03/ 22/ 2002
In this article I'll explore various points associated with the preparation, design, administration and evaluation of sales-related pay plans. Beyond the "how to" approach to this important topic, I also wanted to draw attention to the strategic objective of increasing sales and profitability for your company through the application of a well-designed sales compensation plan. It is possible to implement such a plan, but it is imperative that it also achieves your company's overall business goals and objectives. Without doing so, the plan could merely cost you a lot of money with little to no return on your invested sales dollars.
The article also raised several questions regarding sales compensation plans and what affect they may have on you, your job and your business. Some of those included:
- What are the components of an effective sales compensation plan?
- Does the plan motivate the sales team in the direction of the desired business results?
- From a technological perspective, are there any constraints in the plan that make it difficult to implement and manage?
Condition: Either your current sales compensation plan needs an overhaul and/or you have a need to design a totally new one for a start-up sales organization. You realize that either what you have now isn't working or you are uncertain as to how to best structure the new plan.
Problem: The real question becomes, what are the components of an effective sales compensation plan? Should the plan include incentive earnings and a base salary, or just a base salary? Does the plan include the proper mix of base salary to incentive earnings? Should there be a different payout for new business versus existing or repeat business? Your challenge will be to sort through these issues and build a sales compensation model that best suits all aspects of your business.
Solution: Over the years, my experience has taught me that the most effective and beneficial sales pay plans for the both the employee and the company are variable in their design and are also linked to either individual or team performance. By that I mean that they include some type of base salary, plus commissions or bonuses that motivate the sales rep to achieve the desired level of production. In terms of the amount of base salary to be paid as a percentage of total targeted compensation, most of the major corporations with whom I have had the opportunity to work, set that range between 50% to 70%. The additional income is in the form of a variable incentive or bonus program that is distributed on a monthly, quarterly or annual basis. Variable compensation should be linked to the attainment of sales goals and offer sufficient incentive to the sales person to excel. Some companies, but certainly not all, may put a cap on total compensation. In my view, if the pay plan is designed to achieve all of the company's business objectives and is fiscally prudent, then why not pay the sales rep for as much business as they can realistically produce.
Condition: Now that you have designed a sales compensation model that you believe to be the best possible pay plan for your sales organization, the next issue with which you may be faced is whether or not it motivates them in the direction of the desired business results.
Problem: If the sales pay plan is not properly designed to achieve the desired mix of business, either new versus existing, or product- or service-specific, you may find the your sales organization is not necessarily focused on your entire line of business. The results could be potentially destructive to both your top- and bottom-line results.
Solution: This issue is not really as complex as it may seem. The fixed, or base salary component, of the sales pay plan compensates the employee for the normal day-to-day business activities and is intended to provide some sort of income stability during the business development cycles. The variable, or commission/bonus component is intended to compensate the sale rep for the achievement of specific business results, i.e., the desired product or services mix. There is also the all-important financial result aspect of the plan that should be directly aligned with the desired level of profitability of your business. I would encourage you to run a proforma to ensure that the achievement of the desired business results also achieves the desired bottom-line results. You may find yourself modifying the variable component of the pay plan to get the proper ratio of revenue to profit. Ultimately you will design a plan that achieves both business objectives.
Condition: Now that you have designed and implemented a sales compensation plan that achieves all of your stated business objectives, you will now want to turn your attention to the support systems required to track and report sales results and feed your commission accounting process.
Problem: It is entirely possible that the sales pay plan that you have designed may be difficult or even impossible for your IT function to track and report results. It may even require extensive amounts of additional manpower and cost to modify your current systems, or you may find it necessary to acquire additional software to support your new sales compensation plan. A potential pitfall in this process may exist in the very heart of your current IT infrastructure.
Solution: I have always favored a team approach to problem solving. This method not only fosters the opportunity for new strategies and tactics to be considered, but it also ensures that everyone involved "buys in" to the solution. As I suggested in an earlier article on this subject, form a project team that includes representation from your IT department and solicit their support in clarifying any potential issues relating to tracking and reporting sales results and commission payments. Doing so early on in the process will certainly allow you to make more informed decisions as to the real viability of the plan.
In summary, a well designed sales compensation plan can be a highly effective, strategic tool that will allow your company to achieve its top and bottom line results. With the proper planning process and a collaborative effort your are well on your way toward achieving that objective. And when that happens, everyone prospers!
Contributed by David Berger of Berger Berger Associates, a management consulting practice focusing on sales workforce effectiveness.
