How to Set Up a Compensation Plan for Your Sales Team

Given the impact that sales compensation plans can have on growth, almost every company with a sales force should take a more strategic approach to designing their incentives plan. Fully understanding both the key drivers of successful sales incentive programs and the ways to optimize them can be complex, and plan specifics can vary widely.  There are a few key factors that you should consider when designing and administering an effective sales incentive program.

Elements of a Compensation Plan

Virtually all sales compensation plans are written and documented. The sales compensation plan should be available and distributed to the sales force. The front line manager should use it as a tool to communicate the sales strategy and goals and motivate the sales staff to sell. Here are some of the essential elements to include:

The business’ sales strategy, what the business case is, and what the business is trying to achieve.

Performance measures
Spell out benchmarks and performance measures to help guide the sales force in terms of their focus.

Payout formula
This is perhaps the most essential component that spells out to your staff what is in it for them. The payout formula lays out how they will be paid in terms of straight compensation or commission for sales.

Detail how you will resolve questions or conflicts over sales compensation that are not covered in the plan and may arise.

Develop Meaningful Sales Goals and Performance Objectives
Tie individual performance goals to the company growth objectives.

Design incentives that motivates and rewards productive sales behavior.

Take the guesswork out of the definition of ‘successful selling performance’ reduces ambiguity, and provides clear marching orders to your sales troops.

Act as a supporter of each sales person… not in competition.

Straight Salary Plan
This sales compensation plan works only with organizations that have assured sales volumes. The salary compensation plan defines different salary structures based on the employees marketing skills, qualifications and responsibilities. It also has provisions for salary increments and the criteria for the same.  Salary increments can be periodic or flexible depending on the organization’s policies and the same is clearly mentioned in the plan. This plan however, is not recommended for volatile markets with unpredictable sales volumes.

Commission Only Plan
This plan does not accommodate any other source of compensation for employees apart from commission on sold items. Many organizations prefer this mode of offering commission on sales to compensate their employees, since compensation can be directly correlated with the performance of an employee.

Commission-only plans mention the different commission levels with respect to sales volume or time. (For example 1% commission on sale of first 100 items, 1.5% commission on the sale of next 100 items or 1% commission for 100 items in month, 1.5% commission for 150 items in a month).

Car dealers, furniture stores, and other ‘same day’ purchases are examples of businesses who may have a commission-only structure.

Salary Plus Commission Plan
This plan came into existence due to a major shortcoming of the commission-only plan. The commission-only plan is not of much benefit to a new employee who needs time to settle into the position. Therefore, to compensate such employee during this initial period, he is offered a minimum fixed salary for a period of time and the commission-only plan becomes effective thereafter.

This plan is common for long-term cycle sales that may take several months to close or that are sold according to the budget cycle of the customer or client.

Bonus Plan
This sales compensation plan cannot be used as a standalone plan and must be combined with any one of the three plans discussed above. Adding a bonus component to the sales compensation plan can bring a significant change in the manner in which employees are compensated.

This plan includes the criteria for awarding bonuses and the time of payment, which is generally the year end. In case an employee is eligible to earn more than one bonus, the cumulative bonus calculation is also included in the plan. Bonus components are always paid as a fixed sum per attained objective and not as percentage of sales

Bonus plans are sometimes based on ‘corporate’ profitability rather than employee performance.

Non-Monetary Plan
This plan works similar to the bonus plan with the only difference being that sales incentives are always non-monetary, such as gifts and other items that may be useful in improving the employee’s lifestyle.

One company in our profession offered the choice of a Lazy Boy chair or TV as part of an annual bonus.

The use of a company car is a common perk for a successful sales person.

A comprehensive sales compensation plan can be developed by having a good balance of all the four components: salary, commission bonus and sales incentive in a single plan. Lastly, the sales compensation plan will serve its true purpose only if it is easy to comprehend and execute at all levels.