Components of a Sales Compensation Plan That Works
February 2, 2009
Today’s salespeople may find it harder to sell amidst increasing competition and increased resistance to typical sales methods. At the same time, employers may have a desire to pay salespeople less just to stay competitive. In light of these challenges, it is imperative to make sure your sales compensation plan works – for the salesforce and for the company.
First, know the value of your sales reps. If they took their skills and experience to your competitors, what could they expect to make? Pay too little and you risk costly turnover. Pay too much and the company’s bottom line suffers. Further, morale will take a serious hit if you find you have to adjust sales incentives down at a later date in order to stay competitive.
Second, establish reasonable productivity goals. The best plans adjust goals based on factors such as: tenure of the producing salesperson, product being offered, sales territory and associated competition, etc. Unreasonable goals discourage and demotivate – the opposite of a compensation plan that works. A related concept to keep in mind is making sure that any hurdles/qualifiers for salespeople to qualify for sales bonuses are truly valued by the organization. One company had a team that was largely geared toward customer service, rather than sales. However, the incentive formula required a minimum number of sales as a hurdle to qualify for any incentive pay based on productivity. The manager admitted that there were few opportunities for sales, the sales really weren’t all that important to the organization, and they should be removed from the incentive pay formula. Including them was serving to demoralize the representatives, while providing little benefit to the organization. Make sure that there is a good reason for any qualifiers that you include in your compensation formulas.
Third, give your representatives a bigger piece of the pie once they achieve above a level that is high enough to cover their pay and benefits. If you can motivate your existing salesforce to produce more through higher incentive pay, it will certainly be more cost effective than hiring additional salespeople and paying their benefits. Employees who are motivated to achieve at high levels are a goldmine for your organization, since they lower your fixed costs (benefits, equipment, office space). On a similar note, and for the same reason, don’t put a cap on incentive pay. Why would you want to limit the incentive to produce. If incentive pay is capped at your organization, how much extra performance do you think you will get from your reps above the cap?
Finally, consider non-cash incentives such as recognition and rewards. Although these forms of “compensation” aren’t spendable, don’t underestimate how important they can be to employees. It feels good to be named “top dog.” And if you are named “top dog,” you won’t want to return to the bottom of the heap. Also, consider whether other forms of compensation may be more valuable than the cash it takes to provide the incentive. For example, paid company trips for top performing salespeople may be more valued than the cash required to provide the incentive. Additionally, there is the prestige that goes along with qualifying for such a trip that is similar to an award, just discussed.
Ensure your sales compensation plan adheres to these principles, and you will be well on your way to a sales compensation plan that works!
Posted in Compensation
February 13th, 2009 at 4:41 pm
Great points – I agree. Particularly your second point – it’s better to build a team of winners so the goals should be attainable by 60% of your team. It’s also key to make sure that the goals are clear, measurable, and not too many that your reps don’t know what to focus on and lastly that they are based on your company strategy. In the end your sales people will follow the money, so make sure you are motivating the behavior you need.
You can find more free resources to help you with your sales compensation planing at at including sample plans, expert webinars, surveys and tools that can help.