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Sales Incentive Compensation Plan

Does Your Sales Compensation Plan Need a Makeover?

Few topics in compensation cause more debate and confusion than how to create a compensation plan for sales reps. One thing is clear: a sales compensation plan should be re-evaluated regularly, particularly in times of economic uncertainty.

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The structure of the sales compensation plan can have a big impact on your ability to attract and retain great salespeople. A sales compensation plan needs to be looked at differently than a non-sales compensation plan. There is one fundamental difference which is that members of your sales organization have a direct and immediate impact on your company’s revenue. Therefore, the quality of the sales organization and the ability to retain top performers must be a priority. The overall goal of your sales compensation plan should be two-fold: to benefit the company and benefit the employee. If your plan is not a win-win for both parties, you will undoubtedly see negative consequences from the compensation plan. Consequences could be turnover, decreased motivation, excessive cost, or bad impressions made on potential customers.

How Do You Know If Your Sales Incentive Compensation Plan May Need Some Changes?

Compensation plans that are structured well result in the top salespeople being paid the best. This not only is beneficial for the company, but also sends a message of fairness to the team. So, employee turnover of your good salespeople is the most obvious clue that your plan may need tweaking. But, that’s too late to become aware of the problem.

To stay ahead of the game, keep an ear out for negative comments about the plan. Does this topic come up in meetings often? In addition, routinely look at how the team is performing. What percentage of your sales reps are reaching quota? Reaching threshold? Are your quotas fair but challenging? What are the obstacles to selling that are out of the sales reps’ control? Do the same reps always exceed quota? If so, be sure you are being fair with your territory distribution, and giving enough support to new or junior reps.

Possible Sales Incentive Compensation Plans

When evaluating your sales incentive compensation plan, you should consider:

Mix of pay. What should the ratio of base salary to commission be? Why not pay 100% commission? Salespeople that are highly motivated by commission plans are often your best salespeople. That being said, it is generally difficult to get salespeople to accept 100% commission in difficult economic times, as they are looking for some level of security. In most cases, your best bet is to provide base salary plus commission. This takes some pressure off worrying about covering their basic expenses but also incents them to sell so that they can earn above and beyond their basic needs. A 50/50 plan is quite common these days, although this is a decision that needs to be looked at internally from a financial standpoint. Whatever the mix is, it needs to be affordable to the company, yet motivating to the sales team.

Cap or no cap? Unlimited earning potential. That sounds like a no brainer in terms of hiring and motivating sales people to the job. However, it is important to often re-evaluate whether an uncapped plan is still affordable for your company. Alternatively, if your plan has always been capped, you may want to look at what incremental growth there could be if you removed the cap and then compare the impact on expenses.

Timing of payouts. When and how often you reward your salespeople for their success can have an impact on their behavior. In more difficult economic times, most people would rather receive smaller amounts more frequently, rather than waiting for a larger payout. If you aren’t doing this currently, consider monthly or quarterly payouts. However, don’t forget consideration must be given to your budget and revenue cycle.

An effective sales force can provide a huge competitive advantage to almost any business. A fair, competitive, cost-effective, motivating and routinely monitored sales incentive compensation plan is a major factor in ensuring the effectiveness of your sales force.

Regards,

Eliza Polly
Solutions Consultant
PayScale.com

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