Sales Compensation
Purpose (see below how HRSource™ can help):
To provide an overview on Sales Compensation programs.
Overview and Process Steps:
A company's sales force is the main connection with the customer and, therefore, the company's revenue stream. The sales force must satisfy customers' needs with the organization's products and services. The dynamic nature of today's business world makes it possible for the sales forecasts to change quickly and dramatically, making it even more important for a company to periodically review its sales compensation strategy.
The design of the sales compensation plan must align with the company's business objectives. There are two factors involved: the overall cost of sales and how individual orders are compensated. Depending on the industry, sales compensation can range from 3 to 10 percent of total sales volume and it may represent up to three-quarters of the total sales department budget.
Designing an effective sales compensation plan involves a four
step process: assessment, design, costing and administration. A
periodic review of the results versus objectives is important. The
plan design should involve: Sales, Marketing, Finance, HR. Often
the HR department is not prepared to deal effectively in this
effort, so external sales compensation specialists might be needed
to lead this exercise.
Essential to the design of a sales compensation plan is a clear definition of what is involved. Each organization has a different approach for selling its products and services. Defining this approach needs to be considered when designing the plan.
A sample of a basic sales compensation plan is included.
Sales compensation has a unique vocabulary to describe the various program characteristics. Following are some common terms and definitions:
Mix - The mix is the relationship between base (guaranteed) and commission ( variable, needs to be earned). It is expressed as a percentage of total targeted earnings, e.g. 70/30 would be 70% base and 30% commission.
Bonus - A type of incentive that is tied to an actual goal accomplishment rather than sales volume. Typically used to incentivize a change in selling behavior, often based on a change in the sales strategy.
Capping - Refers to whether or not the sales compensation plan continues to pay indefinitely for additional sales or caps out at a given level of sales attainment. Capping is used to avoid overpayment for windfalls or inaccurate quota setting.
Quota - The amount of revenue expected from a given area or product line. Sales below quota do not pay at the targeted level.
Thresholds - Minimum level of performance required before commissions begin.
Sales crediting - When an order is counted for commission purposes. There is typically a need to distinguish between an order, a shipment and when a customer pays. Often there is a split of these events within a sales compensation plan.
Accelerators - An event that is compensated at a faster rate than the preceding sale. For example sales above the quota are compensated at a higher rate.
The design of a sales compensation plan requires making decisions about a number of elements: eligibility, target total compensation, mix and leverage, performance measures and incentive features. Each of these is described briefly:
Eligibility - Deciding who is eligible to receive commissions from a sale. Consider both contact with the customer and to what degree the sale is influenced by the person. As a secondary element also consider the extent that you wish to build a team spirit within the selling activity.
Target total compensation - This represents the pay level for achieving the quota or expectation. It is a combination of base and commission.
Mix and leverage - The more important a person is to the buy decision, the higher the commission mix generally. Also those in the selling function who manage sales people generally get paid more as a base to recognize the management activities.
Performance measures - The plan should have focused measures to ensure that the outcomes are consistent with the business strategy. These typically direct the selling to specific product lines or margin requirements. This is perhaps the most critical step in the design process. Unless these measures are well strategized and articulated, there is a risk of a disconnect between the sales efforts and the company's growth and profit objectives.
Incentive features - Numerous alternatives are available to direct sales efforts and reward according to the goals of the business. Consider capping and acceleration elements.
The final step in the process is implementing the plan. This should be done in writing clearly spelling out the plan features and definitions. This becomes a legal contract for services so it should also receive appropriate scrutiny and be understood by those administering payment. If the plan will change significantly, consider a communication package to ensure that the effort that went into the redesign is understood and appreciated.
Process Tips:
Some tension in the sales force is indicative of a good sales compensation plan. There are two extremes to avoid:
- "No complaints" from the sales force which is a signal that the plan is too easy and can result in over paying sales people.
- The sales people incessantly complain or don't understand the payment mechanism resulting in less motivation and lessened contact with the customer.
