Is Your Comp Plan Truly Aligned with Your Business Objectives

On my first day working for a new employer, my manager was outlining what he expected from me in my new position.  I was starting my career as a District Service Manager for a major copier manufacturer.

 The mangers goal was for me to spend two days when visiting each dealer.  I was okay with that until it was explained that my bonus was based on the cost of a dealer visit and the number of dealer visits.  Now I am reasonably quick with math, and this was pretty simple; more dealer visits and less cost per dealer visit was how I maximized my bonus.

I told him he was paying me for one-day visits, and he said he wanted two-day visits.  I suggested that he change the bonus structure, and he said no.  For the entire time I worked for him, I did one-day visits and sometimes two in a single day.  I did what he paid me to, not what he wanted.

I challenge you to think about your business. Do you pay people to do something different from what you want?  We will look at some examples in the office equipment industry, but this information applies to every business.

In the office equipment industry, the essential activity for salespeople is to find new customers.  That is the way the business grows.  It is necessary to serve existing customers, but the focus should be on acquiring new business, either from existing customers or new customers.

Simultaneously, in most dealerships, the sales reps earn the same basic compensation whether they upgrade existing equipment or sell net new.  Which is easier?  Upgrading the existing base is much more comfortable, and so they will spend their time and effort doing as many upgrades as possible.

This does two things that are bad for the business.  First, they replace equipment that may be reaching peak profitability on the service side of the company.  The second thing they do is usually discount the service rate to maintain more profit in the equipment.  Both of those hurt the dealer’s overall profitability.

Why do they do that?  Because the compensation plan rewards them based on the profit in the equipment for those actions.  It is an example of the compensation plan not being aligned with the needs of the business. Suppose the sales representative was rewarded for selling net new equipment, and not for upgrading.  They would sell more net new equipment, and the company would grow.

Something similar happens in the service department.  If they have a bonus structure, they reward technicians for doing many calls.  Now that may seem to be a good idea, and it keeps the technicians busy.  But service calls, unless the customer is paying for each one, cost the dealer money.

In most parts of the US, which probably is similar globally, it cost the dealer approximately $100 every time a technician walks in the door.  The more clients he visits, the more expensive his day is for the dealer. Why not compensate technicians to fix it right the first time?

A second mistake is that dealers often encourage technicians not to install parts and reward them for that.  The result is that they will skip putting in a $25 feed tire and then have to come back to install it later; this causes customer satisfaction issues and adds $100 to the cost of the feed tire.

Dealers that reward their technicians for making the device run as long as possible and installing the parts proactively typically have significantly higher profit margins in service and for the dealership as a whole.

I would encourage you to think about how well your compensation plan aligns with what your company needs.  Don’t fear changing it.  Changing the compensation plan where needed can make a significant difference in the bottom line.  It will also move your business faster and further than it is currently.