Sales Compensation

"11 Key Considerations Of The Perfect Plan"

Your sales compensation plan has a greater impact on your company's results than any other single document. It impacts the behavior of your sales organization in a direct fashion. The more care and attention you give to this document, the greater the probability of achieving your desired results.

Salespeople are generally paid differently than all other functions within the company. Their performance is easily quantified and measured. As a result, their compensation is generally comprised of a base salary, and a quota or commission.

The best sales compensation programs are ones that are fair, motivating and will achieve the goals of the company. Make certain that your sales compensation motivates the sales force to achieve your corporate objectives. Salespeople are very quick to look at compensation packages, and figure out how to maximize it for them personally. It is your job as a manager to make sure that when salespeople maximize their individual compensation, they also maximize corporate revenue and achieve corporate objectives.

1. Involve your sales people appropriately in the compensation program

Companies go to great lengths to hire the brightest and most experienced salespeople they can find. When it comes to deciding how salespeople should be paid and incentivized though, the salespeople are very seldom involved in the process. It is difficult to identify the exact reason why companies don't involve their sales force in the compensation program. In large companies, bureaucracy and policies are often made very far from the field sales force. Often large companies communicate a "take it or leave it" attitude, which can be a big mistake. Managers sometimes have the viewpoint that it just doesn't matter if salespeople were involved. This attitude is generally counterproductive.

In smaller companies it much the same. Just as small companies often withhold financial data that is commonly shared in larger companies, the owners in small companies are not as free flowing with information. They often decide what they think is fair and how they will compensate their sales force. Even though smaller companies are private, it is a mistake and counterproductive not to involve salespeople in the compensation program in an appropriate manner.

Consider asking your salespeople what they think of their compensation policy. Listen intently to their answers. Nobody should feel threatened by having this discussion, because you are not asking them to create a plan from scratch, you are asking for ideas and suggestions to fine tune it. The ideas that come out may be interesting and applicable. The answers will often give management insight into what motivates the employees, how to better enhance morale, and insight into their expectations. At the same time, you the manager, will be exhibiting traits that are highly respected in the field such as sincerity, communications, flexibility, and leadership.

2. Don't make your hiring letter a compensation plan

Your company's compensation plan should be fair to each individual, and standardized enough to avoid conflict. If you create entirely different plans for each individual you hire, you will have to include everything necessary to cover all eventualities in each cover letter. In addition, each cover letter will have to be tailored for the individual.

This type of non-standardized approach can create problems. A compensation plan needs to address salary and incentive commission, but there are many additional considerations. In a simple sales environment, a less complex commission plan may suffice. However, there are additional underlying issues that surface in most complex sales environments. Items such as nonpayment by the customer, territory or account assignment changes, windfalls sales, unprofitable sales, sales promotions, resignations, terminations, house accounts, commission splits, and global sales need to be addressed in a complex sales compensation document.

Try to address as many of these issue as possible. The more information and situations you can cover in the sales compensation plan, the easier it will be to administer.

3. Pay commissions regularly and on time

Your salespeople will be much more motivated if they receive the money that is owed to them on the day that you have told them it will be paid. If they don't receive payment on time and consistently, it is extremely de-motivating and causes dissension within your team. Sales managers are usually not the ones who sign the pay checks. The financial organization within your company creates and signs the checks, so they need to understand how critical it is to get these checks out on time and correctly to your salespeople.

Just because salespeople, who are paid both base and commission, are paid differently than operational personnel, they still need to be paid on time and correctly. A manager would never go into the plant floor full of assembly personnel and tell them how much they appreciate their work, but unfortunately their paycheck won't be available for two more weeks. In the same manner, salespeople are dependent upon timely, fair, and accurate pay.

Determine the exact dates that incentives will be paid, and what to cut off dates are for payment on orders. Put these dates in writing and get acknowledged by both management and salespeople.

4. Furnish supporting data with the salesperson's payment

In this day of instant information, there should be no guessing or wasting time with telephone calls and meetings to go over a salesperson's compensation. When they receive their payment, it should include attached supporting documentation. A salesperson should never have to feel uncertain about how payment was determined.

By having supporting documentation, each individual can assure themselves that there were no mistakes or omissions in calculating their compensation. Commission are hard earned rewards for doing a job well done. If there are questions, mistakes, or oversights, address them immediately was a salesperson, and get them resolved with financial so they don't occur again.

5. Keep stability in the sales incentive structure

Sales incentives should be designed to enhance the stability of the sales organization. By frequently changing the compensation plan and structure, you will inject unnecessary discord. In addition, frequently changing compensation plans makes it more difficult for everyone involved to determine fair payment.

Don't change your sales compensation plans as a result of reaction to one specific situation. Change your plans for good reason, but deal with unusual individual situations without overhauling the compensation program and affecting everyone.

For a sales compensation plan to be effective, salespeople need to become comfortable with provisions and the metrics of that plan. They should understand the term is their reward as it relates to their efforts. By keeping the planned stable, and implementing moderate changes at the beginning of each new year, it will help both the company and the salespeople operate more effectively.

Develop your sales compensation plan to reinforce your company's strategic goals and objectives and make sure it will allow your salespeople to thrive. Change your compensation plan when it fails to meet these principles, and then stick with it.

6. Happily pay your salespeople

Your salespeople are the primary customer facing element of your company, and are responsible for generating revenue. There should never be a resentment in paying salespeople for their accomplishments. Begrudgingly paying your salespeople is a sure way to get them talking to your competition and looking for new jobs.

Oftentimes in smaller firms and family-owned businesses there is a reluctance or animosity towards paying generous amounts to salespeople. The founders of these companies often resent paying what they feel is inordinate compensation to someone who's taken advantage of all of their previous hard work. If the sales person is bringing in new business, growing your company and helping achieve executive goal, then pay them without remorse.

Find a sales compensation program that is cost effective for your company and that will not create animosity within your organization. Again, consider the reward to the salesperson terms of the profitability of the sale and how it will impact the growth, health, and competitiveness of your company. Make it understood that the well-being of everyone in the company is dependent on the success and retention of your top producers. Don't let small minded jealousy sabotage your company, or your sales organization.

7. Making your earnings plan realistic

Setting unrealistic sales goals, or putting unrealistic ceilings on earnings power will create discord in the ranks of your top salespeople. Having unlimited earnings potential may or may not be appropriate, and is something you will need to decide. Upper earning limits are a factor of common sense, marketplace, the industry you are in, and the competitive factors of the job market. Having open ended earnings potential, can often be a real motivator to top salespeople, so consider it in your plan.

Make sure that you address the rules of windfall sales, and commission splits so that unlimited earnings truly represent the reward for the work that was done by the individual. Most salespeople want to know that if they bring in big results, they will be paid in a big way. Make certain if you have limitations on the earning potential, that it is well thought out, justified, and defensible.

Spell out in your compensation program with the earnings potential is and make sure you have detailed that information in your compensation plan. It should be acknowledged in writing by both the company and the salesperson. Clearly spell out the who, what, when, how, and why of your incentives. Again, make sure that your sales compensation program truly supports your company's growth and goals.

8. Align your compensation plan with a plan for your company's growth

Salespeople are pros at looking at a compensation plan and figuring out how to maximize it for their personal benefit. With that in mind, it's important that you design a compensation plan that is both motivational for the individual, but also supports the goals objectives strategy and growth model for your company. It sounds easy to do but often the objectives and goals accompany change more frequently than the sales compensation program does.

Salespeople will inherently look for the easiest path to revenue, and the most profitable path. If you're trying to introduce a new product into a new market, this can be difficult for your sales team when compared to more of the same products to the same existing customers. You may have to invest in terms of a higher commission rate, to motivate your sales team in this direction. You can offer special incentives, or sales contests that don't impact the terms and conditions of your sales compensation program, but help you achieve short term objectives.

If a certain initiative or direction is the priority of the executives of your company, find a way to also make it a priority for the salespeople at your company. Give your salespeople the incentive and motivation to make their personal goals coincide with those of your company.

Take a look at the products and services that your company has to offer and determine which ones are the easiest to sell. You may want to put a different commission structure around those. If they are commodity sales with smaller profit margins you may even want to reconsider your go to market strategy and move those to at lower cost channel model. If you are selling specialty products with higher profits that represent the future of your company, then put together a compensation that will emphasize those areas and encourage the sale of those products or services.

9. Make your plan as simple as possible but not simple for the sake of being simple

The sales compensation plan is an important aspect of your business. It needs to be detailed, thorough and guided by common sense. Keep it as simple as you possibly can, but understand that that may not be easy to do. If you build it correctly, it should be easy to understand, non-ambiguous, and salespeople should be able to know within a few dollars what they will earn as a result of their sales.

You'll exasperate your sales force if you have a complicated incentive plan with formulas so complex that even CPAs have a hard time figuring them out. Detailed sales plans do not need to equate to unmanageable confusing plans that need to be over scrutinized and studied to determine compensation. Too many formulas and contingencies build into your plan cause salespeople to have trouble figuring it out. This leads to time wasted each pay period going over details and arguing positions.

10. Reward sales based on the effort

The most profitable source for new business is often from existing customers or clients. Since you usually know more about them, have better access to the people in power, and presumably they have a good history and track record with your company that gives them confidence in doing business with you. However, in most companies real growth comes from new customers in new locations. Expansion is key to survival in all sales organizations.

Consider making your incentive regarding existing customers, and installed base, different from the incentive for gaining new accounts, new business units, our new divisions. This will give the salespeople motivation to growing your business in the directions of your goals.

Almost all salespeople like to sell to familiar customers who they know, and to appreciate working with them. Prospecting on the other hand is not as fun. Relationships need to be built, and the sales cycle is often longer than with installed base and existing customers. This can often be intimidating and time-consuming. Yet prospecting and lead development in new accounts and new organizations is the growth lifeblood of most companies. This more difficult effort, that is so vital to your company's future, should be incentivized to reflect its importance. If you don't give value incentives for the creation of new business, chances are you won't see much of it.

Take a look at your sales compensation plan and determine if you want to structure the rewards for new business, and new environments higher than that from existing customers.

11. Review and modify as needed

In a recent survey, executives were asked to rank their current sales compensation programs. Two thirds said it was only "somewhat successful". In the same survey less than half of those same executives took the time to re-evaluate and modify their sales compensation plans to make them more effective for the company.

Take the time to pause and review your sales compensation program as part of your annual business plan.

In conclusion, sales operations are complex and have a lot of moving parts. One way to help stabilize the sales operations is to have a functioning sales compensation plan that is motivating to the sales team, and moves the company forward in the right direction. A properly designed and implemented sales compensation plan will go a long ways to see your sales, profitability, and market penetration grow.

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