When you first start a business, it's easy to turn on a dime when you perceive an unmet need in the market or encounter a new competitive threat. But as the business grows, it becomes increasingly difficult to respond as quickly.
How can you make an established firm nimble again?
Use a Contribution-based Approach
The first step is to design compensation structures that get everyone pulling in the same direction.
Normally, when you design sales force compensation plans, your goal is to maximize revenue. But as a manager or owner, that's not all that concerns you. You want expenses kept as low as possible, so profit can increase too. Right?
A contribution-based approach allows you motivate sales associates to increase revenue, reduce expenses, and increase profit – all at the same time. With a contribution-based approach, sales associates are responsible for contributing their fair share towards corporate expenses and profit. Once that contribution has been made, they are able to keep most of the rest of the revenue they bring in.
Sales associates are motivated to increase revenue; as they sell more, they make more. But with this system they can also increase their income by reducing expenses. When expenses drop, the amount they have to contribute decreases, so they keep more of the money they bring into the company.
You would naturally expect profit to increase when revenue improves and expenses are reduced, but a contribution-based approach provides a higher level of control – you define the percentage of profit you want to achieve. That amount is then built into the plan design. The result is a system that provides automatic incentives for sales associates to increase revenue, reduce expenses, and increase profit.
Meet the Needs of the Sales Force!
Now that you've aligned the goals of the sales force with yours, the next step is to reduce unnecessary expense so you can run a more efficient operation.
If you're in a service business, your biggest expenses are related to your staff – salaries, commissions, and benefits. You can mandate across-the-board expense
reductions, but the way to really save money is to find out what your sales associates don't value and stop spending money on those items. Normally, you can't simply ask what sales associates want; they want it all.
However, with a contribution-based approach, your sales associates learn that benefits, perquisites and support services come out of their pocket – not yours. We recommend that our clients design several compensation plans that offer different combinations of benefits and support services. Let the sales associates choose the plan they prefer. If no one chooses the plan with the most expensive health and life insurance, and many choose the plan with additional administrative support, you know where to spend your money.
We've had clients save hundreds of thousands of dollars, simply by adjusting their benefits packages to line up more effectively with what the sales force wanted.
By using a contribution-based system, you take a holistic approach to designing compensation. You can factor in the company's level of expense, the competitive situation, the desired level of profitability, and the needs of the sales force. The result is a more efficient operation that responds to the needs of the marketplace quickly – and stays nimble over time.