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Salary or commission? Making the case for sales compensation planning

Salary or Commissions

A big challenge for many growing businesses is how to fairly compensate salespeople when cash flow is often not stable yet. The norm is to hire sales professionals strictly on a commission only basis, hoping that they will outperform your expectations and bring in new business. Others try offering a low salary with tiered commissions to reel in sales. 
On the one hand, a commission-based system is supported by the incentive of new sales and upsells to current customers. On the other hand, sales people may not be overly motivated by this approach, resulting in less than stellar performance. How can a company leverage the best of a salary and commission compensation plan to improve sales performance?

Designing a Sales Compensation Plan for Peak Performance
An effective sales compensation program is based on a balanced approach of a competitive salary and commission schedule, with current industry rates considered. In addition, it must include the following factors if it is to be successful:

  • Meaningful: Does the salary represent the challenges of the job itself and are the commissions based on goals that the salesperson will find attractive?
  • Motivational: Is the salary and commission structure going to produce the kind of performance that the company is aiming for, or does it fail to meet the needs of the sales team?
  • Measurable: Can your human resources team accurately measure the performance results of the salespeople based on the salary and compensation program goals?

Often the first step in designing a better sales compensation plan is aligning your business goals with the efforts of your sales team. This is when the executive team needs to work closely with operations to focus on the short term and long term objectives of the company, given current industry trends. Once these are defined, the task of drafting a sales compensation plan begins.

Sales Compensation Plan Writing
Getting the sales compensation plan documented and distributed to your sales team takes careful effort, but is a necessary part of the success equation. This enables your sales force to understand and carry out the plan consistently and according to a measurable process. The elements of a sales and commission plan are:

  • Company Objectives: This spells out in clear terms what the entire sales team is to achieve in a specific time period, as it relates to overall company goals and future industry opportunities.
  • Performance Metrics: Includes information as to how each member of the sales force is to perform, how performance is tracked, the system for measuring individual performance, and what the performance review process looks like.
  • Payout Management: The sales team is advised how salary and commissions are to paid, the formulas or tiers used to determine sales commissions, and who is in charge of managing this and handling any disputes.

Once the sales compensation plan has been completed, it can be reviewed and approved by your board of directors for immediate roll-out. New hires are given a copy of the plan and current employees are grandfathered in at their current salaries, with the new commission structure put into action. At regular intervals, the performance of the sales team can be reviewed using the established internal reporting system. Note individual as well as team results, and use this data to improve the salary and compensation of your high performance sales pros.

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