Sales Compensation
Overview:
How an organization presents itself to its marketplace is often achieved by its sales force. These are the individuals who take an active approach in getting the message out about the company's products and services. How effectively the sales team markets the company, and in turn, how successful the organization is, is directly related to the sales compensation program. A sound sales compensation package enables the organization to focus sales activities towards desired results, and rewards these outcomes with compensation tied directly to the level of achievement.
The key to a successful sales compensation program can be achieved in three steps:
- Clearly defining sales goals that are realistic but challenging
- Tracking and measuring performance against goals
- Rewarding achievement with competitive and motivational compensation
Sales compensation packages typically comprise one or more of the following components:
- Base Salary
- Periodic incentives tied to short-term goals
- Annual Incentives tied to longer-term sales activities
- Commission-based incentives
- Perquisites to facilitate sales efforts
Services
Case Studies
Case Study #1: Financial Services Organization
Issues:
- Need to focus sales team to push new products and services.
- Provide competitive compensation levels consistent with its competitive market.
- Enhance the total compensation package with sales incentives.
- Provide rewards based on individual and team-related performance.
- Need to recognize account size with different incentive potentials.
Solutions:
- Evaluate competitive market to determine levels of base and total compensation.
- Design sales incentives based on desired mix of fixed and variable compensation.
- Enable weighting of goals to focus attention on desired results.
- Develop incentives to reward for team level achievement of sales goals.
- Differentials awards based on size and complexity of sales responsibilities.
- Develop administrative and tracking guides for effective plan management.
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: The world of sales covers a wide variety of sales situations. Many of these provide the opportunity for the sales person to have a significant impact on the outcome of the sale, through his/her added effort, initiative, and capability. The theory behind sales incentives it to provide the financial rewards that will motivate the individual to exert the effort, take the initiative, and use their capability to get a prospect to become 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 at the best price, to the right customer, at the right time.
Question 2: Who is responsible for the design of a sales compensation plan?
Answer: In many instances the “right” to design the new sales compensation program falls on the Head of Sales & Marketing. However, the team that has input into the design of the plan consists of all of the other interested parties, which may include Human Resources, Finance and IT. Each functional area has a vested interest, and these goals should be represented in the plan’s design. Ultimately, one individual should be charged with the overall responsibility, be held responsible for making sure it is completed and implemented on time, and be accountable to make sure it works as planned.
Question 3: When should commissions be paid?
Answer: There are really two answers to this question, according to how it is interpreted. First, commissions, like any incentive payments, are appropriate when a sales person has sufficient opportunity to be motivated to earn a financial award for making a sale. The sales event attached to the reward means having a customer agree to purchase a product/service.
The second interpretation refers to when the commission or incentive should be paid in relation to the sales event. The rule of thumb is called the “Line of Sight”, and means that the greatest impact will occur when the payment closely follows the event, therefore, reinforcing the cause and effect relationship. This is not always practical, but payment should occur during the next payroll cycle, either bi-weekly or monthly. Waiting 12 months to pay the sales commission presents a long disconnect from the actual date of sale.
Question 4: 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 members doing prospecting, providing technical analysis and 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 the perceived value of each individual’s contribution. The amounts typically will vary by level of contribution, but if properly handled, will provide all employees of the team with a common stake in the success of the sales effort.
