David
Berger

Optimizing Your Sales Compensation Plan

The goal of your sales compensation plan is to reward sales success while motivating increased sales performance. Crafting a sales compensation plan that meets your company's business objectives, motivates sales reps and is easy to track and manage requires careful thought. Follow these steps for Optimizing Your Sales Compensation Plan.

It is possible to implement such a plan, but it is imperative that it also achieves your company's overall business goals and objectives. Without doing so, the plan could cost you a lot of money with little to no return on your invested sales dollars.

The previous article also raised several questions regarding sales compensation plans and what effect they may have on you, your job and your business. Some of those included:

• What are the components of an effective sales compensation plan?
  
  
• Does the plan motivate the sales team in the direction of the desired business results?
  
  
• From a technological perspective, are there any constraints in the plan that make it difficult to implement and manage?

With these questions in mind, let's take a deeper look at the potential issues you will face and, more importantly, how you can make them work to your benefit.

Designing Sales Pay Plans

Condition
Your current sales compensation plan needs an overhaul or you need to design a totally new one for a start-up sales organization. You realize that either what you have now isn't working, or you are uncertain as to how to best structure the new plan.

Problem
The real question becomes: What are the components of an effective sales compensation plan? Should the plan include incentive earnings and a base salary, or just a base salary? Does the plan include the proper mix of base salary to incentive earnings? Should there be a different payout for new business versus existing or repeat business? Your challenge will be to sort through these issues and build a sales compensation model that best suits all aspects of your business.

Solution
The most effective and beneficial sales pay plans for both the employee and the company are variable in their design and are linked to either individual or team performance. By that, I mean they include some type of base salary, plus commissions or bonuses that motivate the sales rep to achieve the desired level of production.

In terms of the amount of base salary to be paid as a percentage of total targeted compensation, most of the major corporations with which I have worked set that range between 50% to 70%. The additional income is in the form of a variable incentive or bonus program that is distributed on a monthly, quarterly or annual basis.

Variable compensation should be linked to the attainment of sales goals and should offer sufficient incentive for the salesperson to excel. Some companies, but certainly not all, may put a cap on total compensation. In my view, if the pay plan is designed to achieve all of the company's business objectives and is fiscally prudent, then why not pay the sales rep for as much business as he or she can realistically produce?

Ensuring Proper Motivation With Compensation

Condition
Now that you have designed a sales compensation model that you believe to be the best possible pay plan for your sales organization, the next issue you may face is whether or not the pay plan motivates your sales reps in the direction of the desired business results.

Problem
If the sales pay plan is not properly designed to achieve the desired mix of business -- new, existing, or product- or service-specific -- you may find your sales organization is not necessarily focused on your entire line of business. The results could be destructive to both your top- and bottom-line results.

Solution
The fixed, or base salary, component of the sales pay plan compensates the employee for the normal day-to-day business activities and is intended to provide some sort of income stability during the business development cycle.

The variable, or commission/bonus component, is intended to compensate the sales rep for the achievement of specific business results (i.e., the desired product or services mix). There is also the all-important financial result aspect of the plan that should be directly aligned with the desired level of profitability of your business.

Run several test cases to ensure that the achievement of the desired business results also yields the desired bottom-line results. You can then  modify the variable component of the pay plan to get the proper ratio of revenue to profit.

Ensuring IT Can Track And Report Accurate Sales Results

Condition
Now that you have designed and implemented a sales compensation plan that achieves all of your stated business objectives, turn your attention to the support systems required to track and report sales results and feed your commission-accounting process.

Problem
It is possible that the compensation plan you have designed will be difficult or even impossible for your IT function to track and report on. It may even require extensive manpower and cost to modify your current systems. Or you may find it necessary to acquire additional software to support your new sales compensation plan. A potential pitfall in this process may exist in the very heart of your current IT infrastructure.

Solution
I have always favored a team approach to problem solving. This method not only fosters the opportunity for new strategies and tactics to be considered, but it also ensures that everyone involved buys in to the solution. Form a project team that includes representation from your IT department and solicit each team member's support in clarifying any potential issues relating to tracking and reporting sales results and commission payments. Doing so early in the process will allow you to make more informed decisions about the viability of the plan.

A well-designed sales compensation plan can be a highly effective, strategic tool that will allow your company to achieve its top- and bottom-line results. With the proper planning process and a collaborative effort, you are well on your way toward achieving that objective. And when that happens, everyone prospers.

Let David Berger help your company create sales excellence