Sales Commission Plans
"How To Choose The Best Plan For Your Organization"
The variety of sales commission plans make compensating individuals in a sales more complicated than with employees in others parts of a company. A salesperson's compensation often includes combinations of salary, commission, bonus, sales contests, and nonfinancial rewards and recognition programs.
Types of commission plans
There are many forms of commission plans. A commission plan can include many types of compensation and can include multiple formulas. Here are the basic components of most sales commission plans.
A straight salary compensation plan for salespeople is used for one of several reasons. It is first used when a new sales rep is brought into a company. It is also used when a new territory is opened or a person needs time to come up to speed and perform at the proper level. A salaried compensation for a period of time gives a new person that opportunity.
Another reason to use salary only is when management is trying to motivate a salesperson to achieve key success factors that are not revenue or sales volume related. Salary only compensation is also used when is difficult to determine an individual's impact on the total selling effort. Sometimes in team selling, or in global and multinational sales accounts, customer care and relationship building is the key focus. One way of guaranteeing proper account involvement is to compensate a sales rep using salary only.
The advantages of salary only compensation are management can ask the sales people to spend their time completing tasks and activities that are important to the company's initiatives and objectives. Salary only plans are used when salespeople are expected to perform customer service, market research, customer problem solving, education, or other promotions. Also, straight salary plans can be used effectively where extensive high-tech integration and design services are required to get a product approved and sold.
Another advantage to salary only plans is they are easy to compute and administer. They also give management more flexibility in positioning their sales force in a way that best meets corporate goals. Another added bonus for management is cost of sales stays fairly constant even with increasing sales volume. This results in cost per unit sold dropping and profitability rising. The disadvantage is when sales go down, salaries remained constant for a time, and they represent an ever-increasing percentage of sales.
The other key consideration of a salary only commission plan is that financial rewards are not tied to a specific job performance. This causes performance evaluation to be more subjective. Since salaries are fixed, it does not provide an incentive for improving the rep's performance. Over long run, this type of compensation plan tends to attract security oriented sales people rather than the true high-performance hunters and business development reps.
Having a compensation plan based entirely on commissions is an excellent way to motivate highly aggressive selling behavior. Straight commission is the right choice if the goal is to turn sales reps loose in a market or territory to maximize sales volume. Straight commission assumes that the non-selling tasks have been minimized in their importance at the expense of sales volume. Another consideration of a straight commission plan is companies have a harder time controlling sales force activities.
Straight commission sales commission plans can be very motivational. Individuals who are motivated to improve their financial compensation are motivated to improve their sales production. However there is a point where further incremental effort and activity increases become less attractive to each person, and at that point sales productivity plateaus.
Sale commission plans compose only of commission are simple and have a perceived sense of fairness. As long as each rep's territory is properly defined with approximately equal potential, compensation equals productivity.
A straight commission plan makes it easy to compute and administer compensation. Compensation costs move up and down with sales volume which makes this attractive to companies that may be trying to save working capital. The company doesn't need to worry about paying higher wages and salaries unless sales volumes increase.
There are some disadvantages to straight commission plans. There is less control over sales reps, and less control over directing other corporate objectives. It may be difficult to get reps to think about relationship building activities that do not lead to short-term sales when every sales rep is trying to maximize sales.
Developing new accounts takes more effort than getting business from existing accounts. As a result, straight commission plans often encourage milking existing customers rather than developing new business. Getting market data, feedback, and analysis from your sales team may also be problematic with this type of plan.
Many sales people dislike straight commission plans because earnings are unstable and unpredictable. When business conditions are poor, turnover rates are likely to be high. Some companies try to compensate this with a draw advanced to the salesperson against future commissions. Draws need to be paid at a future date from commissions earned. Often though, the salesperson may fail to earn enough commissions to repay the draw or they may quit or be fired before the draw is repaid. In those cases, the company has to absorb the loss.
Combination Sales Commission Plans
Combination sales commission plans offer both a base salary plus an incentive based on production. These pay plans are popular with many companies because they have many advantages while avoiding many of the limitations of the other plans. The salesperson gets a stable salary that smoothes out the highs and lows. Management gets the advantage of having more ability to direct and reward their salespeople to perform tasks and activities not directly related to short-term revenue.
The incentive portion of the plan motivates a salesperson to increase sales revenue and profitability. The incentive program can be structured in a tiered format to incentivize top sales reps to achieve on an open-ended basis. All revenues a sales rep brings in above their quota, is very profitable business for a company. The company gains additional revenue and profit, but the fixed expenses for the wage and benefits for the sales rep does not increase.
There are aspects of this plan that can vary. Sometimes incentives are left open-ended and sometimes they are capped. Occasionally an extremely large windfall deal is won by a sales rep that throws the incentives out of balance. Another consideration is defining exactly when a sales rep is credited with a completed sale and is due commission payments.
The ratio of the base to incentive is something each company needs to determine. When a sales rep's activities are mostly related to short-term sales, the incentive portion of the pay is usually higher. When a sales rep is asked to do more relationship building and activities that don't bring in short-term revenue, the base salary is usually adjusted upwards. Increase the incentive portion of the plan when selling the product is difficult, and the salesperson is key to the sales success. The incentive portion should be reduced when the salespeople are largely order takers.
Considerations of Sales Commission Plans
Sales commission plans can be rewarding and motivating if done correctly. It can have a negative impact on motivation resulting lower sales when structured poorly. There is no one size fits all process for developing a compensation plan. There are considerations to help develop a compensation plan that contributes to a high performance sales team.
Sales commission plans are often as much art as they are science. Get the sales team involved when creating the plan. Put out the best possible plan. Unfavorable sales commission plans generate immediate feedback.
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