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Feb 2011 - Vol 6, Issue 2
In This Issue
Industry Strategy and You
Best Practices Series
Closing Thoughts
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Thank-you for all the comments about last month's column on labor scheduling. Apparently I hit home with a lot of you, which reflects what an important business topic this is. Planning is never perfect, but that just means there is always room for improvement.

In the next box I direct you to an article from InfoComm's Executive Director about industry strategy. I encourage you to pay attention to what your trade associations are seeing on the horizon. When you need to think outside your bubble, collaborative associations are a great place to start.

This month's Best Practices column revisits the commission - job cost - growth paradigm. Incentive plans won't fix your job costs and selling more bad business doesn't help profits. Let's get some of the basic mechanics out of the way and in the months to come I will touch on more of the details.

Thank-you for reading,

Tom Stimson
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Commentary: AV Industry Strategy
logoI want you to read this article from Randal A. Lemke, Ph.D. Executive Director and CEO of InfoComm International (Warning: it's long, has big words, and unfamiliar acronyms). It's called Net-Centric AV Hopes and Fears - and before you Rental-Stagers skip over, let me explain why this is important to everyone:

Dr. Lemke explains that InfoComm's vision is to have a seat at the table when conversations begin about a project or issue that will eventually involve audiovisual. How many times have we wished that the client involved us sooner? Dr. Lemke explains how InfoComm is working to bring the industry to the table sooner and as a peer. It will be up to us to make the most of the opportunity. He notes, "the people working at the top of the pyramid of complexity are also at the top for profitability."

For Rental-Stagers and other Live Event professionals, this is what I have been touting for several years. Make sure your channels (hint: producers, meeting planners, event planners, designers) understand why you need to be involved at the concept stage. And if that doesn't work, then take your rightful place at the table even if it means bypassing a traditional channel. If we let someone else do our business development, they will rightfully keep the bigger chunk of profits.


Make the Most of Your Time
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Best Practices Series

Commissions 101 

Balancing Margins, Revenue, and Reward 

Over the past three months I believe I have had more calls regarding commission plans than anything else. In general these stem from a common 2010 occurrence: increased revenue but lower margins. What is typically happening is that managementProfit is pushing for increased revenue in the hopes of driving profit, but the commission structure is rewarding only top line or setting too low of a pricing floor - or both. There may be other profit-sucking issues such as operations processes that don't scale well with revenue or inaccurate cost accounting, but today we will just address the sales compensation portion.

Commission is an incentive to sell the right products, to the right customers, and profitably. We hope it will encourage our sales team to find new business too. Because we ask so much of commission, it makes sense to have multiple components. We will look at revenue, gross profit, and quotas.


For this discussion we will look at two kinds of quotas: targets and floors. Target is the most common form of quota and usually turns up in revenue or accumulated gross profit goals. For most companies that the first dollar of revenue or profit often earns the same commission as the last one. To truly understand the purpose of a target, you need to apply its corollary: a floor. Floors are minimum expectations. They can apply to percentages or aggregates. When applied to revenue, passing a floor will trigger a new commission level. In gross profit models, we meet the floor on the way on the way down in competitive bidding. The following sections apply the quota/floor concept to commission calculations.


Be careful what you wish for: high commissions on revenue often bring in unwanted business. It is important to balance revenue incentives against more practical elements such as gross profit. Consider making the revenue component of compensation low for account managers and higher for business development personnel. I prefer to account for revenue in the aggregate and distribute bonuses quarterly or annually. In the following example we will apply a quota as a floor that triggers the bonus.

Revenue Bonus

The sales team above are all on the same plan. The important concept here is that bonus only kicks in when the quota is achieved and then it only applies to the amount above the quota. By adding a second quota tier we encourage more sales. Salesman A in this example not only exceeded her quota, she passed the second tier as well. So she received 1% bonus on revenue between $1M and 1.5M and 2% bonus on the amount over $1.5M. Salesman C receives no bonus for revenue, but he may have earned commission for his gross profit on projects.

Gross Profit

Because gross profit can vary from project to project and we want the sales person to focus on maximizing each order, commissions on GP should be calculated on a project basis. GP incentives can also have tiers, but it is first more important to make sure that different types of revenue (or channels, or verticals, or product lines) have an appropriate margin expectation. In the example below, the company has set "floors" for each revenue type. A floor is the minimum margin the salesperson is allowed to sell. In some projects a lower margin may be appropriate, but that decision will come from a sales manager.

GP Commission

The project in the above example was sold for 3% above the equipment margin floor - a commission-able $300. To that we apply a 50% commission or $150 paid to the salesperson. The labor was sold below floor (we can alternatively say this is below cost because the floor is generally defined as cost plus burden or overhead) and therefore earns no commission. Given that the profit margins on labor should be much higher than equipment, we expect to pay a higher commission when quotas are exceeded.

These are very simple examples that could apply to systems integrators or rental-stagers. Integrators have an additional tool in that they actually know what the cost of their equipment product will be. Rental companies have to work with a blended cost for equipment, which is less scalable and more difficult to track accurately and fairly. In etiher case there are applicable refinements that are specific to the type of business you operate.

There are many other issues to consider such as, whether Sales people are commissioned on what they sold or how the job turned out? Or, how often do you revise commission/bonus plans? Should you pool commissions? For these issues we consider the company culture and processes before choosing a solution. Perhaps the biggest challenge of all is for companies to accurately track what their costs are on a project basis. And that, is a discussion for another day.

Closing Thoughts

Here's a few scribbles from the margins:
  • I believe in Karma. When you take the time to 'pay it forward' your bank of good Karma goes up. One person tells another and one day something good happens to you because of it. Don't try to account for it like job cost. Treat it like overhead. When all else fails, you still owe the  good deeds bank. 
  • It's far too late to blame the Recession for where your company is today. Now, it's time to look in the mirror.
  • How BIG does a project need to be before line item proposals no longer make sense? Do you think Northrop Grumman designs the entire fighter jet to place a bid?  


About Thomas R. Stimson, MBA, CTS
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Tom Stimson has thrived for over twenty-five years in the information communications technology industry. As a Consultant, Tom helps companies define their goal and then execute the plan that takes them there. For more information visit the website.