Should you adjust your sales compensation?: A sagging economy may cause some HR professionals to reconsider pay programs for sales personnel - Agenda: Compensation & benefits

HR Magazine, Feb, 2002 by David Fiedler

For the woman working in travel sales at AAA of Western and Central New York, moving from inside sales to a position as an outside sales rep seemed wise. She would be trading the certainty of an hourly rate (plus bonus) for the risk of commission-only compensation, but a quick review of the previous year showed she would have come out farther ahead earning commissions.

She started her new job Sept. 4--one week before the terrorist attacks that brought the travel industry to its knees. "There are sales reps who didn't make any commission the whole month of October," says Hayley Schultz, HR manager at AAA.

Suddenly, commission-only compensation lost its luster for the new sales rep, who called Schultz to "complain that, as an employee, she must be paid at least minimum wage--even when she is not selling." Schultz pointed out that salespeople are exempt from New York's minimum wage requirements. "Naturally, she wasn't happy to hear that," says Schultz.

Schultz's situation is not uncommon. HR professionals across the country are struggling to determine if they should adjust their sales compensation plans in light of the events of the past few months. Does the combination of an already slumping economy, shaken further by the fallout from Sept. 11, warrant an examination of the way compensation is calculated and paid?

"Generally, we haven't seen a lot of companies changing their variable compensation plans," says Rob Bentley, senior consultant in sales force incentive design for Hewitt Associates LLC. "When companies suffer, it usually means salespeople do, too."

In fact, only 20 percent of companies plan to change the design of their incentive plans in any way, according to a November survey by Organization Resources Counselors Inc., a management and HR consulting firm headquartered in New York.

Take It Slow

Though sales reps may make a lot of noise about not achieving quotas, Bentley says companies should not adjust compensation for sales staff without a great deal of thought.

Mae Lon Ding agrees. "You should be very conservative in making changes to the compensation plan m mid-year," advises Ding, president of Personnel Systems Associates Inc., an Anaheim Hills, Calif., consulting firm that specializes in compensation and performance management.

Before making a move, consider the extent and depth of the downturn. "If it is short-term--a year or less--don't change a thing," says Ding. "When recovery is expected in the economy for the second half of 2002, why make changes in the sales comp plan now?"

To determine if pay plan changes are needed, Ding lists several steps HR professionals can take.

First, perform an analysis to see if the plan is working as intended. "Assess what percentage of the sales force will receive no bonus this year," she says. "If the company is profitable, at least 50 percent should make something in bonuses."

The reverse is also true--companies that aren't profitable shouldn't pay bonuses, says Ding. Doing so shows that sales goals are not aligned with company objectives.

Next, get a feel for what other companies in your field are doing. "You definitely need to remain competitive within your industry," says Ding.

Finally, don't overreact. A pay plan, says Ding, "is intended to recognize individual performance, but it is also a way for companies to share risks, to acknowledge that 'We're all in the same boat.'"

Know Whom You Are Dealing With

David Cichelli, senior vice president for the Alexander Group Inc., a Scottsdale, Ariz., management consulting firm, says HR professionals must take into account exactly the type of sales staff they have.

"There are two types of sales-people," Cichelli points out, "income producers and sales reps." The two roles serve different purposes, and their compensation should reflect that difference.

"For income producers, their compensation is purely commission--always," says Cichelli. "Their pay plans should not be adjusted because to do so runs counter to the basic principle that their income should be higher when times are good and lower when the economy is bad."

The harsh reality is that an economic downturn should cause a reduction in the number of salespeople, says Cichelli.

Sales reps--who outnumber income producers--warrant more attention, says Cichelli. "A large component of their job is to represent the company and that product to the customer. The compensation equation for this group is created by the company and managed toward a targeted compensation level, achieved by combining a base salary with an incentive."

Cichelli recommends adjusting objectives so that 60 percent to 70 percent of sales reps achieve their quotas. If necessary, he says, employers should add guarantees to protect these employees. "You don't want sales reps to carry the uncertainty of the company."

When Changes Are Needed

Many options short of a full-blown overhaul can help increase the profitability of your company and keep your sales force moving forward.

"If anything, now is the time to make compensation richer and to increase the incentive opportunity," says Thomas McCoy, managing member of T.J. McCoy & Associates, a compensation consulting firm in Kansas City, Mo. "By reducing the base salary and increasing incentives, you are controlling cost to the company and encouraging sales staff to stay focused on what they need to be doing."