David
Berger

Sales Compensation Plans: Challenges And Opportunities

Your sales compensation plan can help motivate your sales team to achieve the greatest sales success and profitability for your company, or it can merely cost you a lot of money. It can even de-motivate your sales reps. There are several important considerations that go into Sales Compensation Plans: Challenges And Opportunities.

• What are the elements of an effective sales compensation plan?
• Does our plan motivate the sales team in the direction of our desired business results?
• Does our plan support our overall business strategy?
• From a technological perspective, are there any constraints in the plan that make it difficult to implement and manage?
• Should the plan include incentive earnings and a base salary or just salary?
• Is there the proper mix of base salary to incentive earnings?
• Should there be a different payout for new business versus existing or repeat business?
• Is the plan designed to achieve the desired financial results?
• How can I compare the plan against my competitors'?
• How do I turn the sales compensation plan into a strategic plan that will drive top- and bottom-line performance?
• How do I best communicate changes in the plan to the sales team?
• Am I earning the most I possibly can from the plan?

If you have asked yourself any of these questions, then take comfort in the fact that you are not alone in facing these compensation-related issues. Many sales reps, sales managers, corporate executives and business owners face the same challenges and opportunities relating to their sales compensation plans.

Fortunately, there are solutions that will enable you to achieve the desired results, and it may not be as difficult a process as you think. The ultimate goal is to design a compensation plan that suits the needs of your entire company, not just your sales organization. With that in mind, let's take a closer look at some of these real-life issues and what to do about them, beginning with the design of the plan.

Sales Compensation Plan Preparation

So how do you design a sales compensation plan that will achieve both the desired revenue and financial results? This is not always a simple task, and there are many factors to keep in mind. The good news is that there are a number of ways to achieve that goal.

You can design the plan yourself, or get help from external resources such as a consultant or custom-designed software. That is your decision to make. However, if you are willing to take on the task yourself, you may want to consider leveraging the collaborative efforts of your company's management, finance and sales teams. Besides, the democratic process is still alive, well and flourishing in corporate America, so why not give it a try yourself?

Form a project team with people from each related department (executive, finance, sales and human resources) to examine the overall impact of the current and/or proposed compensation plans. I would be hard pressed to suggest a better way to get everyone's buy-in to the finished product.

In order to create the best possible plan, it is important that the group has a clear understanding of the business results the company must achieve. Most likely, that will include key performance measurement areas such as revenue growth, new product or service offerings, expense ratios, profit margin, ROI and others. Typically, sales expense is expressed as a percentage of total revenue and can be targeted at a desired level that ensures overall profitability. Sales compensation will often represent the lion's share of that expense. Keep in mind that, while it may be tempting to adopt a plan that worked in another company, it is important that you create one that is best suited to your unique business and marketing strategies.

Sales Compensation Plan Design

With that information in hand, the next step is to begin the actual design process.

When designing an effective sales compensation plan, you will likely have to make some decisions about the plan's overall structure:

• Will it offer a base salary only, or will it be a salary and incentive plan?
• If it's the latter, what percentage is each component of the total targeted income?
• Will the plan be commission only without a base salary?
• Will incentive earnings be expressed in dollars or as a percentage of base salary?
• How do you ensure that the plan meets your financial criteria?
• Does it meet the needs of the entire company and not just those of your sales organization?
• Is the sales compensation plan competitive in the marketplace?
• Does it allow for the profitable growth of the business?

Only you can best decide which of these qualities meet your criteria. Each department represented in your planning team has different needs and objectives, and it's important to understand and incorporate all of them (or as many of them as is appropriate) into the compensation plan. Here are some examples of what departments typically want:

• Salespeople want a competitive pay plan and need to be motivated and be paid fairly for what you want them to do.
  
  
• Sales managers want to achieve results, stay within budget and keep the sales force excited about company products or services.
  
  
• Executive-level managers or business owners want to ensure profitable growth of the business while at the same time paying salespeople fairly and equitably for the results they achieve.
  
  
• HR managers want to feel confident that the compensation plan is competitive in the market.
  
  
• Finance managers want a plan that is fiscally prudent.

Hence, the value of a multi-functional team that will not only design the best possible plan, but also ensure its ultimate success.

Given the divergent needs of each department, it's a good idea to design a few different plans and test them against a "what if" scenario to ensure that you are meeting the overall needs of the business. You could use historical sales performance data, as well as a projection of future results to forecast your total sales costs. This will enable you to create a plan with universal appeal and afford you some options in the event that you need to make revisions to the original plan.

Be sure to look for any unintended behavior that may result from the plan, and make the necessary adjustments to either reduce or eliminate it. Also, it is important to keep the plan fairly straightforward and simple. You cannot incent every area of sales responsibility with money. Focus on only those results that flow directly to the bottom line.

Administering And Evaluating The Sales Compensation Plan

At the end of your process, you should have a sales compensation plan that includes such components as base salary ranges, a mix of base salary and incentive earnings, incentive earnings only and total cash compensation based upon measurable business results. The plan you build should meet all of your company's needs and have the appropriate reporting mechanisms to track results and link to a commission-accounting system.

An Internet search using the keyword phrase "sales compensation plans" will lead you to a variety of software programs that could assist you with the design and effectiveness testing of your compensation plan right through implementation. Some applications also feature performance tracking/reporting capabilities and administrative guidelines for such things as frequency of incentive payout and performance measurement.

It is also important to evaluate the plan over a period of time so that you can determine if it drives the desired sales behaviors and goals. If you find that it does not, then implement the necessary adjustments and evaluate their impact.

Whatever plan your company builds, it's important to remember that the sales compensation plan by itself cannot ensure the ultimate success of your business. The plan also needs to be accompanied by ongoing coaching, motivating and employee-development activities.

Let David Berger help your company create sales excellence