Labor costs are one of the biggest expense items a company deals with. When expenses are under scrutiny, many companies look at the significant cost associated with their sales efforts, and rightly so. However, there are many mistakes that companies repeatedly make. This article looks at the biggest errors we've seen companies make in their outside sales compensation programs, the "don'ts," as well as the activities that companies should undertake, the "do's."

"My payroll is killing me"
CEO - Typical Company - daily

Don't - Arbitrarily cut costs

Probably the biggest mistake that we've observed is reducing sales compensation expense just for its own sake. Don't get me wrong, reducing expenses is the right thing to do; the problem is that cutting expenses across the board is the wrong way to do it. It is better to reduce headcount 10% than it is to maintain the current headcount and reduce each incumbent's income 10%.

Reducing headcount sends a very strong message and is usually quite motivating. It is, in essence, corporate evolution, as the company is saying that only the strong will survive. On the other hand, a 10% across the board pay cut is de-motivating. Instead of keeping your "A players" whole, you are keeping whole the guy that retired five years ago but forgot to tell anyone. Don't kid yourself, everyone knows who the "retired" guy is. Additionally, a 10% or even 20% pay decrease is not going to strike the fear of God into anyone. Conversely, the thought of being unemployed in a down market will.

Additionally, don't start playing games with expense accounts. The few hundred or so dollars you could save will buy ill will ten times that amount. The bottom line is that in times of a sluggish market, the last thing your company needs is an unmotivated or disgruntled, customer-facing employee.

Do - Rationalize compensation expense

Make sure you take into consideration who you are paying, instead of just looking at what you're paying. Are your "best" sales representatives being paid the most? Is the contribution that each sales rep provides commiserate with the incomes they are earning? Do you have charter members of the "lucky territory club?"

Outside sales representatives are the most expensive sales resource a company owns. Make sure this resource is being employed as effectively as possible. It is not atypical that one of the top three highest paid sales reps in a company has become such only through tenure. This is the guy that has inherited the best accounts as previous reps retire or leave the company. Do you have one of these guys? If so, you may have found a way to put $100,000 or so back to the bottom line by promoting this guy to your competition and reassigning his accounts to a hungry newcomer.

Don't - Create inappropriate performance measures

Another big mistake that companies make in down times is tying a sales rep's commission or incentive to something that is out of their control. The typical train of thought goes like this, "why should I be paying my sales reps these big bonuses/incentives when the company is not making any money?" The answer is the same as it always has been: Because that's what the market dictates. Sales representatives are motivated by their pay, but for some reason down markets seem to bring on cases of delusion. This delusion leads to practices such as paying on things like "net contribution," "Account profitability," or even "Net Income." The problem with this is that all these measures include costs that a sales representative has no control over. Be careful to avoid measuring a sales rep on how efficient your order fulfillment, purchasing, etc., practices are or you are sure to have disgruntled reps sitting across the desk from your customers.

There are situations where a company may want to incorporate some expenses into a sales representative's compensation program but a down market is not the time to do it. These types of changes are most successful when certain guarantees are put in place, such as paying the higher of the new or old pay plans for several months. A down market is when a company can least afford these types of expenses.

Do - Revisit performance measures affecting compensation

Don't - Shrink in fear

Do - Be creative