How to choose a sales compensation plan to meet your business goals

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Sales compensation is the money that a company pays to its salespeople. The purpose of sales compensation is to motivate salespeople to sell more. There are many ways to design a sales compensation plan, but the most important thing is that it should be based on what you want it to achieve.

The boss wants the sales team to make a lot of money for the company by selling products and developing new customers. They also want the sales team to work well with each other and do their administrative tasks well.

Salary plus commission

A salary plus commission is a way to get paid that combines a salary (a set amount of money you get every week or month) with a commission (a percentage of the money you make from selling things). This way, you get some money no matter what, but you also have an incentive to work hard and sell a lot.

Some people might think that if we pay them a commission, they don't have to work as hard at other things, but that's not true. You are still expected to work hard at everything, even if you are being paid a commission.

Salary Plus Commission, Plus Bonus

This means that someone gets paid a base salary, plus extra money for every sale they make, plus even more money if they reach their sales goals.

It would be nice if selling more products or developing new customers was enough to motivate salespeople. Most people need an extra incentive, and this is where management and compensation can work together.

You could institute a short-term bonus program to increase customers, which would mean identifying 100 "suspects" and running each of them through a defined series of contact activities. I would pay a bonus for this in order to manage on the front end of the sales cycle instead of the back end. Also, to address increasing sales year to year, I suggest a full-year, quota-based bonus opportunity. This would be a significant bonus that would provide a full year's worth of motivational pull.

Sizing the Components

So how do you put all of this together to create a highly effective compensation plan? Let's start with a set of assumptions: you are hiring a new salesperson. You can reasonably expect $350,000 in sales volume from your new salesperson in his/her first full year on the job. Your average gross profit on that volume will be 40%. You will share 30% of that gross profit with your salesperson.

This means that you will pay your salesperson $105,000 in commissions in his/her first year ($350,000 x 40% x 30%).

Let's do some quick math to see how much this job is worth. 40% of $350,000 equals $140,000 of gross profit, and 30% of that equals $42,000 in compensation. Please note that I'm not saying that $350,000 is reasonable for every salesperson. I'm not saying you should operate at 40% gross profit, be willing to share 30% of it, or that $42,000 is the right amount to pay a salesperson. I'm just trying to show you how to work the math. Please also note that this analysis is where you start this process. The two most pertinent questions in compensation planning are how much volume/profit can I reasonably expect, and how much am I willing to pay for it?

This job is worth $42,000 in compensation. If you want to earn $350,000 per year, and you will share 30% of your gross profit with your employer, then you need to generate $1,167,000 in gross profit. To do this, you need to sell $2,916,667 worth of products or services.

The person wants to be paid $42,000 in return for $350,000 in sales. They could be paid a salary of $42,000, or straight commission at 12%, but a better approach would be a salary of $1,000 per month, seven percent commission, two short-term bonus opportunities paying $1,000 each and a $3,500 quota-based, full-year bonus opportunity.

Revenue Sharing vs Profit Sharing

There are two ways that companies can share their profits with employees: revenue sharing and profit-sharing. With revenue sharing, employees receive a percentage of the company's total revenue. With profit-sharing, employees receive a percentage of the company's total profit.

For example, if a salesperson is competing for an order for window clings and the full-markup price is $1,000, but the production cost - time and materials - is only $600, then at seven per cent straight commission based on gross sales, if the salesperson sells the order at full price, he/she earns $70 and you NET $330. However, if the salesperson discounts to $900, then the commission only drops by 10% to $63, while your share drops by almost 30% to $237. Discounting further only increases this disparity.

Salary vs Draw

A draw is when you allow a salesperson to take the difference between what they actually earn in salary plus commission and $3,000 per month. This is essentially a no-interest loan, with future earnings serving as collateral.

The company pays the salesperson a monthly amount, which is a percentage of what the salesperson earned the previous year. If the salesperson doesn't make enough sales to cover the monthly amount, they don't get paid anything extra that month.

Multiple Plans

When a salesperson is operating on a different compensation plan than the other salespeople in the company, it creates an environment of competitiveness and mistrust. This ultimately hurts the company's bottom line.

It is not a good idea to let the salesperson decide their own compensation because they may exaggerate their sales and earnings. The two most important questions when deciding compensation are how much volume/profit can be expected, and how much the company will pay for it. The goal should be profit, not just volume. Different salespeople will have different motivational triggers, and different compensation wants and needs. As long as each plan is clear and effective, compensation can improve sales performance.

Not that your pay scale should be the highest in the market, but it should be in line with the competition. Assess your organization's strengths and weaknesses. The next step is to conduct a self-assessment to identify your organization's strengths and weaknesses. Most times, the organization's strengths will be the same attributes that the competition is looking for, but they won't have them. As you identify your organization's core values and strengths, you'll also want to identify the weaknesses. These may be opportunities for improvement that will help you in your market analysis. The self-assessment process is not just about looking at the organization's current strengths and weaknesses. It is also about what you see as your strengths and weaknesses in the future. You need to look at your ability to compete in the future, and the ability to attract and keep key personnel.

As you conduct your self-analysis, you'll want to answer the following questions:

· What are the organization's core values?

· What is the company's vision for the future?

· What are the company's strengths?

· What are the company's weaknesses?

· How does the company compare with the competition?

Your focus on this goal would include ensuring that your planners and schedulers are loading the production lines with the right mix of jobs and that they have the information they need to keep the jobs moving. You would also want to monitor the progress of each job through the shop and take corrective action when jobs fall behind schedule.

Communicate the Plan to Employees Once you have designed the plan, it is important to communicate it to your employees. They need to understand what the goals are and how they will be measured. They also need to know how the plan works and how they can qualify for the incentives. Many companies make the mistake of designing a brilliant plan and then not communicating it effectively to their employees. As a result, they do not motivate the employees to work toward the goals and the company does not realize the benefits of the plan.

Train Employees on the Plan besides communicating the plan to employees, it is important to train them on how it works. Employees need to understand how they can qualify for the incentives and what they need to do to earn them. Many companies make the mistake of assuming that employees will automatically know how to work under the new incentive plan. This is often.

The second reason for failure is that managers don’t hold employees accountable. They need to explain why the plan is important and why it’s important to meet the performance criteria that were selected. The plan must be tied to individual performance reviews.

When you are measuring the performance results, you must make sure that you are looking at the right data, that the numbers are accurate, and that you are using the data to improve performance. In some organizations, managers just look at the numbers and get upset because the numbers don’t meet the performance criteria. That’s a mistake. If you don’t correct the problem, you will continue to have the same poor results.

If you can’t correct the problem, you need to look at what’s causing the poor performance. Look at the processes. You may need to change the process or the performance criteria. You may need to change the way you measure the results. The point is that you need to use the data to improve performance, not just to get upset.

Conclusion

When designing an incentive program, there are a few key points to keep in mind in order to make sure the program is successful. First, the plan must be fair to employees. It must be both internally fair and externally competitive. Second, the reward must be large enough to be discernible and valid for employees.

The goals must be easily understood and communicated. Third, the program must deliver what is promised, on time and fairly. Finally, the timing of incentive payments should be as close as possible to the qualifying event. This increases the motivational value of the plan to employees as well.

Being honest about the business and where it is financially. It also requires setting goals and communicating these to employees regularly.

What do you think? Which compensation plan have you chosen and why? What would you add to this list? Please share your thoughts in the comments below.

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