There Is No Silver Bullet

Do you ever find yourself looking for some magical answer to all of your business problems? Often when businesses are underperforming, owners or managers start looking for that one program or fad theory or what we often call the silver bullet to solve all of their problems.

It's important to recognize that there is no magic solution to business problems. Reengineering, total quality management, budgeting for results, activity based costing and a host of other programs have been introduced to the business world only to meet with very mixed results. Many times, businesses buy into programs like those mentioned hoping that they will replace the fundamentals required to successfully manage and grow a profitable business. The bad news is that it won't happen. Millions of dollars are spent each year on programs that leave owners and managers perpelexed as to why they didn't have the impact they had hoped for. These programs can have a positive impact on organizations that are fundamentally sound. They won't really help businesses that have a shaky foundation of management fundamentals in place.


These organizations, to varying degrees, have a difficult time just managing day-to-day activities. Attempting to assimilate a "silver bullet" program into the organization requires time away from putting out the fires that are sure to arise from marginal management practices. This tends to merely compound the problems the business is experiencing.

It is important for businesses to first examine their fundamentals. Or as we sometimes refer to it, their blocking and tackling. For those of you who enjoy sports analogies, think about a football team that is fundamentally weak at blocking and tackling. These two tasks are the foundation for success on the football field. When a football team can't block and tackle well, there is little chance of stopping the other team or scoring touchdowns. The same holds true in business. Think of managing people, functions and projects as blocking and tackling. If a business does a marginal to poor job in these areas, there is little chance for long-term success.

Sure we can all point to organizations that are successful in spite of themselves. They have found a strong niche and are making solid profits without sound management practices. But what happens when the economy turns down or the nice little niche the firm has carved out no longer is as viable as it once was? Without a solid management foundation in place there is little chance that an organization caught in this predicament will fight through it. We see this happening almost daily.

Before agreeing to bring any comprehensive packaged program into the organization, make sure that the basics are being handled well first. Then feel free to implement programs that make sense for the organization. There are incremental benefits to be gained from many of them. But the point of this Brief is to emphasize that these programs will not replace sound management practices.

Sales Compensation Plan Components

A sales compensation plan cannot be developed carelessly if sales reps are to be properly motivated and compensated. We find that many companies have ill-defined, confusing and generally inappropriate sales compensation structures.

It is important to create a sales compensation structure that motivates sales reps to higher levels of performance. It is also important to allow sales reps to earn compensation as a direct result of their efforts without crippling their ability to meet their monthly obligations. In other words, pay sales reps well by creating incentives to achieve higher levels of sales, but provide a safety net that is not too high or too low. This can be a challenging task.

There are essentially four possible components from among which to choose in developing your sales compensation plan; salary, commission, bonus and sales incentives. We believe that a well constructed sales compensation plan can include all four components.

If you opt to pay your sales reps a base salary, try to keep it low enough to allow room to create sufficient incentive and motivation, but high enough to give your reps some breathing room in meeting financial obligations. Generally a base salary will fall somewhere between 15 and 40 percent of total compensation. Obviously as a sales rep becomes more successful, the percentage of total compensation will fall. Therefore, a rep whose base salary represents 40 percent, for example, of total compensation in the early months of employment might end up with 15 percent of total compensation made up by salary after a period of time. Some organizations provide a training or "greenhorn" salary that is initially higher and is reduced over time to allow sales reps to get their customer base established and sales volume up. The thinking here is logical and acceptable since the sales reps are not worried about paying bills in the early going and can focus on selling and building relationships.

Some organizations prefer to base sales compensation on straight commission. The thinking here is that a straight commission structure allows reps the opportunity to get out of selling exactly what they put into it and the reps can directly correlate their activity with their compensation. And to some extent this line of thinking has some merit. However, a straight commission structure can be a disincentive for some potentially outstanding sales reps to join an organization. In most cases, it takes some time to get to a level of sales that provides an acceptable level of income. Therefore, in the early months or years of a rep's tenure with the company the income level is often not sufficient to meet the reps' monthly obligations. This can be a distraction and an incentive to give up. Some will argue that if the rep gives up they didn't have what it took to make it anyway. Some industries such as the insurance and brokerage industries have made it virtually standard practice to offer a straight commission structure. And they have been successful in doing so. But, there are a number of industries where this type of structure simply won't work.

According to MyBusinessBooks, commissions that make up a part of a broader sales compensation plan tend to work better. Commissions can be based on sales or gross profit. However, be careful not to provide commissions based on sales whenever the sales rep has any control over pricing. Sales reps are human and commissions based on sales only invites price reductions to make the sale. In some cases, the price reductions can be too deep leaving the sales rep with commission, but the company with little gross profit on the sale.
In a plan that involves several components, commissions should make up the biggest part of total compensation. Generally, this will range up to 80 or 85 percent of total compensation. A well balanced plan will have commissions making up in the neighborhood of 65 percent of total comp.

Adding a bonus structure to a sales compensation plan can add incentive to reach new levels. Generally speaking bonuses should be paid at year end for meeting or exceeding sales goals, for reaching certain target incentive levels or for some other specific, measurable reason. As an example a bonus structure could be set up to pay $5,000 for reaching a certain level of total sales, $7,500 for reaching yet another level, $10,000 for reaching yet another and so on. Be careful not to add too many levels. It will simply complicate the plan. Also, make the bonused big enough to incent reps to want to hit each level. One interesting approach is to create a wider gap between bonus levels and make the bonuses cumulative.

The final component that can be included in a sales compensation plan is sales incentives. These are generally non-monetary incentives such as trips or gifts. These are often associated with sales contests, but can also become a part of a sales compensation plan. Incentives are best used for achieving short-term results. The incentives selected should be significant enough to get sales reps' attention. Incentives that aren't attractive are not worth offering. The offer will fall on deaf ears and won't provide sufficient motivation to stretch to higher levels.

Putting a sales compensation plan together needs careful study. Run a sensitivity analysis to assess the impact on sales rep compensation and company profitability at various levels of sales. It is important to build a plan that is simple, straightforward and easily administered. Avoid complicated, confusing plans at all costs.

Five Common Business Mistakes

We have compiled this list of five common business mistakes that can be crippling to any business:
1. Making poor hiring and promotion decisions and repeating this process over and over again. It is truly amazing the number of companies that do not have a sound hiring process in place. It is equally amazing that most organizations do a very poor job of matching people to jobs.

2. Lack of accountability. In addition to poor hiring and promotion decisions, employees are often not held accountable for meeting reasonable, but demanding expectations. This impacts the organization in many ways, but most importantly in overall performance, employee morale and customer service.

3. Operating without a GOOD long-range strategic plan. Too many companies live for today. Some have developed plans, but they often lack vision and substance. Developing a long-range strategic plan is often viewed as an exercise that needs to be completed because companies should have one.

4. Managing with a short-term mentality. At the expense of the long-term viability of the company, management is too often focused on maximizing profits over the short-term. A short-term mentality very often leads to numerous operating and customer service problems that do significant damage to the company's credibility and image. This is often caused by cuts in the workforce that are too deep or simply unwarranted, an unwillingness to spend money on activities or infrastructure that might be important and a focus on the compensation of management which is often directly tied to short-term profits.

5. Lack of cost controls. In too many organizations, money is spent on the wrong things and not spent on the things it should be spent on. Far too often, budgets are prepared without good assumptions and justification leading to overruns and missed profit targets. This can obviously have an adverse impact on banking and investor relationships. The balance between cost control and maintaining a long-term mentality can be difficult for managers not well trained or well prepared to deal with these issues.

But That's The Way We've Always Done It

Change. This six letter word can strike fear in the hearts of many an employee. The thought of changing anything can be anxiety producing in some people. But businesses are dynamic. And for businesses to survive, they have to be flexible and they need to have the ability to react quickly. If an anti-change mentality exists within the company, the ability to remain flexible and react is reduced considerably.

Businesses and the people that inhabit them become creatures of habit and comfort. The thought of change in procedures and processes can be uncomfortable. But it is vitally important that a business remain open to change and adjust the way it goes about its business as changes in the market(s) occur and as inefficiencies creep into the operating environment.
Because people are reluctant to change, it is important to establish a standard of change. In other words, employees should be well aware that nothing is sacred. If a process is causing problems, it will be changed to make it work better. If a particular approach to doing business isn't working as well as it used to, it will be changed. The "because we've always done it that way" excuse is not acceptable in explaining why something shouldn't be altered.

Since employees are often protective of established ways of doing things, it is sometimes difficult for them to admit that there might be a better way of accomplishing the task at hand. There is also the fear of job loss when an employee feels there will be a reduction in the amount of work required to accomplish a particular task.

To avoid an ant-change mentality, set expectations about change. Those expectations include eliminating the notion of sacred cows. Sacred cows in business can be, at best, limiting and, at worst, crippling. Sacred cows can be employees, processes, procedures, products or services, promotional approaches, office or store front location or a host of other things held near and dear to the heart of someone in the organization.

Look at current business practices with a critical eye. Ask yourself if those practices really are the best way to go about meeting your goals. If they aren't, initiate changing them. Employees will feel more comfortable about change when it is a part of the culture. When change is not feared because it is known that the business will keep up with market changes and with the times, employees will buy into the idea of change more readily and help facilitate the change process.

Don't allow employees to dictate the rate of change. Many employees will tend to slow that rate. Your job as a manager or owner is to encourage employees to identify things that need to change or to assist the employees in identifying what needs to be changed.

It's widely recognized that businesses that are adaptable and flexible stand a better chance of thriving. They can react quickly and prudently. In a culture where change is uncommon and feared, the ability to change rapidly is diminished significantly because the organization isn't accustomed to making changes as needed. In a slow-to-react culture, the business often finds itself on the outside looking in, so to speak, when it comes to taking advantage of new opportunities in the market or upticks and downturns in the economy.

Change is inherent in business. Unfortunately too many businesses are not good at recognizing when to change. And in many other cases, the people within the organization hold the business back by not wanting to change. Cast a critical eye on all facets of your business and constantly ask yourself if any of them should be changed. Ask your employees to do the same and encourage them to come forward with their ideas for change.

One word of caution, however. Sometimes an owner or manager will want to change things simply for the sake of change. Adhere the old adage, "if it ain't broken, don't fix it". Certainly something that appears to be working well can often be enhanced by making some minor modifications. Evaluate whether radical change is necessary or just some simple enhancement is in order.

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