Rental and Sales Incentives…
Well this is sure to cause some controversy, conversation and indignation. How should you structure your sales incentive for your rental business? I’m not going to sit here and tell you the answer, because there is no ‘one’ answer but I am going to outline some of the key considerations. For the purposes of this article I am going to focus on incentives for the sales team (as opposed to operations, service or admin/shared services).
First, let’s start with the most basic and yet most fundamentally important question – what behaviour are you trying to encourage? The purpose of an incentive scheme is to promote a desired behavioural response, what seemingly is a simple question to start the process is actually the most important step of all. The measures and structure you design are all based on the answer to this one question. Too often, the response to this is to ‘sell more product’ or ‘make more revenue’ but these do not address the broader needs and direction of the business. What about profitability? Is ‘more’ based on existing business/customers/products or new? Are you selling your product or sub-hire? Should this be on total revenue or only hire? Do we include ancillary charges like fuel/transport/consumables?
So… if your head is already starting to spin, don’t worry, you’re not alone. In this article, I will explore the options and questions you need to consider in developing and implementing your sales incentive scheme for your rental business. We are going to step through answering that key question – what behaviour are you trying to encourage? We will also look at the positives and drawbacks of some of these choices – more often than not there isn’t a wrong answer, but there are different outcomes.
Where is your business developmentally? Are you growing, contracting or coasting? More importantly, where do you want to take this business over the next 6, 12, 24, 36 months? This is an answer only you can give; it will depend on your capital availability, market projections, business plans and objectives. It is only when you have reconciled these decisions that you can start to build your incentive scheme. There is no point setting unachievable ‘stretch’ targets in a contracting market, this is not to say that you shouldn’t push your sales people, it is acknowledging the reality of your current position and the market forecasts. Take an example where a mining operation/major infrastructure project is about to finish in an area… setting a growth target for your sales person will not likely result in outperformance, it is more likely to foster dis-engagement.
Be realistic about your capital investment strategy and business plan. If you are going to set growth targets for an area/region, are you prepared to back them with the additional assets/capital that is required to meet those targets? Nothing frustrates a sales team more than winning work only to be let down by being unable to supply.
Know your own sales team/structure. Do you operate sales agents geographically, by product, by market sector, by customer type? Each of these will require a different approach to incentives and more importantly, measuring incentives. Before you embark on an incentive scheme, ensure that you are absolutely clear that a) that you are able to measure performance and b) that you and your team know what these measurements are based on. Use the example of a product specialist working across multiple branches – can you isolate the revenue for that product? But also, can you isolate the ancillary revenue for that product across those branches/areas? If your scheme is including ancillary charges like transport/fuel/installation/labour… this may not be as simple as you think. You may think that it is just easier to exclude ancillary revenue, but your pumping/power/propping/site accommodation agents will likely disagree…
When you are dealing with remuneration, you must be; black and white, transparent, absolute and bulletproof. There can be no ambiguity, vague assumptions or varied interpretations of inclusions and exclusions. For each role and scheme, every assumption, calculation and definition must be documented and made absolutely clear. Failure to do this will only result in conflict and disengagement.
Let’s get into some metrics…
What about profitability?
All too often we end up with revenue targets that have nothing to do with actually making a profit! Using revenue instead of GM/EBIT/EBITDA just lets the dogs loose – price discounts, sub-hire at no margin, consumables/ancillary charges at cost or worse. It’s time to let go of the old ‘sales people aren’t that complicated’ excuse – we are in business to make money, not lose it. If you have a sales person who can’t handle the difference between making a profit or a loss… well…
I have spent years watching sales people try to interpret an invoice from a supplier and on-charge that to a client. Usually, the thought process goes along the lines of… “if I charge more, then we’ve made a profit”… Yeh, no. And let me be absolutely clear, this is not the sales teams fault. This industry has historically been absolutely terrible in actually training sales and operational staff in financial literacy. There is a fundamental lack of understanding in how overheads apply to transactions and this filters through the entire sales process. This is why there is a basic application of ‘if it goes higher it must cost more’ – completely disassociated from what it costs and how many there are available in the market.
Hire revenue versus sub-hire revenue versus total revenue…
We’re talking about rental businesses here. We can argue about the relative benefits of cost reduction through sub-hire versus own-machines another time but ultimately we want the equipment we own to be on-hire. However. Linking this thought process to incentive schemes is fraught with danger. Take using own-equipment only rental incentives – the sales agent walks into the yard, see’s nothing is available, isn’t being approved for additional fleet and therefore has no incentive to sell?
Including both owned equipment revenue (hire revenue) and sub-hired equipment revenue is a more holistic approach, particularly in a capital investment poor period. This means that the sales agent is still engaged to sell regardless of whether they have equipment ‘at-hand’ or not. Put this in perspective – it is not the sales persons fault if the equipment is not available is it?
Then there is total revenue. This can be dangerous given that there are multiple factors that can drive this behaviour. Sales agents can ‘sell’ items instead of renting them, they can ‘game’ consumables contracts and they can go off the reservation in terms of product scope.
Now I’m going to get radical… the response to this will be interesting… what if, we incentivised sales agents on sub-hire revenue? Stop. Think. What behaviour would this drive? Well, the risk is that the agents deliberately seek opportunities that are out of scope but these could be controlled through operations and reporting lines. But, if delivered well, this would mean that the sales team is driven by getting all ‘owned’ assets on hire before they could realise multipliers based on additional transactions. Obviously, this leans on the deliberate conflict we create between assets, operations and sales, but why can this not be a legitimate approach to a sales incentive scheme?
I can already hear the sales people screaming at the screen about how they are always ‘done over’ by the assets and operations teams to sabotage this idea – moving assets in etc… But, let’s just consider this for a moment. If more assets are moving in, the branch/area is generating more revenue. If you have exhausted your allocation of assets, you have discovered new business. I didn’t suggest that sales agents should only be measured on sub-hire revenue, but maybe this should be a significant driver of incentive?
So let’s talk about ancillary revenues
It is too easy to just say that ‘other’ associated revenues are excluded from incentive schemes – think; hoses, leads, installation, transport and fuel. In some cases, such as site accommodation, installation can actually dwarf the hire revenue on the table – surely success and wins must be acknowledged in these instances?
The first challenge is that sometimes these charges can be either front-loaded or trailing revenue – an agents success in a given period may not be realised on the balance sheet for months (if not years). Next, we casually dismiss low price, low capital assets such as hoses, props, barriers and leads as ‘other’… this is not a fair, they can be integral to securing business.
How then do we recognise and reward this winning behaviour if it hasn’t yet necessarily translated into invoiced revenue? This is not an easy decision, ultimately revenue is only revenue when the invoice is paid. So recognition and reward are due but cannot necessarily be reconciled with financial reward.
This leads us in to discussion of financial versus non-financial incentives. The most common and obvious incentive schemes are based on financial rewards. We make money, you make money. But what about other incentives? I’m not talking about movie tickets or meat-trays. So many B2C business’ use point based systems for rewards – think frequent flyer, flybuys, woolworths rewards etc… So why do we focus incentive schemes purely on financial rewards? What if we treated our employees as customers? What if we gave loyalty and performance a points system that could be spent on training, share investment or additional leave?
What about periods?
It is easy to install a set and forget incentive scheme for each financial year but let’s look at what this actually means. Often, schemes include a full year and monthly/quarterly component, but all too often, this is signed off at the start of the financial year and doesn’t change. This means that unrealistic targets set early can scupper an entire year of incentives – this leads to disengagement and a team that ‘goes through the motions’ for 12 months knowing that they will not achieve the targets that are required.
Let’s shake this up a bit – why don’t we look at dynamic incentive targets that move with the market and business conditions throughout the year? Before every CFO/Financial Controller in the world screams at me, let’s look at this logically. Adjusted targets and KPI’s reflecting dynamic changes will still set reach goals that improve financial results whereas set targets that are unachievable only lead to disengagement and no incentive to perform. The best forecasters/budgeters in the world cannot accurately foresee the future in 3, 6 or 9 months let alone 12. So how then do you set incentive targets over the same periods?
Perhaps, incentives should be relative as opposed to actual? What does that mean? Well, instead of setting dollars and benchmarks at the start of the year, try setting relative measures. If we were designing a quarterly performance scheme, lets set targets like improve EBIT 10% on the previous quarter or raise prices/utilisation 5% YoY… different isn’t it? What it would mean is that despite market conditions, there is a challenge to improve each month/quarter regardless of the financial situation.
Sales incentives are a powerful and necessary weapon in your HR arsenal, but the design and application cannot be ad-hoc or simplified. When designing a scheme, you must focus on the behaviour you are looking to encourage. You must document, communicate and ensure that you have the capability to measure the metrics you judge your team by. Rewards do not necessarily have to be financial in nature – there are alternatives. Simple and standardised schemes are good but may not satisfy your entire team where geographic or product based roles conflict. Do not be afraid to diversify your incentive scheme to cover different environments. Equally, don’t be afraid to push the boundaries – there are no rules around incentives, make them dynamic, make them non-financial, make them fit your business and your team.
Wolf & Bear Services have experience in designing incentive schemes and modelling result based outcomes. Call us today to arrange a meeting and lift your team’s productivity.