Employee Compensation and Performance- One of the biggest management challenges for a growing business is compensating salespeople effectively. You know you need an incentive compensation plan that encourages your sales force to land new accounts and continue to upsell existing customers, but where do you begin figuring out the best way to compensate them? It often boils down to finding the right balance between base pay and commission and/or bonus.
Sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. Executing a well-designed sales compensation plan can help companies create a sales culture of high performance where individual goals are aligned with those of the larger organization. Furthermore, building a reputation for recognizing and rewarding good performance while also helping companies attract and retain top sales talent.
Every compensation plan should be constructed to help your company achieve its strategic goals and to synchronize with the primary elements of the Strategy for Sales Perfection. If the plan does not achieve these two objectives, you need to restructure your compensation plan. Secondarily, your compensation plan needs to address the inherent goal to attract, reward and retain the right people.
A sales compensation plan is a way to put your sales and marketing strategy into operation. Given the impact that sales compensation plans can have on growth, almost every company with a sales force should take a more strategic approach to designing their incentives plan. Fully understanding both the key drivers of successful sales incentive programs and the ways to optimize them can be complex, and plan specifics can vary widely.
Here are some of the essential elements to include:
Strategy – The business’ sales strategy, incorporate product sales initiatives into the plan, and finally, what the business is trying to achieve. Keep in mind that you will need to consider your environment, your product categories, your marketing plan, and your competitors.
Performance measures – Spell out benchmarks and performance measures to help guide the sales force in terms of their focus.
Payout formula – This is perhaps the most essential component that spells out to your staff what is in it for them. The payout formula lays out how they will be paid in terms of straight compensation or commission for sales.
Develop Meaningful Sales Goals and Performance Objectives – Successful selling means motivating sales people to attain certain objectives. Be realistic with these objectives and make sure that each level can be reached.
Never structure your compensation plans around a straight commission. It limits the number of candidates you will attract, and it typically drives sales volume towards lower margin items that are “low hanging fruit”. Straight commission programs seldom drive sales volume within proprietary and high margin product categories. If you are a proponent of commission only plans, then design the plan around a base and commission.
Sales compensation formulas should be a mix between base salary and variable pay. How you decide to structure the plan rests entirely on the type of business you are engaged. Completely evaluate each and every aspect of your business and how this will affect the plan, such as the autonomy of the sales person to control the sale, the kind of selling you are engaged, and the sales cycle of your business. Let your top performing sales people provide input to the plan, include your HR department in the plan design, and devise a suitable formula with an implementation strategy.
I personally believe a sales compensation plan should be structured around performance to annual budgeted profit objectives or product penetration objectives. I find these to be highly effective and typically bestow all the objectives management is trying to achieve. Additionally, these plans should be indexed to meet certain performance goals designated by company executives. Consider the following example.
Assume you have one sales person for this model and the sales person is paid according to the following plan. This plan is based upon the assumption that the sales person will be compensated for attaining their quarterly profit goals.