Effective sales compensation plans are essential for motivating sales teams and driving business results, yet many organizations find it difficult to get it right. To simplify the process, here are answers to five of the most common questions leaders ask us when planning or refining their sales incentive programs.
Sales compensation plans are appropriate when the employee has the opportunity to make a significant impact on the outcome of the sale through their 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 into a buyer.
If designed correctly, the sales incentives should also focus the salesperson’s efforts on selling the desired product or service to the right customer, at the best price, and at the right time.
There are a number of reasons why plans fail, most of which can be controlled or eliminated with proper oversight. The most common reason is that the plans are too complex and cumbersome. They need to be easy to understand for 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; they aren’t reactive to changes in a company’s business approach.
In many instances, the “right” to design the new sales compensation program falls on the director of sales and marketing. However, the team that has input into the plan's design should include 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.
Commission payment timing should be linked to when the company recognizes the sale. The definition of the “sales event” has changed. Most companies recognize that, from a motivational standpoint, the greatest impact will occur if the payment closely follows the sale. However, companies are also unwilling to make payments until the customer is invoiced or payment is received. Thus, immediate payments are not always practical. Still, it is important that the salesperson 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.
When we think of the “generic” salesperson, 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 several individuals each playing a vital role. This is the sales team, consisting of various people 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 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 predetermined split based on the perceived value of everyone's contribution. The key is to provide all employees on the team with a common stake in the success of the sales effort.
A clear, well‑managed sales compensation plan helps motivate teams and support stronger business results. If you have any additional sales compensation questions, please contact us.