An optimally designed sales compensation plan, perhaps the biggest lever of sales-performance management, can function as a powerful coach to carry a sales force to and through objectives. A sales plan can also become anxiety-inducing if sales rep performance runs rampant, dragging compensation costs, and thus diluting revenues. It’s a see-saw of sorts – motivating at times, controlling at times, and efficiency tends to get pushed aside.
The Role of Sales Compensation Plans
Sales compensation plans are introduced to recruit, reward and retain sales people for achieving their targets and promoting the company’s product. Generally, the sales compensation plans are a combination of base salary, commissions and bonuses Without any delay, lets get started to review the sample explanatory essay.
‘The average base salary for a Sales Associate is normally set between $60,000 to $70,000 per annum. Additionally, an extra 10% commission is given on the sales above $500,000 per annum. Moreover, bonuses are included when some specific targets are achieved.
Another factor referring to the sales compensation plans is the commission paid to the sales people in accordance with their sales and other activities. Roughly, 10% percentage of the overall income is awarded in this case. If the salesperson meets the 80% sales mark, he gets the 10% commission reward.
It’s also motivated by the goal of getting the sales team to squeeze just a little more product out of existing resources, and a little more revenue from those products. The danger of the disease, however, is that such plans have the power not only to raise revenue but to raise costs as well. Good compensation design is all about creating plans that properly incentivise the sales team toward the company’s financial ends.
Balancing Incentives and Costs
1. Align Compensation with Business Objectives
Another is that a good sales compensation plan is always attuned to the business strategy; if the general business goal is to pick up share in new markets, then shared rewards need to reflect effort at acquiring new business, not sales volumes.
For instance, a software firm seeking to scale up could offer an increased commission for new business – 15 per cent on sales to new clients rather than a 10 per cent commission on repeat business – so that the sales force would actually work harder toward the company’s strategic goals.
2. Implement Tiered Commission Structures
Most importantly for a client’s wellbeing, tiered commission schedules can work; they can put incentives in tension with costs, because they can structure commissions so that the client’s incentive to do more business grows progressively as more business is done, while the total of the business’s commissions tab that show up on the client’s final bill also grows progressively (albeit at a slower rate).
For example, a telecommunications business could use the following pay-by-results framework: 5 per cent commission on sales up to $100,000; 7 per cent on sales above $100,000 up to $250,000; and 10 per cent on all sales above $250,000.
3. Cap Commission Payouts
Controlling payout costs is another reason for capping commissions. Companies figure they want to pay their top people well. But if you don’t cap incentives, they can get really expensive.
For example, a pharmaceutical company caps quarterly commissions at $50,000: it wants to recognise and reward superior performers, but not to see its compensation costs spiral ever upward.
4. Regular Review and Adjustment of Compensation Plans
Market conditions and business objectives change, and therefore, the sales compensation plan needs to be revisited and updated from time to time, in order to keep the process aligned with the current business plan and financial metrics.
Example: Drawing on the example of the electronic company above, we provide a simple text for an electronic company to run a sales compensation review. It could go like this: Once a year, our sales compensation plan is evaluated for changes (such as variable pay rate, performance goals, etc), the goal is to correct what happened last year and modify the plan to make sure product consumers do not buy anymore than our company would like.
The importance of motivating sales organisations to perform, on the one hand, and keeping organisational expense budgets low to add profits, on the other hand, can both be aligned only when their respective objectives are achieved – in other words, with good sales performance and a healthy balance sheet. This means that it is the duty of compensation architects to make sure that their compensation plans are aligned with business goals; to use tiered commission plans; to cap sales incentive payments; and to revisit their sales compensation plan often. In this fashion, organisations will be able to deliver on the promise of responsible sales performance.
For example, to win the fiercely competitive war for salesforce time and attention, the corporation of today must incentivise right; or, to put it differently, they must incentivise well – that is, to survive, grow and thrive in a long-term fashion, and to be economically profitable. Sales compensation plans, when carefully crafted to serve business objectives, can be the catalyst of growth, the means by which a company achieves its goals, the engine that pumps up the profit margins.
