Design Sales Compensation Plans Carefully

We've all heard the notion that money is not a primary motivator of people. We're here to dispell that notion, especially as it relates to your sales force. While a number of factors enter into the motivation equation, compensation certainly ranks near the top for sales people. In fact, someone not motivated by money might not be effective in a sales position.

But most companies seem to struggle when designing sales compensation plans. There are a number of questions that surround building the plan. Should we use a straight commission plan? Should it be a straight salary plan? What combination of salary, commission and bonus or other incentives should be used? There is no secret formula for designing an effective sales compensation plan and plans will vary somewhat based on the type of product or service being sold.

Many companies use a straight commission plan either because they believe that it will somehow save them money or delay cash outlays or because they believe straight commission motivates people more than any other form of compensation. Let's be clear about the fact that you simply don't want your sales force focused too much on how they are going to pay their bills. The age old argument that starving people makes them hungrier and makes them want to sell more is true to some extent. However, when an employee is more worried about where their next dollar is going to come from it can very often create undue stress which could lead to an inability to focus on the tasks at hand.

And what about a straight salary sales plan? In this case, where is the incentive for someone who is motivated by money and feeds off of receiving incentive payments based on performance?

We believe that a combination of salary, commission and bonus is usually most effective in compensating sales people. The question then becomes how to effectively blend all three into a sales compensation plan that will incent people as well as compensate them according to performance. One thing to keep in mind is that the plan needs to be kept as simple as possible.

An important point about compensating sales people is that unless you are willing to allow sales people to make a lot of money and potentially make more than some of your mid and top-level management people, you probably shouldn't be in business. There is a real reluctance on the part of some owners and managers to allow sales people to earn the kind of money they need to be paid to incent them to high levels of performance. This can lead to an inability to attract and retain top people. At the same time, you need to be very careful not to overcompensate them.

Also, sales compensation incentives should most often be based on gross profit rather than selling price, especially when sales reps have any control over final pricing. It is important to manage gross profits and tying commissions to selling price can negatively impact gross profits when sales reps have leeway in quoting prices to customers.

There is a reasonable level of compensation for sales reps that must be determined. Obviously you will want to have some control over how much top reps are paid. That control is established when developing the plan, not by making sudden changes in the plan after you realize top reps are making more than you intended. By control we mean a well planned and motivating compensation plan that incents reps to high levels of performance and pays them very well when they do perform, but does not overpay them.

First determine what you believe to be a reasonable level of sales for a top sales rep in your company. Be careful not to be selfish in making this estimate. Remember that sales people need to have the ability to make big money if they perform. But they must perform at a high level to achieve high levels of compensation.

Once you have carefully analyzed the situation to arrive at a reasonable level of compensation and the percent of gross profit you are willing to allocate to sales compensation, you're ready to begin putting the pieces of the plan together.