(Note: This is a portion of Chapter 7, which runs from pages 115-147 in the book. Copyrighted material, Business By Phone Inc. All rights reserved. No parts of this may be copied, electronically or otherwise.)

Because this group feels it is different than all other groups, and they are, and confusion exists as to what telemarketing really is and does, the entire compensation topic, as it relates to the variety of positions that exist in telemarketing, is a muddy issue at best.

A major problem stems from the history of the medium, as well as perceptions about what these people do in respect to their value in the organization. Some interesting examples of that thinking are:

• For the longest period of time the people who performed these tasks were called communicators. Do we see big "comp" plans here? No, because the perception is that it is a task, anyone can do it, especially part-timers.

• Scripted business-to-consumer programs (presentations that are read or highly structured) were often the order of the day. Anyone can dial and read a script, right? It is just another task and another lower-paying job. There is a lot of turnover and staff is easy to replace.

• These are campaign programs, like calls made to sell glue for the glue gun, or it’s time to reorder your computer ribbons, or "have I got a deal for you" type calls. They are seen as not too difficult. It means lots of calls, a production environment, another task type assignment, and surely less-than-exciting compensation arrangements.

• Inbound calls that take an order, means simply, if you can hear, you can do the job. Well, I am not so sure we aren’t missing something here as well.

• Customer Service is a reactive skill, right? Well, you do need to know a lot about products or services. Maybe it is a little better paying position, but still task driven. "It’s fairly easy to get these folks and we don’t need to pay an arm and leg." Well, maybe, but are we missing something here as well? I think so.

• The complexity of the product, as well as average order, impacts rep compensation, right? Well, sometimes it does.

• The telephone is an inexpensive selling tool. Not really, in fact, second in expense only to field selling expenses.

• Extra incentive is always a motivator. Well, yes and no. It depends on how you do it and with whom.

The point you ask? The entire topic of compensation and recognition – which includes, the why, when, how, and the people – is not simple or easily understood. It’s also a topic that can quickly give you an ulcer. In this business there appears to be a contradiction in terms. Management’s perception vs. the employee’s perception of the same assignment is often quite different, and therein lies the rub.

To start we need to revisit our simple definition of telemarketing when used as a sales channel.

Second, what we do after we have described the medium, is literally, what we do. It is order entry, and servicing the customer after the transaction, or proactive selling. Compensation is impacted by the degree of difficulty, economics, revenue, and expense of the sales function, and the designed job risk, i.e., no performance, no job.

Compensation programs translate into the degree of difficulty or how easy it is to satisfy the call objective and how business missions are impacted. Basically, "Is it worth it?" Finally, if you are selling, you’re a sales person not a telemarketer. Field sales people aren’t called "automarketers."

There are a couple of buzzword phrases that I always keep in mind when I am addressing these topics. They are:

• If you can’t track or prove the result, don’t compensate for it.
• For every recognition activity there is an opposite and equal result or activity. That’s not unlike Newton’s Third Law of Motion.
• Not all people enjoy all recognition systems.
• Motivation tactics used to foster better or stronger performance can be impacted by a recognition system, if the employee agrees to, and understands the system.
• Recognition systems that are not understood by the employees impacted are worthless and don’t impact stronger performance.
• Individual behavior styles, staff value systems, training, and management all impact the success of recognition systems. When one thinks about the topic in-depth, one quickly understands that performance appraisals are in fact recognition systems with specific objectives. They answer the question, "How am I doing?" They do so with a formal feedback loop as a part of the process. By the way, no feedback adds to possible system failure.

We won’t spend a lot of time on the topic of performance evaluations, other than to say employees want to know how they are doing, and how they can perform better. For better than average performance they generally enjoy recognition, which in turn feeds their self-motivating process. Here are a few examples:

• Employee of the Month (with the best parking spot and a lot of company press about the award).
• Cash rewards for cost saving suggestions.
• One’s name at the top of a published performance list showing outstanding achievement (proactive reps only).
• Promotions
• Work-leader assignments
• Assigned as the "Product Knowledge" source in the department
• A raise, a prize, a trip, or even merchandise
• A recognition article in the Company newsletter
• A letter from the boss, and a pat on the back
• Special recognition stationery, or a unique workstation
• Special award plaques
• Compensation plan (risk/reward)
• Compensation Logic

Before one designs a plan, there are three other topics that need to be addressed. They are:

(1) compensation philosophy for the entire organization, i.e., "If we sell $50,000,000 it’s worth $35,000."

(2) the degree of difficulty, with reference to your inbound/outbound tasks, and the specific complexity of the call objectives

(3) finally, the comparative value of the assignment if it is successfully completed, or objectives are exceeded, compared to other sales type assignments.

Let’s look at examples of all three.

(1) Compensation Philosophy - At General Foods (White Plains, NY), in their food service division, incentive systems, (as in sales commissions or bonuses), are frowned upon and non-existent throughout the division, however, merit increases are available based on the division’s performance.

(2) The degree of difficulty and/or job risk, as it relates to the reason for the call, i.e., call objective. Thus, the inbound order entry task is perceived to be less difficult than the outbound account maintenance specialist with new business responsibilities. These are different skill levels, and in turn require different compensation arrangements.

(3) What would you pay a rep who could turn $300,000 of existing business into $411,000? That assignment might have a value of, $32,500, for example. Of course, your financial math would apply. Once value is decided, comp plans are much easier to design. Also impacting this question is the geographic section of the country, and what others are paying. Please be advised that the geographic section of the country has a marginal impact on proactive, inside sales positions.

In general, reactive calls coming into your facility are salaried, non-exempt positions, with wages computed by the hour. Recognition systems, more often than not are for the unit/department, and are based on the total departmental objective. Rewards are often bonus in nature. Proactive slots nearly always have individual rep incentive systems applied. These positions are non-exempt as well. FLSA issues are important considerations for you to think about when planning or designing compensation or recognition systems. Review this with your HR people. The systems are often commission and bonus driven.

Again, why this topic is confusing, is that most compensation data confuses, or does not adjust for, the various telemarketing/telesales functions, or degrees of difficulty. There are six major functions that impact difficult and less difficult categories.

The most difficult assignments are numbers 1 and 3, handled by 5 or 6, and the least difficult assignment are numbers 2 and 4, handled by 5 or 6. You may have any combination of tasks with the above. For example, business-to-business (3 plus 2), inbound or (2 plus 4 with 6) business-to-consumer, handled by a service bureau, which is telemarketing for hire. All require different compensation plans and or recognition systems.

Other points to remember are, anything with job-associated risk will pay more, as will complicated call objectives on an outbound multiple call basis. Complexity of product, and product margin value will dictate higher or lower compensation systems. Believe it or not, the section of the country issue only impacts reactive positions where the name of the game is expense contribution, not top-line contribution.

How do you answer the occasional objection from other functional disciplines, as in warehouse staff? "Why don’t we get extra incentives? If we pick the wrong product, or ship to an incorrect address, the customer might not reorder. Our job is important too." The answer to that is, "You get paid to pick and ship correctly. That’s the task, that’s the requirement, and that’s the job. Yes, you are important, but if you screw-up enough, you lose that job, but, direct contact with our customers and prospects pays more for exceptional performance, over and above what might be considered as operational performance". The clue here is customer contact is not a 100% task position.

The above situation has another face, and it’s called a union shop. The nature of union contracts, i.e., Communication Workers of America (CWA), does not lend itself to individual recognition systems for achievers. In theory, what you do for one, you must do for all, and the unique individual purpose may be defeated. Therefore, group recognition is the only way to go, if at all in this situation. By the way, big time sales achievers in this environment leave anyway.

If you think about how direct mail came of age, you will understand the evolution of the telemarketing medium. Simply stated, business-to-consumer applications came first, followed by business-to-business applications. The universe of contact possibilities is vastly different, i.e., 260 million people, compared to 10 million businesses. The cost per contact is an issue for both mail and phone.

Thus, cost per contact has driven compensation practices for telephone sales people since the 1950s. Well, there is nothing wrong with that, however, a postage stamp does not suffer from boredom, stress, pressure, or tension. Sales reps do.

Right up to the 70s, these positions were perceived to be temporary in nature, or fill-in slots until something else happened. The result was low pay hourly positions for everyone involved. These positions, for the most part, were not considered as real jobs or perceived valuable by the employee or the employer.

The oil and gas crisis of 1975 literally forced the business-to-business sales segment to use the telephones more intensively, with and for its customers. They simply could not afford to service and sell all of their customer and prospect bases, considering the expense of operating field sales organizations. Thus, telemarketing assignments were upgraded to meet the current need. In turn, compensation levels were impacted, and in this case favorably.

If you now consider the nature of these assignments as no travel and reasonable growth opportunities, these jobs became particularly attractive to the professional women in the work force. Today (and I would forecast in the future as well), easily 65% of telemarketing positions are filled with professional women, both managers and reps.

These telemarketing organizations or units are now considered as a highly desirable element in the scheme of business, and its corresponding objectives. They are efficient, productive, highly trained, and 100% managed. For those who are just starting, they are considered as a self-liquidating investment expense. Often the return on any investment pays off well within the first year, with the average being six months, when a solid marketing plan is in place. Compensation is a predictable expense and can easily be weighed against the return. All of the above has helped with levels of compensation and a more professional approach to the entire topic.

Unfortunately, the majority of compensation plans are developed by people who either do not understand the topic, are crazy, or just plain lazy. I apologize for being blunt, but that’s what I see when I am asked to help design a working plan to replace an existing plan.

In one way, it’s how the plan designer views the assignment. If it is viewed as how to pay as little as possible, we are in deep trouble before we even get started. If we view the assignment as how we can motivate and compensate for reasonable or outstanding performance, we are in better shape.

Negative Plans can cause negative motivation. Where we find management that feels commissions, bonuses, and incentives are a necessary evil, we also find plans that in one way or another are telling the plan participant, "We don’t trust you," or, "You take all the risk, pay us first, and if there is anything left over, you can have a little." Often there is a failure to recognize that products and services do not sell themselves. They are sold via one vehicle or another, to one degree or another. Here are examples of negative motivation. I don’t recommend their use.

• Fear motivation: Do the job that we have described and you get a chance to keep it.
• The first $20,000 in sales or $10,000 in margin has no reward. All contribution over the objective is at 1%. This is what we call a Company greed motivator.
• Your first $250,000 in sales is worth 2% commission, the next $250,000 is worth 1%, and everything over $500,000 is capped, with no commission. This is just plain insane.

Statements like, "Underages are carried forward, and you need to make them up before commission is paid", or "Windfall sales over $20,000 will not fit under your plan, and are to be negotiated," etc., are negative motivators. There is an implied message here, and it’s not favorable, nor is it motivating.

Positive Motivators will drive a successful program. Remember, the objective of the above plans is to reach an objective, but you don’t need the aforementioned negatives. We refer to these plans as risk/reward plans. The risk is the amount of extra incentive that can be earned, and the reward is the base salary. Depending on the job function itself, e.g., customer service, selling, order entry, etc., the degree of risk will change, as you will later see. The impression we want to instill when writing these plans is, you are in control of your income and your destiny, not the company. This is an exciting concept for the player. In other words, the more you achieve the more you are rewarded, the less you achieve, the less you get.

These comp plans (RISK/reward) can even drive away the non-achiever and that’s good too.

Another positive plan feature for management is that it can deal with the age-old problem of, "Well, I don’t need any more commission this year, so I am going to let up a little." The reps can not afford to come to that conclusion, if you design your plans properly.

It’s not a well-known fact, but compensation plans can become boring. They occasionally are taken for granted, or the rep loses interest, i.e., "What will be, will be." In this case, the plan neither motivates nor demotivates. It is advisable to have plan mechanics that allow rewards to be paid for a variety of behaviors, including the super achievers. We call these compensation legs. The legs address all staff, but tend to emphasize and address the top 25% of your staff, the super achievers. Super achievers will go where the money is. It’s not unlike the joke, "Where does an 800 lb. guerrilla sleep? Anywhere it wants!"

• Keep in mind, compensation plans are forms of recognition. Reps like to own the reputation of being highly compensated. In fact, it’s not unusual with this behavior style, for reps to show other reps their commission check. They want to be recognized.

• Pay out on the plan should be frequent, at least monthly. The truth of the matter is if you could pay out daily with cash, you would have a highly motivated, proactive sales staff.

• Payouts for reactive staffs can be quarterly, without a problem. In fact, it is advised.

The question also becomes sticky when compared to field sales reps, as well as distributor, and/or manufacturer’s reps that are under a contract or agreement with your organization.

Finally, if you are in Memphis, TN, you need to know the correlation to the Silicon Valley in California, or Chicago, or New York City, as it relates to exciting compensation programs locally.

There are a variety of sources of information available from associations, industry publications, and search agencies. However, caution is the word of the day. These organizations tend to lump all the data from all the disciplines, the functions, the assignments, and the companies (and their locations) together. The published data is then some sort of an industry average, and is very suspect. I believe you need more specificity than they provide. So what is a manager to do?

Develop a Profit and Loss Model, and adjust (if necessary) to all of the above gathered data. A brief example of the model you want to use follows. It is driven by the expense or cost of sales data (COS).

1. Current performance: 425 accounts x $5,000 average performance x 45% Gross Margin Contribution (GMC) = existing GMC
425 x $5,000 x .45 = $956,250 GMC

2. Planned future performance (Net sales and margin): 425 active accounts x $5,000 average production = existing sales volume, x 35% gain objective = Incremental Sales Volume Gain, x 45% = Incremental Margin Gain (IMG)
425 x $5,000 = $2,125,000

$2,125,000 x .35 = $743,750 (ISVG)
$743,750 x .45 = $334,687 IMG

3. Existing sales volume plus incremental sales volume, equals planned sales volume objective
$2,125,000 + $743,750 = $2,868,750

4. Incremental margin objective plus existing margin objective, equals planned gross margin objective
$334,687 + $956,250 = $1,290,937

Kind of exciting, isn’t it? The question now becomes, would you pay $40,000 total compensation (base and incentive) for these results? I think you might. That’s a 3.1% cost of compensation on gross margin. Not bad at all. Of course, you would apply G & A, and all other direct expenses including FICA. But, on the surface, this makes sense, and you now have the basis of starting to develop a comp plan to make your objectives happen.

Please remember that new business applications are more expensive. More calls, more cost. But don’t lose sight of the lifetime value of the customer when deciding if it is worthwhile.

If the productivity can not be measured, extra incentive is hard to apply, thus:

1. Appointment setting, up-grades, cross-selling, dials, minutes on the phone, and net sales can be measured against previous results, and can be incentivized.

2. Creating a warm and fuzzy feeling can not be incentivized.

Selling the upper management can be a challenge. We suggest you learn the language of management before you take on this challenge. Here are some pointers that will help. Profit center management is motivated by expenses, profits, and revenues, whether they are for profit, non-profit, or revenue-neutral organizations.

• Management always thinks about budgets in percentages first, then in hard numbers. (For example: "We are talking about a more than 23% profit improvement, amounting to over $100,000.")
• Management is often concerned, even fearful about disturbing existing compensation practices. "If it ain’t broken, don’t fix it". It’s called fear of the unknown.
• Management often perceives the TSRs’ job as a simple one, "So why such a complicated compensation plan?".
• Even worse, the effort may be perceived as an expense. This concern will be exhibited when the results are unable to be clearly tracked for their true incremental value, i.e. lead qualification routines. Given these inclinations and preconceptions, it’s important to prepare justification, evidence, and proof of a compensation plan’s worth before approaching upper management for approval.

Specifically:

(1) Collect case examples of organizations that reduced their sales expenses, and enhanced revenue, by using the telephone medium as a sales channel.

(2) Know the necessary numbers, i.e., profit percentage your company is seeking, margin contributions, etc.

(3) Know your existing sales expenses, and the percentages when compared to net revenue production.

(4) Prepare a model compensation program with plenty of what-ifs, i.e., strikes, bad weather, etc.

(5) Offer to test the compensation plan against the previous year’s actual sales results for the reps and sales management team.

(6) Compare your sales costs to field sales costs by percentages of contribution (e.g., $20 million in sales at a 9% sales cost and 4% contribution for field sales, versus $2 million in sales at 8.2% sales cost and 23% contribution for inside sales).

(7) Compare new accounts, or reactivated account results, to the results of other marketing methods, i.e., field sales, direct mail, trade shows, etc.

(8) Get management involved. "I need your advice, Boss. If we could reduce our overall compensation percentage inside our cost of sales, when compared to revenue, and at the same time increase top-line production, while enhancing our bottom line by 30%, by simply adjusting our compensation plans, would management be interested?".

(9) Test to prove plan effectiveness. You can try one or two reps, on the plan for 6 months, as opposed to the entire department for one year. Also, use control groups, i.e., A vs. B, with and without inside sales.

Testing can help, both in plan design and justification to management. Because of the large volume of calls that can be made in a short time period, statistically sound samples can be developed, often in periods as short as four months. In that time, testing a subset of your people, you should be able to determine how a given compensation plan will produce and pay out for both the organization, and the plan participant. Objective results are always better than subjective promises.

Over the past twenty-five years, based on well over 305 inside sales units, I have personally demonstrated that these types of compensation plans, with fixed and variable expense concepts, can be used to motivate performance. In other words, as soon as base salary, FICA, and insurance contributions (which are fixed expenses) have been covered, then only the variable compensation expense (commissions) would apply, when goals are surpassed. This drives down your cost of sales percentages, and that is what these assignments are all about.

In practice, the variable expenses, as a percentage of increase, over fixed costs, turns out to be very small. In mathematical terms, the more the TSR sells, the more the cost of sales (as a percentage of sales) will drop. This can be pointed out to management in many ways, including graphically, and it can help change an entrenched opinion about compensating the inside sales staff, from no interest, to a very positive position.

In summary, sell your compensation plan. Nobody else will do it for you.

The question for new units or new staff is, "Should we have a plan that adjusts to actual data, once the numbers stabilize, and/or once we believe the new rep can make the grade?" The answer is yes. It is not a bad idea, but not always necessary. It is your call.

If you should decide to use a start-up plan for either category, the plans should be very simple. Some points to consider:

• A duration of 60 to 90 days
• Have increased production schedules in that period, as in increasing step quota.
• Establish quotas that can be reached. As experience is gained, quotas can be increased.
• If the rep or the unit is successful, in your opinion, apply the actual results to the standard plan, and as you will later see, you can go on from there.

Initially, the new inside sales unit was viewed as an organizational pariah. The average order was $324. The starting compensation for TSRs was $12,000 annually, with 3% commission on all sales over a $12,000 per month quota. All underages were carried forward, and TSRs lost their jobs if under quota three months in a row. TSRs were, for the most part, rejects from other industries, or out-of-work New York actors.

Fixed bonuses of $1,000 to $3,000 were awarded on net sales over $120,000 per year. Average income was $16,000. Top income was $32,000. The cost-of-sales, fully burdened (i.e., including rent, utilities, overhead, etc.), was 43% of net revenue sold. Combined sales volume for the four TSRs, two managers, and one fulfillment person was $1.65 million.

Dissatisfied with these results, AMR’s president hired me as their new vice president of sales. I took action immediately by terminating all non-sales personnel, essentially the entire management team, retrained a fulfillment person, and fired two non-producing proactive selling reps. We then added 52 TSRs and 5 managers over the next 18 months.

We redesigned the compensation packages, and developed professional sales programs similar to those presented in this chapter. As the basis for the redesign, I used 50% of planned compensation for the base, for both managers and TSRs (90% base for support staff). The remainder of compensation was to be earned by reaching assigned sales objectives, with open-ended compensation rewards for exceeding objectives.

We then changed the call objectives, concentrating on consultative selling techniques and the benefits of business education and the AMR service, no more "Do you need any seminars today?" Here were the results we achieved at the end of 30 months:

• Direct mail revenue was unchanged, $17,000,000
• The average sale rose from $324 to $465
• Telemarketing revenues increased from $1.65 million to $8.25 million in 30 months
• Cost-of-sales dropped from 43% to 26.8%, and the company paid dividends to its stockholders for the first time in its 16-year history. They also paid cash for everything they purchased.

The results for existing telemarketing staff compensation were just as dramatic. Average income moved from $16,000 to $28,500. Top TSR incomes went from $32,000 to more than $60,000. The two top management incomes went from $40,000 to $129,000. Don’t forget that the cost of sales percentage dropped dramatically. Turnover rate shrunk to 25% over the same 30-month period! Terminations and resignations amounted to 13% and promotions or new positions amounted to 12%.

The credibility this selling operation achieved producing these results was impressive. From the Chairman of the Board on down, upper management perceived this unprecedented success to be attributable to the new compensation plan, plus having career sales management personnel.