When it comes to how businesses pay their salespeople, there's no one-size-fits-all approach. That's especially true for many companies with diverse products and services. Some pay commission based on sales, while others only pay on margin; still others blend both with incentives and special bonus plans.
No matter which approach you use, success depends on awareness. Your sales management team must understand your company's overall goals and structure compensation to align with them. In short, sales compensation should be not just a tactical focus for your organization, but a strategic one as well.
Compensation plans shouldn't be developed in a vacuum. You and your sales leaders need a solid grasp of your overall industry and your organization's place in it. You'll need to factor in variables such as new product launches and major promotions, as well as consider your personnel structure.
You should also address these questions: Is your company a start-up or an established business? What are sales goals? How long are your delivery cycles? What are your objectives: To secure new clients, increase average order size, add margin? Do you want to open a vertical market, new products? Each answer will help you design a compensation plan tailored to your company's specific needs.
Finally, take a hard look at your sales organization. For instance, do you need to attract new representatives to make C-level sales calls? Do you want to retain employees to build a long-term, client-based sales team, or is rapid turnover acceptable?
Of course, you can reduce selling costs and enhance profits by capping sales compensation, but in the long run you get what you pay for. If you hire good salespeople and compensate them poorly, expect high turnover, which comes with costs of its own. A sales plan that compensates strong performance will allow you to attract the best salespeople—and retain them as well.
Calculating the cost of sales (CoS) is an important part of planning a compensation package. For a quick CoS ratio, simply take an individual's salary, plus commissions earned at 100 percent of quota, and potential bonus opportunities; then divide by that person's revenues to obtain the percentage. A more sophisticated approach adds in marketing expenses, corporate overhead, direct expenses paid to the salesperson and expenses related to sales support costs.
Compensation plans vary widely, but all should include "accelerators"—that is, increased commission rates for employees who achieve target levels.
There are many variations and we recommend multiple combinations based upon the objectives of the organization.
Here are a few final considerations to keep in mind as you customize your compensation plan:
No question about it: Creating an effective sales compensation plan is hard work, but the effort typically pays off in both improved sales performance and achievement of your corporate goals.
Ken Thoreson “operationalizes” sales management systems and processes that pull revenue out of the doldrums into the fresh zone. During the past 16 years, his consulting, advisory, and platform services have illuminated, motivated, and rejuvenated the sales efforts for partners throughout the world. His book Leading High Performance Sales Teams is a best-seller, and his fifth book, “JAMMED! for New Sales Managers" was published this summer. Ken provides keynotes, consulting services and products designed to improve business performance.