One company designed a bonus plan that encouraged managers to work as a team.
Too often, the sales department is an island unto itself. In part to rectify that, Chris MacAllister, president of MacAllister Machinery, a distributor of Caterpillar tractors in Indianapolis, designed a bonus plan that encouraged his five managers (including the sales director) to collaborate.
"I wanted the managers to work more as a team -- at problem solving, incremental revenue, and customer service," he says. And he hoped the managers would set an example for the other employees.
The 1993 bonus goals he devised with his managers were based one-third on pretax-profit dollars, one-third on pretax-profit margin, and one-third on total sales. Sales volume spoke to market share; profit dollars to what the company could put into retained earnings and profit sharing; and profit margin to the managers' efficiency in running their departments.
Most important, the bonus plan was an all-or-nothing proposition for the management team; they all won or they all lost. (Although the five shared the program, the bonus amount differed from manager to manager, as a percentage of salary. There were no caps on the bonus plan.) MacAllister knew the program was working when two repeat customers gave him 100% of their business (for machines, parts, and service) after his managers teamed up on sales calls. "That wouldn't have happened if we had called on them separately," he says.
Not only did the managers meet their goals, "they blew them all away," earning bonuses approaching 50% of salary and helping the distributor emerge from an industrywide slump. Sales jumped by 25%, to $128 million, and pretax profits rose by about 30% in 1993.
"Before, the sales department interacted with parts and service only when necessary," MacAllister says. "This program brought the sales manager closer. He set the tone for the sales force; it cascaded down."
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When revising sales pay, where do CEOs seek help? A 1993 poll of 172 managers taken by the Executive Committee showed that 24% tapped other CEOs, 13% consulted their sales force, and 12% hired a consultant.
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Before You Change Pay . . . There are very real costs to altering pay plans. Company president Chris MacAllister (see above) lists his time, consultants' fees as high as $250 an hour, and the opportunity cost of change. "Turmoil hurts sales," he says. If you don't include salespeople in the process, they may walk straight to the competition. Then there's your ego; a successful salesperson can easily earn more than the founder.
But in any fast-changing business, incentives must change. After handing out bonus checks earlier this year, MacAllister tweaked his managers' incentives program. For 1994 he replaced the "sales volume" component with a "customer satisfaction" factor. His aim: a plan that sticks for two to three years.