Companies are being forced to totally rethink their business model and marketing strategy as a result of an extremely challenging economic marketplace. Stakeholders and boards are demanding increases in the bottom line. Because of the economic stagnation, companies are finding it increasingly more difficult to increase prices, and are facing market pressures to drop prices even further.
In the past, as revenue increased, sales commission plans built on revenues actually created an unintended, yet, de facto increase in commissions. This invisible increase in compensation resulted from sale of the same units with increased costs. The economic situation has put a halt to run-away sales and price increases, and actually exacerbated the pressure on margins. More importantly than before, it is critical that companies take a hard look at their sales commission plans, and determine if the company and their sales force are actually being well-served by a pay program that in all likelihood needs to be revamped.
A well-designed sales compensation package will enable the company to focus its sales activities on desired results, tie the rewards directly to achievement level, and be sufficiently flexible to handle future market shifts. As the organization’s business model and marketing plan vary, the sales compensation package needs to reflect this new strategy.
The key to a successful sales compensation program can be achieved in four (4) steps:
Sales compensation packages typically comprise one or more of the following components:
- Clearly defining sales expectations and goals that are realistic but challenging.
- Tracking and accurately measuring performance against expectations.
- Rewarding achievement with competitive compensation and motivational features that provide a Win/Win for both the company and the sale force.
- Monitoring the results, modifying the plan when necessary, and keeping the sales personnel informed.
- Base salary or draw against commissions
- Commissions tied to short-term goal attainment
- Incentives/bonuses tied to annual sales results
- ”Spiffs” and other focused incentives
- Achievement or Career recognition
- Participation in long-term equity type plans, particularly for Super Stars
Frequently Asked Questions What is the main purpose of a sales incentive plan?
Who is responsible for the design of a sales compensation plan?
When should commissions be paid?
How do you reward sales on a team basis?
Question 1: What is the main purpose of a sales incentive plan?
Answer: Sales compensation plans are appropriate in situations in which the employee has the opportunity to make a significant impact on the outcome of the sale through his/her added effort, initiative, and capability. The theory behind sales incentives is to provide the financial rewards that will motivate the individual to exert the effort, take the initiative, and use their capability to convert a prospect to a buyer.
If designed correctly, the sales incentives should also have the desired effect of focusing the sales person’s efforts on selling the desired product or service to the right customer, at the best price and at the right time.
Question 2: Why do some sales compensation plans fail?
Answer: There are a number of reasons why plans fail, most of which can be controlled or eliminated with the proper oversight. Most common is that the plans are too complex and cumbersome. They need to be easy enough to be understood by participants and those who have to track performance and administer the program. Another common failing is that the sales plans are not monitored to make sure they do not create undesired results or poor sales practices (i.e., Bank loan practices). Lastly, sales plans can be too inflexible, and not reactive to changes in a company’s business approach.
Question 3: Who should be responsible for the sales compensation plan?
Answer: In many instances the “right” to design the new sales compensation program falls on the Director of Sales & Marketing. However, the team that has input into the design of the plan should consist of all interested parties, including Human Resources, Finance and IT. Each functional area has a vested interest, and these goals should be represented in the plan’s design. Ultimately, the Sales Department should be charged with the overall plan responsibility, be held responsible for making sure it is completed and implemented on time, and be accountable to make sure it works as intended.
Question 4: When should commissions be paid?
Answer: The key to the timing of commission payment is directly linked to when the Company recognizes the sale. The definition of the “sales event” has changed, and although most companies recognize that from a motivational standpoint, the greatest impact will occur when the payment closely follows the sale, they are unwilling to make payments until the customer is invoiced or payment is received. Thus immediate payments are not always practical; however, it is important that the sales person is credited with the sale as soon as practicable. This assumes that the individual is receiving a base salary or draw against future commissions, since they obviously need to survive. Some companies will, therefore, make partial payments based on deposits or payment milestones.
Question 5: How do you reward sales on a team basis?
Answer: When we think of the “generic” sales person, the image that comes to mind for many people is of an individual going door to door to make a sale. In reality, many sales situations are collaborative with a number of individuals each playing a vital role. This is the Sales Team, consisting of various individuals performing prospecting, providing technical support, making sales presentations, closing the sale, taking orders, and handling the related administrative details. If the team is functioning as a cohesive and effective group, each member of the team should somehow share in the rewards associated with the sales event.
The easiest and fairest method of distributing the wealth is to provide each team member with a pro rata share based on a pre-determined split based on the perceived value of each individual’s contribution. The key is to provide all employees on the team with a common stake in the success of the sales effort.