But business does not unfold in real life as it does on Microsoft Excel projections. So, when the vagaries become unsustainable, prudence dictates that the goose that lays the golden egg is protected; and no, that’s not the salesperson,
Contrary to lay belief, compensating salespeople is not an exact science. This is something salespeople should be alive to and not always lament, “Ahhh…they never pay commissions”… “They are just frustrating us”… “They keep changing the incentive scheme…” Here’s why:
Because of the complexities, needs and vagaries of a business environment, sales compensation is a hit and miss exercise. For instance, if you’re selling loans, lay thinking would insist that you pay, say, ten per cent of the loan sold as commission. But wait! Your profit is not the principal amount sold but the interest earned on it. So, pay ten per cent of the interest, yes? No. It’s not that simple. What if the interest is not fully realised (paid up on time)? Consider this simplified illustration: the interest amount is Shs. 1,200 to be realised over twelve months at one hundred shillings monthly. If the seller is paid one hundred shillings, and the loan repayments dry up on, say, the sixth month, only five hundred shillings will have been realised (i.e. six months multiplied by one hundred shillings less the one hundred paid out as commissions). But that calculation is arithmetic not financial. What do I mean? There are costs involved in selling and recovering that loan. The seller’s commission is only one such; his retainer is another; rent, insurance, water, electricity, airtime and transport are still others. When the, we’ll pay one hundred shillings in commissions idea was mooted, it was under the assumption that all would pan out well. But business does not unfold in real life as it does on Microsoft Excel projections. So, when the vagaries become unsustainable, prudence dictates that the goose that lays the golden egg is protected; and no, that’s not the salesperson, it’s the business. The former wouldn’t exist without the latter. If your income suddenly diminished, which of these two would you sacrifice? Your ayah’s salary or your child’s school fees? But these adjustments are not permanent; they are necessary to allow you regroup and find new ground. Equally, when a company is regrouping it may sometimes change the compensation package because the existing one does not make business sense. It’s nothing personal.
Here’s a more practical example. Before the capping of bank interest rates, investment firms could afford to pay commissions upwards of thirty per cent of gains made on returns. With capping of the rates and more specifically mandatory increase in savings rates, many investors shifted to the more comparatively guaranteed return on savings. Seemingly overnight, thirty per cent commission dwindled to twenty then to ten and in some cases nothing. But it’s unfair I hear you say. Really!? What would you do if it was your business? Accelerate the sinking of the ship by drilling a hole through the bottom? And if you say you’d continue paying the commissions (meaning incurring unsustainable costs) then that doesn’t make you fair. It makes you irresponsible.
This challenge of suitably compensating salespeople is not merely because of unsustainability of costs and neither is it only in the service industry. It could also arise because of directing sales efforts to a new strategic direction. For instance, if the business selling wines or electronics goes into a new territory, the prudent thing to do is focus the salespeople there. How? Possibly by offering higher commissions for sales made in that territory. And if that doesn’t work, because the salespeople are happy with the comfort zone of familiar territories (as they most likely will be),then gradually diminishing the commissions in the comfort zone areas and upping the ones in the desired territory until some equilibrium is established.
Please note though, that I am not blind to the fact that there are businesses that unethically refuse to pay commissions. (May they burn in hell!)But that’s different. And is a story for another day.
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