Sales Compensation Plans

Gene Siciliano

Most experts seem to agree that misguided incentive and sales compensation plans were near the heart of the country’s financial crisis, the effects of which are still rattling around Europe as this is written. These compensation plans encouraged aggressive individuals on Wall Street to over-sell the wrong products to the wrong people and pay themselves very handsomely in the process.

Everywhere I go, CEOs complain that their sales compensation plans don’t seem to work as well as they had hoped. Or they justify their compensation plans and attribute the poor results to poor selling skills, unmotivated salespeople, poor sales management, inadequate information systems and, of course, the economy.

The reality is that while all these things can contribute to poor sales team performance, nothing sinks motivation faster than poorly designed sales compensation plans. Some examples I’ve seen:

  • Straight commission plans: Here, the company pays a set percent commission on every dollar sold, regardless of whether sales levels are below, at or above where the company wants them to be. This enables salespeople to decide for themselves how hard they want to work and provides no incentive for them to work harder, even if the company needs more profit.
  • Poorly designed commission plans: For example, some sales compensation plans pay the same commission rate for profitable items that they do for unprofitable or marginally profitable ones. This is often because the company doesn’t know how to track the details, or because the company doesn’t know which is which.
  • Incentive plans that cap earning capacity: Some plans cap salespeople’s earning capacity even though the profitability of sales above the cap is usually considerably more than sales below the cap. A really good salesperson wants to know that the sky’s the limit, even if there’s no real chance of ever reaching it.
  • Incentive plans that don’t provide incentives: Some companies have bonus plans that make the salesperson wait for the quarter-end or even year-end to get financial recognition. The reward is so far removed from the event that they’re no longer connected in the salesperson’s mind.

I’ve also seen CEOs convert their entire sales force to straight salary so they could better manage the process—not knowing that they have guaranteed they’ll have a truly mediocre sales force from then on.

Compounding the Mistakes

If you combine one or more of these infamous sales compensation plan mistakes with any of the non-compensation issues mentioned above, you can have a seriously unproductive sales team—and not know how to go about fixing it.

A bad sales compensation plan effectively converts “pay-for-performance” into “pay-for-non-performance.” If your sales incentive plan doesn’t create a win-win-win—for you, your salesperson and the customer—it is bound to fail sooner or later.

Here are six key features of a winning sales compensation plan:

  1. It pays more for what you want to sell more of, and less for what you want to sell less of, relatively speaking. If you pay the same commission rate for everything, you’re telling the salesforce you don’t care which of your products they sell. If that’s true, fine. If it’s not, you’re reinforcing the wrong message.
  2. It pays more for sales that bring more profit to your bottom line. Of course, this means you need to know which products have a higher profit margin. If you don’t know your margins, you have a cost accounting issue as well as a sales compensation issue. Both will kill your bottom line faster than you can say ”money pit.”
  3. There are no limits on salespeople’s earning capacity. Create powerful incentives for your salesforce to keep reaching and keep selling, even when they’ve reached their personal income comfort zone. You do that by sharing the added wealth that comes from those extra sales—a bonus, a richer commission rate, a trip to Hawaii, or whatever you truly believe will excite your salespeople to keep going at full speed until year-end.
  4. The incentive pay is awarded as close as possible to the event it’s paying for. The idea is to strengthen in the salesperson’s mind the relationship between the deed and the reward. You can say they’re related all you want, but if the pay comes months later, and the salesperson has gone on to put effort in other directions since then, the association becomes weak, at best. The best strategy is to pay commissions monthly, every month. When adjustments are necessary due to breakage, returns or whatever, deduct those from current payments as they occur.
  5. It includes bonuses in addition to commissions. Bonuses are great for rewarding that extra effort, whether it’s for the top salesperson of the month, quarter or year; for the salesperson opening the most new accounts during a new campaign; etc. These are payments in addition to commissions that reward for exceptional success—not for routine performance, and certainly not in lieu of sale-by-sale commissions.
  6. It’s easy for salespeople to understand. Explain your sales compensation plan clearly to your salespeople. If they don’t understand it, they’ll assume they’re being taken advantage of to the company’s benefit. If you change the plan, take pains to explain the benefits of the change to them and how they can best take advantage of the new features. They’ll figure it out anyway, and you’ll lose some trust in the process unless you’re up front with them.

Don’t Forget Strong Sales Management

OK, having said all that, I need to say a few words about another critical issue—sales management. I’m sure you’ve heard that more money can never compensate for poor management, and that’s very true. If the person managing your salesforce is not a good sales manager—doesn’t follow up, doesn’t train, doesn’t create a motivating environment, doesn’t hold subordinates accountable—then no amount of clever sales compensation plan design will make up for that.

By contrast, put a good sales compensation plan and a good product line into the hands of a good sales manager, and you’ll see sparks fly as the performance climbs. The difference between your weak salespeople and your strong ones will become dramatically evident, enabling you to very quickly build a world-class sales organization with world-class results.

Gene Siciliano is author of Finance for Non-Financial Managers.
Copyright 2010, author retains ownership. All Rights Reserved.

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