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Sales
Compensation
Plan Components
Pay your sales reps what’s fair and what they
earn
A sales compensation plan
cannot be developed carelessly if sales reps are
to be properly motivated and compensated. We
find that many companies have ill-defined,
confusing and generally inappropriate sales
compensation structures.
It is important to create a sales compensation
structure that motivates sales reps to higher
levels of performance. It is also important to
allow sales reps to earn compensation as a
direct result of their efforts without crippling
their ability to meet their monthly obligations.
In other words, pay sales reps well by creating
incentives to achieve higher levels of sales,
but provide a safety net that is not too high or
too low. This can be a challenging task.
There are essentially four possible components
from among which to choose in developing your
sales compensation plan; salary, commission,
bonus and sales incentives. I believe that a
well constructed sales compensation plan can
include all four components.
If you opt to pay your sales reps a base salary,
try to keep it low enough to allow room to
create sufficient incentive and motivation, but
high enough to give your reps some breathing
room in meeting financial obligations. Generally
a base salary will fall somewhere between 15 and
40 percent of total compensation. Obviously as a
sales rep becomes more successful, the
percentage of total compensation will fall.
Therefore, a rep whose base salary represents 40
percent, for example, of total compensation in
the early months of employment might end up with
15 percent of total compensation made up by
salary after a period of time. Some
organizations provide a training or "greenhorn"
salary that is initially higher and is reduced
over time to allow sales reps to get their
customer base established and sales volume up.
The thinking here is logical and acceptable
since the sales reps won’t be worried about
paying bills in the early going and can focus on
selling and building relationships.
Some organizations prefer to base sales
compensation on straight commission. The
thinking here is that a straight commission
structure allows reps the opportunity to get out
of selling exactly what they put into it and the
reps can directly correlate their activity with
their compensation. And to some extent this line
of thinking has some merit. However, a straight
commission structure can be a disincentive for
some potentially outstanding sales reps to join
an organization. In most cases, it takes some
time to get to a level of sales that provides an
acceptable level of income. Therefore, in the
early months or years of a rep's tenure with the
company the income level is often not sufficient
to meet the reps' monthly obligations. This can
be a distraction and an incentive to give up.
Some will argue that if the rep gives up they
didn't have what it took to make it anyway. Some
industries such as the insurance and brokerage
industries have made it virtually standard
practice to offer a straight commission
structure. And they have been successful in
doing so. But, there are a number of industries
where this type of structure simply won't work.
I believe that, for most industries, commissions
that make up a part of a broader sales
compensation plan tend to work better.
Commissions can be based on sales or gross
profit. However, be careful not to provide
commissions based on sales whenever the sales
rep has any control over pricing. Sales reps are
human and commissions based on sales only
invites price reductions to make the sale. In
some cases, the price reductions can be too deep
leaving the sales rep with commission, but the
company with little gross profit on the sale.
In a plan that involves several components,
commissions should make up the biggest part of
total compensation. Generally, this will range
up to 80 or 85 percent of total compensation. A
well balanced plan will have commissions making
up in the neighborhood of 65 percent of total
comp.
Adding a bonus structure to a sales compensation
plan can add incentive to reach new levels.
Generally speaking bonuses should be paid at
quarter or year end for meeting or exceeding
sales goals, for reaching certain target
incentive levels or for some other specific,
measurable reason. As an example a bonus
structure could be set up to pay $5,000 for
reaching a certain level of total sales, $7,500
for reaching yet another level, $10,000 for
reaching yet another, and so on. Be careful not
to add too many levels. It will simply
complicate the plan. Also, make the bonus big
enough to incent reps to want to hit each level.
One interesting approach is to create a wider
gap between bonus levels and make the bonuses
cumulative.
The final component that can be included in a
sales compensation plan is sales incentives.
These are generally non-monetary incentives such
as trips or gifts. These are often associated
with sales contests, but can also become a part
of a sales compensation plan. Incentives are
best used for achieving short-term results. The
incentives selected should be significant enough
to get sales reps' attention. Incentives that
aren't attractive are not worth offering. The
offer will fall on deaf ears and won't provide
sufficient motivation to stretch to higher
levels.
Putting a sales compensation plan together needs
careful study. Run a sensitivity analysis to
assess the impact on sales rep compensation and
company profitability at various levels of
sales. It is important to build a plan that is
simple, straightforward and easily administered.
Avoid complicated, confusing plans at all costs.
Good
luck and good selling!
Russ Lombardo
PEAK
Sales Consulting, LLC
russ@peaksalesconsulting.com
(702)
655-5652
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