. But i can afford to pay a very handsome commission on anything that s above 30.
So again using numbers just as an example. I can pay zero cem and a 30 gross profit. But if they go to 35 gross profit. I might give that salesperson 25 of the gross profit above 30.
All the way through 35 in other words. I can give them a bigger share of the gross profit above the floor. I can have multiple floors. I can have a profit level or a commission level between 30 and 35 percent and another commission level for everything.
It s above 35 percent. If getting to a 40 gross profit is your ideal and you couldn t be happier. You might want to give them 50 of the amount above 35 percent. So you can build some models to see what works best in your organization.
Now having said all this we know that there are a lot of projects that actually come in lower than 30 percent. So in order to average 30 percent. We know that there was something less than 30 percent in something more than 30 percent. Why would we sell something below our margin.
Sometimes it s a good customer and we have to sometimes we re selling in the slow season. And we want to encourage sales and we re willing to give up a little bit of margin in order to do that right so if i can sell below the floor. How do i make money as a salesperson well. I can move the floor.
Which makes a very complicated commission plan and a lot of arguing will probably ensue about whether or not a lower flow or floor is appropriate or i can augment the incentives with a bonus. So why do i want to have commission and bonus. And this is why sometimes we want the salesperson to close the job below margin. Where they are not going to make a commission.
But i have a bonus plan that s going to make up for that so. The bonus plan pays on the top line and again using round numbers maybe a half percent. An integration company one or two percent in a rental and staging company commission on the top line that goes our bonus on the top line. That goes along with the commission on the gross profit line.
So i have a combination of three things to incentivize my sales team with their salary. Their commission on gross profit and their bonus for revenue in between those things three things i out be able to incentivize them to sell the right kind of business. More profitable business. Okay and the right kind of business now.
I gotta have to do introduce one more concept to this before we bring this to a close. What is gross profit. Every company measures it differently in an a project based organization like most rental and staging companies are you re gonna have variable gross profit from job to job what if you decide to sub rent. The projectors for this job.
That s gonna reduce the crow s profit for it. What if you have to hire a video engineer for that job who s a freelancer. Okay. That s going to add expenses to that to another job and lower that gross profit are those things the fault of the salesperson in other words.
The salesperson deserve to have their commission reduced because you made an operational decision about how to make money on this particular job or series of jobs and the answer is no in a set of program in which the salesperson doesn t have control over the results won t work in the long run. So one way to overcome this is to pay commission on the project as it was sold in other words absorb all the expenses across all the jobs either as a burden number or a flat number or don t calculate them at all make sure that we sold the job at a profit in commission for that and then we can execute for a profit across all the jobs from an operational level. So lots of things to consider well worth it don t forget think about the behaviors. You want to encourage and the ones you want to discourage and then structure.
Your commission and bonus plan and the sin of plan based on the individual. So that you could maximize the results. It s a big topic. But it s worth looking into i m tom stimson and thanks for watching.
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