“Coin operated.”
I was discussing revenue goals and comp plans with a friend. “Salespeople are coin operated” he said again for emphasis.
The phrase is hilariously descriptive and accurate. Good salespeople will, without fail, do the actions that maximize their comp. That’s what makes them good salespeople. And that truth has caused many headaches for CEO’s and CFO’s who poorly designed their comp plans.
The power of good sales comp plans lies in their ability to tap into the salespersons’ desire to make more money. The simpler the plan and the more directly that connection is made, the better.
Why do we assume reacting to incentives is a trait exclusive to salespeople?
Obviously it’s not. Reacting to incentives is a most human trait. As brand founders and leaders, we often make incentives an afterthought if we think about them at all. “Here’s your salary. Maybe here’s a bonus. And here’s some equity. Now get to work” The incentive for the employee is essentially don’t get fired and usually becomes ‘don’t get fired for long enough until I find a better job.’
I witnessed this with a client once. The company had a serious cashflow problem. The CEO knew they had a cashflow problem and agreed changes had to be made. But the actions needed to solve for this ran counter to what they really wanted to do which was to introduce more products, run discounts and hammer ads without regards to profitability to drive sales. That made cash come in, but it also made cash go out even faster as increasing amounts of debt were layered on. I talked with group leaders about what we needed to do but couldn’t effect the changes. At first I thought maybe I wasn’t being clear enough, or wasn’t showing with data. But it eventually dawned on me that all our incentives weren’t aligned. Everyone knew what the founder wanted and they were going to continue doing that to avoid being fired.
It was irrational from the point of view of the company. But entirely rational from the point of view of the employees.
There’s a lot of talk of AI enabling much smaller teams, reducing OpEx, and changing the margin structure. But AI isn’t going to turn an average employee into a superstar. As a brand leader building around a small team, your goal is to find people with high superstar potential and then create the incentive structure to harness their drive so they become those superstars. Incentives are the key!
There’s a reason as leaders that we don’t tie incentives more directly to desired outcomes. Figuring this stuff out is hard! OKR’s (and similar programs) are a start, but have their own set of issues:
- We have to agree on the metrics and outcomes we want to achieve. Oftentimes we as leaders aren’t clear on these ourselves.
- If you have gone through an OKR-like process, you understand how easy it is to add to the list. You start by wanting three and you end up with eleven and then you try to comprise with 6. A sales comp plan with 6 objectives won’t work. And neither will a bonus or incentive structure for other employees. What do you want people to focus on?
- People wear many hats. Sales closes deals. You don’t ask the salespeople to also jump in on product development, marketing and help with the accounting. With so many jobs and responsibilities, how do we narrow down the objectives for any individual?
- Brands are complex and everything is intertwined and interdependent. A group’s OKR depends directly or indirectly on some other group’s work.
- Things change. What seemed clear back in December can be irrelevant come May. See tariffs.
- What’s the right reward? In sales it’s easy, a commission on sales. Can we bake our variable comp for other groups into our revenue model?
So how do we incentivize the outcomes we want?
I think the best structure focuses on the two most important drivers of the business - profit and cash cycles. The company sets goals for contribution profit and this company goal is then broken down to groups and ultimately individuals. A similar process is followed for cash cycles but here it’s broken down into specific metrics most relevant to the group or person. For the purchasing team, the cash cycle goals are Days Inventory by product category (i.e. ABC) and IRR accuracy (i.e. how well did the purchasing group project amount and timing of sales of the products they purchased).
Lastly, bonuses are only paid if the company hits its contribution profit and cash cycle goals. Everyone is pulling together.
This type of incentive structure appeals only to the highest performers.
This is a massive mindset change for most employees and founders. And as Ben Perkins discovered, you are going to lose a lot of people putting in a system like this. But you will have and attract higher caliber people willing to work harder because they will understand how they can advance faster and make more money.
If you need help thinking through and implementing the incentives, reach out. We work with a select group of clients to make big improvements to their profitability and cash flow and are paid on a performance basis.