Sales compensation plans, not just for sales people

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Podcast, where every week your hosts, Mark LaCour and Matt Bertram share proven strategies and real-world tactics to help you connect with customers and close more deals. Let's do this. All right, welcome back everybody. Before we get into our guests, Matt, we got a review. All right. Yep, we got a five-star, another great pod from OGGN. As a marketer at Oil and Gas, I find this podcast very valuable. Learned about sales from markets helped me become better at my job, and Matt has taught me a bunch about different marketing strategies and tactics.

Highly recommended. That's from a Vander 53 from the United States. So, if you'd like to get a shout-out like a Vander 53 from the United States, leave us a review. We'll happily read it on the air. And today, we're super happy we have Greb Crabtree on. He's actually sitting in Alabama. Welcome to the show, Greb. Hey, welcome. Thanks for having me. Yeah, and we were talking before we turned the mic on. You've been all over the world. You help companies from all different sizes figure out something which is very hard to figure out, which is sales compensation. And that's the whole subject

of today's show. And so, just right off the gate, Greg, what are the steps for setting up a good comp plan? Well, you know, one of the phrases I'm known for is a man who aims at nothing hits it with amazing accuracy. So, the first thing that we have to understand in the world of business is our work with simple numbers. I've written two books. Simple numbers, Straight Talk Big Profits was written in 2011. Simple numbers, 2.0, Rules for Smart Scaling was written in 2020. And in both of those books, we really highlight the effect that labor is an input and margin is

an output. If you don't learn anything from today's podcast, I want you to understand those two concepts of labor is an input, gross margin is an output. I don't really give two hoots about revenue. Revenue is the first dollar that you do math with, but we have to become a margin driven mindset, especially when it comes to sales and marketing activities. And then if you don't get focused and understand margin, you're really going to end up creating activity but have no accomplishment from that activity. And so, once you understand what the target is for a dollar of

labor input going in, what is that margin output, then I can start to craft compensation. And compensation being, it comes in all flavors. I can have base compensation. I can have variable, you know, comp. I can have overall company performance kickers that go into it. I can do spiffs when certain activities happen. And so, a lot of that comes back into, no matter what the technique is that I choose to use, I cannot exceed the ratio of what is the dollars of gross margin that I need in the numerator for every dollar of labor that I put in the denominator,

that all matters. And what we're good at is quantifying those things and helping people set those targets. I actually just got off a call with a client, you know, that's a manufacturing company of, for their team overall, we have a target of gross margin relative to all labor in their business. We have a target for their sales team. We have a target for their management labor team. We have a target for their direct labor team. And the idea is across time, all of those separate types of labor will ebb and flow. You know, sometimes there is a, right now, for

example, we're seeing increasing cost in direct labor that lowers ultimate margin, you know, out of the business. And so, therefore, it's, I can't change that dynamic. And in many cases, as much as we push charging more, raising prices, there is a price that's too far for the market to say yes to. We're seeing a major, major trend across our client base that I've got to get more margin activity for my management labor, which includes the sales labor. So the sales team and the management team has to be pushing more margin throughput to the business right now

to compensate for the biggest labor increases that we're seeing are the actual doers of whatever the direct labor is for the type of business, you know, that you're dealing with, because those people are not plentiful and they're commanding a pretty strong salary. Yeah. It's interesting in our industry and the fact that we touched about this a little bit earlier, there is a difference in the sales channel between the people that are order takers and the people actually go out and hunt for new business. And you brought up something I thought was fascinating, the fact that you need

to compensate this too differently. Absolutely. And the errors that we say when we go in and do a breakdown of a project to help people fix their compensation structure. The first thing I'm looking for is who's an order taker and who's a market maker? You see a lot of distortion through COVID where we had one client that we dramatically changed their sales teams comp structure. Prior to COVID, they were a sleepy little, little bit of outbound sales, but you know, still a lot of order taking from a pretty consistent customer base for their product that they imported. And then COVID hits

and all of a sudden the phone's ringing off the hook that they started getting a different customer coming directly to them for their product. And all of a sudden salespeople that were properly compensated at 100 grand a year for the job that they had were now making 300 by answering the phone. They didn't reach out to a single new customer. That just was inconsistent. But before we changed the comp plan, we had to prove that we could hire somebody for $65,000 a year and be just as successful answering the phone and taking that order. So over a course of six months, we proved

that that was the case. Then we had to go to the salespeople that said, listen, you know, you've kind of been given a gift of the market here. We've got to change your comp plan because this really isn't going to work. And all of those people who stayed, they knew it. Oh, wow. Yeah, amazing. They're still well compensated, but they're compensated more to market. And so this is kind of another overarching thing that we talk about simple numbers, philosophies. We believe in market pay. So you can't create a long term sustainable business if you don't pay market pay

that gets market performance. So I must have both of those things in alignment. I can cheat the market a little while with under market pay, but I'm not going to keep my good people and I'm going to be the Oakland A's and have the lowest payroll in baseball, but I'm not even going to sniff the playoffs because even their moneyball metrics can't work the way that they're currently doing. And so you get away with every now and then you have a little flash, but you're not going to be sustainable. You're not going to win championships. But there again, I can't just throw money at

something and say, oh, well, now it's going to work. Well, if I don't get the output, I'm dead too. And it's getting those two things to work together is really what's critical. And then to throw the extra piece in there is, well, I have a contention to where now I know there's people on they'll listen to this podcast that are in the sales marketing place or sales marketplace and I'm going to hurt their feelings when I say this, but we really shouldn't say sales and marketing. We should say marketing and sales. And there's a reason why I say that because last time I last

time I checked, marketing has always preceded the sale. It may have been the same person that marketed who then sold it. But if I want to be a purist about it, marketing has always preceded the sale. And if I can get those two things to play nicely together, which that's a tall order sometimes, but I've got to get my marketing function to work correctly to set things up. And then I got to get the sales function to scope and close and move on to the next thing. And once again, it's not a one size fits all. We've got clients that are struggling that need

a true real sales person that can go out and win a new customer with direct contact of some sort. They've got to bust down the walls and break through the barrier and get to that customer. And I'm telling you, that is one of the hardest hires that we're seeing in the marketplace right now. And to use the baseball analogy in baseball, you shake a tree and outfalls nine gloves and one bat and they will find a place for that bat to play no matter how crummy of a fielder they are, especially now that there's DH in both leagues, they become the DH. But in

business, you shake a tree and outfall nine operators and one salesperson. That's the disparity between effective sales. Now, if you find that person who truly is that great salesperson, you want to compensate them fairly. And like I said, more so appropriately for the market making, the order taking piece, I want to systematize. I want to put that into a process. Yeah, it's a little more of a high end customer service role that you can do. But you're probably putting less variable compensation on that order taker than I am. I've got to put a variable comp,

whether I want to or not, probably on the true market making salesperson. And there's 10,000 ways you can design those. But there's a couple of parameters that you always want to stick to. Well, Greg, I got a ton of burning questions here. Far away. You know, I'd love to just hit you with at least one of them really quickly. One of the big things that I think other salespeople could relate to is if you really are like a rainmaker, right,

and you bring in the business, and then the next year, they move the gold post, right? Like, they're like, okay, well, you've done this, now you got to do that again, or we're going to change the comp plan. I was with the Fortune 500 company and would hit it out of the park every year, and they'd move the gold post to make it harder and harder to continue to get that kind of comp payout, right? And so I quickly moved to a commission based program where it was fixed, right? It was like, okay, if you do this, you get this versus the how they structure the bonuses.

How do you wrestle with that for clients? And what's fair between kind of the salespeople and the employer? Well, you know, once again, you got to look at the type of business model. Is it a business model where I'm getting recurring revenue, for example. So we have a lot of clients in the managed service provider, IT space. And so they're trying to go win monthly recurring revenue customers. Well, there's a certain amount that I got to pay for that capable salesperson to go interface in the market, they must possess the technical awareness of the industry,

but they've also got to possess sales skills to be able to go do it. And so there is an element of there's a base pay that I need to pay them to go perform a repeatable function. And, you know, they got a prospect, they've got to do presentations, they got to get work on converting leads. But then there is a variable piece that is relative to their success. And so the idea is, now, if they have ongoing interaction with that customer, then, you know, you can afford to make that base pay a lot higher and make the variable piece much lower. And I'm more of a fan of that.

And I'll just go ahead and share this with you. I mean, go to Harvardbusinessreview.org and our HBR.org and pull down Dan Pink's article that he wrote 15 years ago about why salespeople should be paid a salary and not buy variable pay. Now, you can't always get away with that. I get it because certain industries, it is so built into that industry that you will lose that purse, that really good salesperson. If you don't pay relative to what the industry pays, you don't have a choice. But we're seeing more and more industries now to where you can actually pay a good salesperson,

you know, a base pay with some variable amount, but little to none. The client I just finished talking to that's a manufacturing client, they went to fixed compensation for their sales team back in 2006. And they've done quite well. And they have a really stable sales force. And they're growing, they're one of my few clients is actually growing in spite of the market at the moment, because of that. So everybody kind of, everybody wants to kind of pick and choose what they look at that. Yeah, you can hire a salesperson on a variable pay and you can have

that little flash of brilliance. But is it sustainable? And there's errors on the expectation of the salesperson, there's errors on the company side, where, Hey, what have you done for me lately? And it really comes down to the base pay is really for you to go execute faithfully day in and day out the actions of a good salesperson. And we can all define this not about whether or not did something happen, because many times what happens is you can be the best salesperson in the world. Like if you're a real estate salesperson right now, there are no houses on market to

sell. It doesn't matter how good a salesperson you are, you don't have any inventory. So what? I mean, well, but you got to go do the actions. And when that moment happens and there is a house to sell, you're the one that gets it. But you're well off of the heyday, you know, that you had during the low interest run, you know, the past couple of years. And every industry has its kind of times like that. And so what I really kind of prefer to do is like said, here's the base pay for the function that I want you to reliably complete day in and day out. And I need you for

the long term, I need you for the five year window of activity to do that. And then let's talk about the variable piece that is the measure of it's not so much are you winning when the market is handing stuff out to you? Are you winning when it's a tough market? And those are the times that I got to look at those two things differently. And you got to look at each situation, you got to look at the business that that company is in, you got to look at how do you go acquire those customers. And like I said, there's 1000 techniques. But I think our biggest error that we make as a

company is we're trying to offload our risk onto that human. And I think that's just objectively wrong. I need a sales function even when the market is weak, because I need that good sales person there when the market starts to come back. So unless I'm a dying industry, I'm really just cutting off my nose to spite my face to cut down that salesperson's compensation. And I need to build that into my base operating expense costs that I've got to cover. And I've got to have capital reserves to get through the downtimes and not lose my good people. But on the opposite side,

that salesperson can't be so unrealistic to say, which plan do I want to sign up for? Because if I want the really high variable compensation, I got to live with a really low variable compensation. And I think a lot of that is we've had clients that had basically sales people stick a gun to the client's head and say, I'm going to leave. And one of our famous stories is client had a senior VP of sales that basically did that. And we told the clients to let him go. I mean, it was like, he was your worst nightmare as a salesperson, because every two months he wanted

to renegotiate his comp plan. And we said, listen, I mean, he's replaceable client, let him go, three months later, he's begging to come back. And I go, no, hadn't missed you, paid a lot less in variable comp too, for people that could do your job. And so once again, be careful what you ask for, because if it can be done, and so I think this is kind of where the reason why we need to understand the distinction of the process. And so when we break down business, there's four things that happen in business. Every business transaction,

there's four things that happen. The first thing is marketing had to happen. If I don't know of a product or service, nothing happens. Secondly, a sale occurred, I got somebody to a contract. The third thing that happened, there is oversight of the delivery of the product or service. And the fourth thing is the actual delivery of the product or service. One of my clients is a great entrepreneur. I took this theory from him, and I give him credit for it. He said, you know, if you really kind of look at all these things, you can almost assign this in percentages.

Roughly marketing is worth 20% of the transaction, sales is worth 10, oversight's worth 10, and the product or services worth 60. And you can smudge those percentages a little bit plus or minus in either direction. But that is the sequence of activity, because this guy was an engineer, so he always thought of things in terms of engineering models. But I mean, really, we use it commonly with our clients to understand breaking business into its parts. And so if I'm really good at marketing, I don't have to be as good at sales. And if I'm not good

at marketing, I'm going to be really good at sales. I'm over relying on that human to feel a void of what my other weakness is. And then obviously, if you can't deliver the product or service timely, you're not going to stay in business. But there's tons of stories of great businesses that have great product and services that they just can sell their way out of a paper bag if they had to. Yeah, we see it all the time. So Greg, like marketing is to generate that demand, maybe generate some inbound calls, right? And talking about the versus maybe sales might be

more outbound, right? So why would you break those percentages, 20% marketing and 10% sales? Like, can you go into that a little bit more? Well, because in a lot of cases, is that sale actually outbound? I mean, that sale could be an inbound, you know, like if you look at the tech sector, you know, tech investors highly use BDRs, business development reps, is that marketing, they're trying to get through the wall, but they're not the person who's actually going to they're just warming up the customer to hand them over to a salesperson that has

the technical expertise to scope the technical nature of the need and get it to a closing from that regard. But when you're living in an environment where it is getting harder and harder to break through or get across the boat to get into the castle, you know, to talk to anybody, I mean, we live in a world now that sales is probably at its peak of business ever of resistance of people being sold to. And yet they need to be sold to. And so the marketing piece to warm up a customer and deliver a qualified lead has really elevated in its value and diminished

because used to what we would call a business development person, you know what I call that Cro Magnon selling. I'm a human that I've shoved marketing and sales into one human and they market to you and sell to you, but it takes human to human contact and they just go human to human until they get a win. And that's not very leverageable. It's not very efficient, but in some industries, that's all you got. It's the only way it can be done. And those people would have to be super highly compensated because here's the other aspect of

it. This current generation, they don't like those jobs. They don't want to do those jobs. So with a declining pool of available salespeople, guess what the world of the free market says? They start to go up in value and I have to find a way to recover that cost in my sales cost and my margin, you know, to be able to deploy that. So Greg, I want to kind of bring you back just a little bit. This has all been fantastic. By the way, you made a whole bunch of friends when you put marketing from the sales, but you also pissed a whole bunch of people off. You did both at the

same time. That's right. Yeah. Which we love. When you do this a lot and I've said it publicly and I've written about it publicly, you know, it is what it is. So, you know, a lot of our listeners are senior people in Fortune 500, Fortune 100 companies, large enterprise, that's had the same sales and marketing culture for a hundred years. And to your point, things have changed a lot in that world. So is there a handful of mistakes that you see companies make over and over again that you can kind of talk about to let people be aware of those

gotcha moments? Well, I mean, I would go back to what I said at the beginning. The mistake is I'm not drawing the distinct relationship of margin needed as my numerator and comp available to be spent to generate that margin. We tend to think in terms of activity rather than the leveraging of a dollar of labor to create more than a dollar of margin is how business creates success. And too many times, I think as people create either initiatives in an area or even maintenance of an activity that's still ongoing, we lose sight of what is that correct ratio

that we've got to maintain that is the picture of success. And so until I know what the picture of success looks like, I'm just throwing spaghetti on the wall and see if it sticks. And that to me is the biggest mistake because like I said, there's a thousand ways to calculate, you know, variable structures. And I went to this conference one time that we got to spend a day with the guys at Dell in their small business department and talk to them about their sales structure. And now there's things that Dell has done over the years that I'm not a huge fan of.

They have the big thing that you ring the bell or like they, you know, they have all kinds of things. It's that's a pretty hardcore sales structure. Well, it is. But in the SMB area, though, the sales VP, he was saying, listen, I got people that are 80% base and 20% commission, and I got people that are 20% base and 80% commission. I said, we'll flex it relative to how that person works. And it's like, that's pretty insightful because then this goes back to Dan Pink's article that I talk about. And we've got to understand the human motivation. And trust

me, a lot of my very high incentive based sales clients, they have become painfully aware of what we call the belly full moment. Every highly commissioned salesperson has a moment that you can throw more out of all you want to, and you're just going to lose more money because their belly's full. That's as far as they're going to go. And it's human nature. And we're facing a secondary thing, as I said earlier, that there's zoomers that are coming into the workforce. They don't want this job no matter how much it pays. And so you got a different problem to solve

in that. And so once again, it is set the targeting mechanisms first. And I cannot stress this enough. It ain't about revenue. Matter of fact, we recommend everybody needs to put a swear jar in your office. And every time somebody says the word sales or revenue, they got put a dollar in the swear jar, maybe even $5. And they can only say the words margin margin is the only thing that matters. And so that's the first thing. And so if I understand the relationship of margin to sales dollars, then it's just I got to look under the hood of that human and say, what is it that makes

that person tick? There's a great behavioral economic study on cab drivers in New York City. And one of the fields of study I love is behavioral economics. And so it's how do you take human behavior and deal with economic situations? Because we do not always do what's in our best interest. And these cab drivers would rent their cab for a 12 hour shift. Invariably, they would sit in their cab for a full day on a slow fair day. But on a good fair day, they quit it to a clock. That makes no sense whatsoever. Guess what? Sales people that make

a half a million dollars a year do the exact same thing. It's human nature. And if you do not create systems and processes to understand that human that you're dealing with, to get them to move around it or accept that as a limitation that you can't change, you're just going to end up throwing more dollars at it. One of my IT hardware guys, he just kept throwing more dollars, more dollars, more dollars. And it's like, you know, sales people said, I need more leads. So we hired BDRs. Well, that's an operating expense that I said, Well, did you raise your gross margin target

because you're now handing them leads that they didn't have to go get? No, they complain. You can't run a viable business model if you don't recoup the cost that you had to spend. And you got to change the target. And until you understand those competitive barriers, you're just in a downward spiral, you know, in making it work. And once again, this is kind of why I say, it's understanding the targeting mechanism first. And then to you got to understand the human that you're dealing with and you adapt the compensation to what makes that human get to their fullest

potential. But once they get to their fullest potential, you ain't changing them. It is hard wired. There's nothing you can do to make that person go beyond that belly full moment. It's so true. I mean, when I think about my own history and the teams I've ran in that context, you're 100% right. I've seen top performers that made their number early in the year literally just take the rest of the year off. And now that I said it out loud, it's like, it's crazy. Why do they not keep selling and double the amount of money? But to your point,

their belly was full. That's right. Exactly. We're getting close to winding down the time, which kind of sucks because I would feel like we're just getting into this. Greg, I do want to ask you a question. So Matt and I both believe that sales and marketing in our industry should be joined at the hip. And one of the things we get asked a lot on that view is, how do I set up a compensation plan for my marketing team that is connected to sales success? Any ideas on how somebody may want to approach at a very high level?

The only plan that I think creates, you know, total company success. I'm a fan of the great game of business that Jack Stack created Springfield remanufacturing if anybody has not read the great game of business. I mean, the one variable pay technique that we see success with is where I pay somebody essentially the median of market pay. And that's kind of our favorite spot. So we pull a lot of wage surveys. We subscribe to one of the high end services that's not publicly available that we run salary surveys. So we can pull a wage survey for any position, any sick code,

any geography in the US. And so we help our clients understand that piece of it. But then the idea being that if the company hits their contribution margin or what you guys would probably call gross profit. So after direct labor, after gross margin, what is that what we call the output of the business engine? I don't really care about net income, because corporate can make decisions about net income. They can spend money out of the operating expense budget for this year that has nothing to do with the current year. And so basing bonuses off of net income is a really

sloppy technique. So we like it off a pure margin creation. If management can't manage the expenses relative to margin, it's their problem. And we look at these triggers and what great game of business kind of came up with that we've mimicked their process. We look at that as the critical number that you base it off of. And so there's levels of attainment. And so if we hit the target, I get a 10 to 15% bonus of my base pay. If we beat the target, it ramps up. Usually it'll cap out somewhere at no more than 20% of your base pay. But the idea being what I'm not a fan of

is giving away a cut of margin to somebody. Because what I've done is granted an annuity, and this is especially for a month of recurring revenue kind of businesses, that if I start paying commissions relative to gross margin, then I basically lowered my overall margin. And what I really want to do is say, here's a base pay for the actions I need you to do. Here's what success looks like at this level. Here's what success looks like at this level. And your success bonuses are relative to your base pay. And that is actually easier for a person to

think and measure their success because I can show them on the wage scale that you're in the 50th percentile with your base pay. We hit this bonus, you're now in the 75th percentile of the market. That's success. And love it. To me, that is more relative to how you understand success rather than, hey, I'm trying to hit a moonshot. Yeah, I won the lottery, but it's not relative and it can't be repeated. And if it can't be repeated, everything's just out of sync and you can't be sustainable as a business that way. It's also very simple to understand. In my past, I've had

comp plans that I needed somebody else to explain to me, which is not a good company. No, it's not. But many of them are, I went in and did this project for a car dealership one time, and they brought me this two D-ring binders of sheets. And I go, what's this? Well, this is everybody's comp plan. Literally every stinking employee in the whole dealership had a different comp plan. It took their controller two days every quarter to actually figure out what everybody's bonus was. Crazy. That is just insane. So efficient. Yeah. So Greg, we got to get out of here, but this

has been super helpful. Obviously, you know what the heck you're talking about. If anybody in our audience want to get in touch with you because they need some help, what's the best way for them to do that? Best way? Certainly email Greg.Crabtree at simple numbers CRI.com. So that's my email address. I'm out there on LinkedIn. So you can certainly connect with me there. The book website of my two books, the easiest website that'll link you over to it is simple numbers.me. And so that'll get you over to it. But we've got some free tools and some stuff that'll, we've done some of our

recorded podcast and some of those things. You can look at some of our free content there. But those will be the two best ways. I'm probably the easiest person in the world to find because there's not too many people named Greg Crabtree. Or if you search on Greg Crabtree or simple numbers, you'll find me. Yeah. And folks, as always, we'll have the links in the show notes. So just scroll left to right, depending if you're on iOS, on Android to get Greg's information. So speaking of contact information, as always, Matt's and I's social links are in the show notes as well.

Matt and I are still working on the insiders group. Stay tuned for that. It looks like we're getting up launching probably first quarter of next year, but we're taking our time to make sure we do this right. The reviews have now been moved to its own review site review podcast called Five Stores Under. That's going to launch in two weeks. Greg, it was wonderful having you on this show. I literally could have had this conversation for another three hours. Thank you so much for joining us. Any time. Happy to come back. All right, Matt, ready to get out of here? What's that?

Remember, make a difference and not a sale. Check us out next week for another enriching and cheeky episode of oil and gas sales and marketing podcast, a production of the oil and gas global network. Learn more at oggn.com.