When we run businesses we all walk in assuming that everyone in the business is on the same page and that everyone is pursuing the same goals – namely the success of the business. My experience has shown me that this is not usually the case.
Here is a quick test to prove my point: Does everyone in the business have the same compensation and incentive structures? Most likely not. Therefore it pays to review each disciplines (Sales, Marketing, Operations, etc.) incentive structure and make sure their goals are aligned.
A case in point: The sales team is normally provided incentives (commissions) based on revenue attainment. This is good. You need to have someone responsible for attaining the business’s the top line. However, this may not be enough. In a volume only incentive plan, price becomes the sales team’s primary differentiator. The sales team will now create friction within the business trying to drive the selling price down to make it easier for them to sell. If you have a sales team that is pressing that prices are too high, you might want to look at their compensation plan as one of the possible causes for this friction. (On the other hand you also need to make sure that you are not overpriced verses the rest of the market, and if you are how you quantify the incremental product value you claim to have. I’ll look at this in later blogs.)
A solution can be to make sure that the sales team has both revenue and gross margin target goals (sales cannot affect other costs of the business as directly as price and hence should have gross margin, not earnings targets) as their objectives. Provide compensation accelerators for business above target margins (this is business that is good for everyone and should be encouraged) and compensation decelerators for business below target margins (just because it is lower margin business doesn’t mean you don’t want it, it just means it is not as valuable to the business – and hence not as valuable to the salesperson, as higher margin business).
Targeting and attaining higher margin business will help exceed earnings targets for a target revenue amount. This is a very good situation and the sales team needs to be rewarded for their part in it. Taking lower margin business means you will need more revenue to meet your earnings dollar commitments. Your sales team needs to participate in this with you as well.