Don’t Risk Eliminating Your Sales Rainmakers

It makes sense to trim the fat when trying to increase your profits. But ensure that is what you are trimming. Here are two cautionary tales of how not to do it.

Let me first state that I am a profit-focused businessperson. As an example, I will not launch a new event unless I can project a 25% profit margin for that event in its first year. I am also ruthless about not spending more on an event than is necessary. In general, most expenditures should have a relationship with revenue generation. When trying to increase profits, the expense side of ledger is the first place to look and potentially make cuts.

But when considering reductions in staff or their compensation, the last place you want to cut is the compensation for your revenue generators, unless you’re planning to eliminate those resources for lack of performance anyway and/or you have replacements ready and waiting. For a refresher on my opinions about sales compensation, see this article.

Consider these two cautionary stories- what I am calling Rainmaker Removal techniques- divulged to me recently by industry colleagues recently:

Story #1 involves a new VP of a trade show company who decides he is going to slash expenses on all four of his market-leading events to increase profits. He has discovered, for instance, that the press room food budget for one of his events was $76,000 the year before he arrived. That is a fair target for reduction or elimination. Additionally, he has identified other operational costs that can be cut, increasing the bottom line. So far so good.

He then looks at the sales representatives’ commission rates and decides to slash them in half, believing that the reps are getting paid too generously for “sales” that are effectively rebooking their favorite customers. The high commission rates have left little incentive to prospect for the new business that might warrant such compensation levels. Though the sales representatives have salaries, the commission changes mean decreases of nearly six figures from their annual compensation. But the VP’s rationale is that generating new business – via more prospecting – would be the way they could return to the total compensation they had earned before the commission cuts.

But what happens is that total sales start to decrease, as the reps begin to ‘mail it in’, not wanting to prospect to guarantee their previous income. The VP, wanting to increase revenue, has also launched other new events that require new efforts. However, the sales reps actively resist every new launch as they have no intention to help the new VP succeed because he cut their commissions. In fact, they actively resist every effort made to increase revenue whatever the tactic. What happens? After three years, a few of the shows have imploded and the new VP is gone, as his plan to increase profits fails badly, leading to his ouster. The two sales reps who had been put on probation by the VP left the company and are at other event companies, now making the money they feel they deserve. The two reps might not have been in the top 20%, but they had been willing to learn and “earn their keep’ with the right handling. But the VP’s first actions turned them into problem children and sealed the fate of both the VP and some of the events he managed.

Story #2 features a CEO who has five medium-sized conferences, supported by two sales reps who have been selling booths for those events for more than 10 years. Over that time, sales have steadily increased such that the company has achieved the greatest annual profit in its history, with exhibit sales a significant contributor.

To continue the growth in profitability, but feeling he has run out of ideas, the CEO retains a consultant to help. Among the consultant’s ideas is a recommendation that the CEO slash the commissions of the reps, thus grabbing additional margin from each sale and adding to total profits. The commissions are the sales reps only compensation, so the CEO’s actions significantly reduce their income without any upside. The happy relationship that the CEO enjoyed with the sales reps is badly tarnished and both soon leave the company and find sales jobs elsewhere. They feel that their performance over many years has been ignored by the CEO, and for some reason they are being punished. The CEO, now left high and dry without any experienced sales reps, must now find and train new sales reps who are willing to accept less than standard compensation on a commission only compensation basis. The result? A disaster for revenue and profitability in the short term and the need to rebuild sales revenues thereafter.

The point of these stories is the goals to increase company profitability were a good idea. The actions taken to support the new strategy, however, were heavy handed and not well thought through, certainly not from a personnel perspective. The result? Decreases in profitability and sales organization rebuilds. The simple fact is this, if you have highly performing sales resources, their managers must remove all barriers to their making as much money as they can (not cutting incentive), presuming that their compensation is strongly correlated with your event’s success and profitability. In other words, their compensation and your event’s profitability must be intrinsically aligned for everyone to be happy. If you must reduce their salary, commission, or bonuses, and you want to keep the sales rep, there must be an upside for the sales rep which exceeds what is taken away. The manner in which this is handled is crucial and must carefully planned and executed.

Frequently, cutting compensation is a tactical tool for removing poor performers. As a profit-enhancing approach, it usually is a short-term win (if any win at all), and a rather poorly conceived method of saving money (as is shown in these stories as Rainmaker Removal Techniques.) If you are fortunate to have top performers, they must be treasured not roughly handled. You should pay them well and avoid ill-advised tactics to save money from their compensation packages- unless you have completely thought your tactics through.

If you do not, your competitors will thank you….