How Effective is Your Sales Compensation Plan?

How Effective is Your Sales Compensation Plan?

We are often asked to review sales compensation plans.  An effective sales compensation plan is a delicate mix of incentive, motivation and fairness.  A plan with a poor design can not only hurt morale, but also inhibit successful hiring.  Here are some critical factors in designing (or re-designing) your sales compensation plan.

Apply the K.I.S.S. principle (Keep It Simple Stupid).  We see way too many plans that most of the salespeople don’t understand.  Therefore, the plan becomes ineffective.

Design the plan to meet your company objectives.  If you are looking for more new business, then reward that activity with a higher commission.  If you want to grow one segment of your business over another, then reward that activity.

Pay for sales related activities.  Salespeople sell, engineers engineer and accountants collect money.  Don’t have your salespeople performing non sales related activities and then complain that sales goals are not met.

Pay promptly.  Tie reward to performance with minimum delay.  It’s okay to pay commissions after receipt of payment from your customer.  But, pay it within 30 days and not 3 months.

Implement some level of base salary.  If you hire a new salesperson as an employee make some portion of the compensation a base salary.  A base salary gives license to provide direction.  If you want to pay commission only, then retain an independent manufacturer’s representative.

Do not let a “draw against commission” run a muck.  If you have some salespeople “in the hole” more than 6 or 9 months of draw; you have a management problem not a compensation problem.  If salespeople are not performing, replace.  No compensation plan will make a poor salesperson better.

Check around your industry and your marketplace.  Maintain a competitive compensation plan to retain and find good salespeople.  If you pay less than a competitive wage, you can expect less than spectacular results.

Review your compensation plans annually and adjust as needed.  There is no intrinsic benefit to a plan that originated in 1948.

Not everyone is equal.  Salespeople differ in experience, motivation and talent.  There is no reason to pay every salesperson the same.  Just make sure the plans are fair.

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Keep these tips in mind when it comes time to review your sales compensation plan. Every business is a little different and has unique goals and circumstances.  A fair, competitive and simple comp plan, however, is the common element to drive sales.