How you pay and incentivize salespeople is crucial in building the right culture in your small business. Salespeople must be motivated to sell to increase to top line of any small business.
Organizations that reward sales success and penalize failure use a “carrot and stick” approach. The carrot is the reward, and the stick is the negative consequence.
The Wrong Way to Use Carrot & Stick
A stark example of this carrot-and-stick approach was illustrated in the movie Glen Garry, Glen Ross. Alec Baldwin plays an aggressive sales manager who gives a motivational speech to his beleaguered sales team, which is played by Jack Lemon, Ed Harris, Alan Arkin, and Kevin Spacey. The sales manager proudly announces a sales contest. The first prize is a Cadillac Eldorado, the second is a set of steak knives, and the third is “You’re Fired.”
The carrot is the Cadillac Eldorado, and the stick is being fired. This is a misuse of the carrot and the stick approach. Why? Because you are pitting your salespeople against each other in a winner-take-all contest. Regardless of how well all the salesmen perform in this scenario, the one who sells the least will lose his job. Throughout the movie Glen Garry Glen Ross, you see massive corruption with salesmen bribing the sales manager or stealing the good leads to save their job.
The opposite of this behavior is just as damaging. Modern-day sales managers have succumbed to an “only be nice” leadership style. Managers have been so demonized in our modern society that they are reluctant to use the “stick.” Instead, they promise rewards for outstanding performance only. Why not? It’s much easier for them… they don’t have to be the bad guy. Plus, not getting a reward is like a “stick” anyway. Right?
I strongly advocate the “carrot and stick” approach when used properly. Here’s why…
It’s not so much about rewarding success and creating a competitive environment as it is about clearly communicating expectations.
A Story of Three Salespeople
A business has three salespeople.
- Jane gets paid a straight commission of 10% for everything she sells.
- Joe gets paid a 4% commission plus a modest $30,000 yearly salary.
- Jim gets paid a salary of $50,000 per year with no commission.
The sales quota for each salesperson is $500,000.
- Jane will earn $50,000 in commission if she makes her sales quota.
- If Joe makes his sales quota, he will earn $50,000.
- Jim will get paid $50,000 regardless of how much he sells.
The carrot for Jane is increased sales. If Jane sells $1,000,000, she will earn $100,000. The stick for Jane is decreased sales. If Jane sells nothing, she will make $0.
The carrot for Joe is modestly enticing. If he sells $1,000,000, he will earn $70,000. The stick for Joe is settling for his base salary of $30,000. If Joe lives a modest lifestyle, he may be okay with earning $30,000.
There is no carrot or stick for Jim. If he sells $1,000,000 or $0, he will earn the same $50,000.
Business Owner’s Viewpoint
Let’s look at the role of Jane, Joe, and Jim from the business owner’s viewpoint. A business owner relies on salespeople to make their sales quota. If they don’t, revenue drops, growth objectives are halted, and you must reduce costs to match lower revenue.
Regardless of the sales compensation method, you can fire any salesperson that’s not performing.
If Jane fails to meet her sales quota, you will save a minor amount of money in sales costs, but you still must replace Jane to regain revenue. In this compensation scheme business owners hire multiple salespeople to account for poor performance by any one salesperson.
If Joe fails to meet his sales quota, he will be fired halfway through the year. After all, you don’t want to pay money for no sales.
If Jim falls behind in his sales quota, you’ll immediately fire him and find someone else who gets the results you need.
Regardless of the salesperson and their compensation level, the company will suffer from low sales.
Emotion and Performance
Jane will feel stressed and under time pressure to close a sale. If your business has low-priced goods with short sales cycles, this can be a positive emotion consistent with your company’s sales goals. If, on the other hand, your sales cycles take time, this emotion will create undue pressure on new salespeople to cheat your customers.
Joe has options. On one hand, he can learn to live at a lower income level and make enough sales to avoid being fired. Or, he can take his time to develop deeper customer relationships for more significant sales. If Joe’s lifestyle requires his paid commission, he will be pressured to sell because his base salary is less than he needs for basic living expenses.
Jim feels little pressure to sell, but that doesn’t mean he won’t get results. If Jim feels he’s working harder than his fixed salary warrants, he may ask for a raise. Employees hate asking for a raise. Therefore, Joe will most likely hit his quota to avoid being fired and do no more.
The Moral of the Story
In our story, you see that Jane has the biggest carrot and biggest stick. Joe has a modest carrot and stick. Jim has no carrot or stick.
Remember when I said the “carrot & stick” approach is about communicating expectations?
Jane understands expectations. She needs to perform. If Jane fails to sell, the company will feel the pain of laying people off. Likewise, if Jane exceeds her sales quota, the company will exceed its growth and profit objectives.
Jim is hearing a different message. He is told that he has a sales quota, but he will not feel any pain if he doesn’t make it, nor will he feel any better if he exceeds it. Jim is told that the less effort he puts in without being fired, the greater the value of his fixed compensation.
Joe is given a safety net but must sell his quota to live as he wants. He can improve his savings or reward himself if he exceeds his quota.
The more aligned the “carrot and stick” is with your company’s objectives, the less you will have to communicate your company’s goals to your salespeople. Jane will do well in a low-cost, short-sales cycle industry. Jim will do well with low-competition sales that require few sales skills. Joe will do well with longer sales cycles that are more technical.
Conclusion
Here are recipes for success with a carrot-and-stick approach:
- Rewarding poor sales, like strong sales, is a recipe for disaster.
- Use the carrot and stick approach to clarify expectations; not to create rivalry.
- Sales commission earning caps are the same as fixed salary sales compensation. Avoid them when sales ability matters.
- Create sales compensation programs that are simple and consistent with company goals.
- Follow through with payments promptly.
It’s important to note that no matter what compensation system you create, there’s no substitute for hiring the right people and paying them what they are truly worth. In his book Good to Great, Jim Collins found that bonus programs were not a substantial factor in determining a company’s success. However, paying skilled professionals what they are worth is a determining factor of company success. So, no matter how you use carrot and stick, pay high-talent employees what they’re worth.
Jeff Schuster is the author of this post and is a business coach with Mechanics & Mindset Business Coaching. Jeff has published several more blog posts, podcasts, and videos on business mechanics, mindset, and coaching. Please set up a complimentary coaching session with Jeff if you’d like to share your business situation and gain insight into what may help you grow your business to the next level.
