Using Compensation to Drive New Value Added Business Strategies

Change ...change...change, it seems is what you have to do if you have been attending industry seminars and reading industry magazines and web sites. When will it stop, when will I have a baseline that is profitable, when can I get back to just manufacturing? To quote song writer Billy Preston, "...you got to keep on going through those changes...". It never stops, you have to be in continual change to be successful and have a mechanism for analysis and implementation of change. Most printers and communicators are thinking about adopting strategies for providing new services and products but seem at a loss on how to drive the changes they want through their own organizations.

Compensation as the first Agent of Change

There is no magic bullet, however a logical place to begin is by looking at the way people are compensated. New business strategies automatically require new compensation plans. The reason for this is simple; a compensation plan should provide incentives for employees to achieve things that the company wants to achieve. If sales people receive incentives for selling black and white printing and receive no incentives for selling color, then the company's strategy is to increase black and white sales. If the company's desire is to increase color sales then it has the wrong compensation plan in place. Therefore, if you change your business strategy in any way, you need to review your compensation plan since it is likely to be incorrect based on the new business goals.

Compensation is not the only element of change required to get your organization to refocus on new directions, but it is the most powerful. In addition, you may have to change management style, communications, organizational structure and even workflow to achieve desired new directions.

Printing Sales vs. Business Development

You may have to change compensation for the whole enterprise, but the place to start is in "mission critical" areas, meaning sales. Sales personnel will generate the revenue and profit you need, if you can get them to think differently. Selling "services" as opposed to impressions requires a monumental change in behavior. New integrated services require Business Development with their customers, not sales and this behavioral change will not occur if the compensation plan is unchanged. Business development requires that the sales person understand their customers business, their needs and their customers needs. Together, with their client they develop the service that will be sold. This is a lot different than finding out quantity, paper and delivery date. It requires more thought, creativity and analysis from the sales organization. How then, do you reward these new sales people for developing business, instead of taking orders? What basis do you use for compensation?

Printing sales personnel have typically been paid on the revenue they generate, but in the business development model you need to change the basis to profit. Printing companies must change from thinking about large revenue numbers with little profit, to smaller revenue numbers with large profit. Changing your pay basis from revenue to profit is the single biggest mind set change you need to make in developing a new compensation plan. The table below illustrates the difference.

Printer Graphic Communications Co.

Service

The Revenue Model

The Profit Model

Revenue

Design

$0

$8,000

Print

$50,000

$50,000

Asset Management

$0

$4,000

Fulfillment

$0

$10,000

Costs

Design

$0

$3,000

Print

$42,000

$42,000

Asset Management

$0

$1,500

Fulfillment

$0

$4,000

Gross Profit

$8,000

$16,500

Sales Comm. (8%)

$4,000

$1,320

Net Profit

8%

21%

Building a New Compensation Plan

OK, now don't panic! Your obvious question is, how will I keep my salesmen if they are making less money and doing more work? The real question is, can you afford to be in business if you don't change your model? Remember, you are giving your salesman a whole lot more to sell with the new value added services. Why should you keep sales people who are not delivering a realistic profit to the enterprise? In order to keep the sales people you want to keep, there are a number of questions you need to ask to build a compensation plan that will make them happy and deliver profit for your business.

1. What percentage of their compensation should be variable?

The theory is the larger the variable percentage, the more aggressive my sales organization will be. In some cases, Print Sales Personnel may be paid commission only. As profits have declined in Print sales, more and more sales personnel are paid commission only. You may consider, changing your compensation model to a 40% or 30% variable income providing to your sales people more perceived security while still giving them the opportunity to achieve a superior income. Having a fixed salary also seems to make all the Business Development work that is required more worthwhile to them.

1. Should sales compensation be capped at the top?

I was visiting a print shop once and there was a Mercedes Benz parked in front and I asked the owner if that was his car. He said no, that was his salesman's car, he drove a Honda. In a revenue based model, you better have a cap. In a profit based model, who cares? Since you know that each job sold is going to deliver a profit to your company that you set, then the more the salesman makes, the better off the company is. Removing a sales cap can also be an incentive for sales personnel in your new business model.

1. How do I reward exceptional performance?

Once you decide on how much of the compensation is variable (e.g. 70% fixed, 30% variable), you can then place incentives and rewards on the variable amount. For example, if I expect the sales persons total compensation to be $100,000, I would pay them a salary of $70,000. To earn the other $30,000 they must perform and I can reserve some of the $30,000 to pay them only if they achieve above 95% of their quota. Reserving this amount provides an additional performance incentive.

1. How do I monitor and change the program?

A comp plan is working well if the company is making a profit and achieving their goals and sales people are happy and not leaving for greener pastures. When starting a new compensation program, it should be monitored monthly and discussed quarterly. Don't change it unless you have to, nothing irritates a sales person more than a continually changing sales model.

The Graphic Communications Market

Printers are changing from suppliers of printed pages to suppliers of communication services. For every dollar spent on print, there are six dollars spent on other services and for printers to survive into the future, they must add new services and change their business models. Organizations will struggle if they do not change their compensation models to match their new business. It is NOT the only thing that needs to be done, but a logical first step since you need to have sales to generate a profit and profit IS what it is all about.