Design Effective Sales Compensation Plans

Design Effective Sales Compensation Plans

Why do people decide to pursue sales as a career? A few people who are not salespeople respond “because they can’t do anything else.”

The most frequently requested answer to salespeople most salespeople is “the money.” The majority of occupations require years of studying in order to be able to call themselves such as Architect, Chartered Accountant Civil Engineer Barrister, Solicitor or Doctor. After they have been certified, these professionals need to establish their expertise and credibility before they are able to earn the high salaries that come with their profession.

Salespeople do not have such obstacles to entry, yet those who succeed typically have similar incomes. Many are able to evaluate their earnings against the top Barristers. Earnings of more than 250,000 pounds sterling are not unusual in rapidly growing industries.

What is the reason salespeople are paid such a high amount? Most likely, it’s because businesses find that salespeople generate business more effectively than other ways. The majority of employers reward success in sales with commissions since it is effective. Does the commission-earners deserve it?

Salespeople, on average, contribute to the jobs of 27 other employees in a study. When you consider the suppliers who are employed by them, the study has some credence. It’s not saying that sales professionals can’t do their job without these 27 individuals, but if the sales were not made, the jobs wouldn’t be there.

Commission plans always draw criticism from both the ones who gain as well as those who do not. Jeffrey Pfeffer of Stanford University’s Graduate School of Business extols the virtues of not messing with the pay system. Overall, it’s an excellent suggestion. When it comes to commission plans, it’s difficult to comply with.

The majority of schemes begin on basic principles, and they are then subject to constant modification when circumstances change, or unwelcome negative side effects are discovered. Poorly thought-out or unplanned plans require more modifications.

Let’s look at the possibilities from a managerial standpoint. Commission motivated by commissions gives the salespeople the things they desire to feel a sense of the ability to control their own destiny and non-judgmental feedback on their performance. Are we to be shocked by their actions in line with their compensation program and personal requirements instead of responding to directives from management?

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The changing strategic objectives trigger adjustments to commission plans. The idea of directing salespeople to concentrate on services will not have any effect since their primary source of earnings is derived from the sales of products. Simple solutions in the form of incentives can only cause more problems than they did in the company I worked for.

The additional incentives, which were intended to draw the attention of sales forces for low-end, high-volume items, increased the cost of payroll to over budget but did not have the desired impact.

A variety of factors influence sales behavior and motivation. The mixture of base salary and performance pay, the time frame for measuring, the date at which commissions are paid, method of measuring and accelerators, the level at which the bar for ‘on target’ is set, and the capping all contribute to. The inconsistency of the payment levels for various products and services creates a new degree of the complex. Commission plan design deserves much greater attention than it typically receives.

Blend of base pay and performance pay

Attention is focused on winning immediate business when the proportion of commission to salary rises. The aggressive accelerators increase the importance of achieving or exceeding each sales goal. Similar to water, people who are driven by this mindset will always locate the fastest path into the hill. The desire to gain is a focus for the mind. The longer-term perspective, such as the developments in the market, or even the development of new products, can be ignored unless they provide clearly defined upside earning opportunities. Promoting team behavior in such circumstances is similar to trying to move water up a hill.

A high base salary with low commissions encourages long-term thinking and good corporate citizenship. The reputation and relations of the company are more well-maintained. Strategic sales opportunities get greater attention. In my first sales job, bonuses based on the company’s performance as well as individual earnings provided team-based motivation. Salespeople were more likely to go to customers with no immediate need to make. For larger businesses, this method can divert the focus away from revenue and profit targets to being believed to be doing what is right.

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The measurement time

Orders tend to get clogged into a mass at the conclusion of measurement times. Salespeople tend to focus on their current business and do not pay attention to prospecting. The pressure to close the business on time to meet the measurement period’s end dates forces pipeline tasks to the second position. In contrast, sales goals for weekly or monthly periods can result in lower value orders, as salespeople increasingly focus on opportunities that have shorter sales time frames.

Annual, semi-annual, or quarterly measurements can cause long famines and bigger orders. Activity targets are intended to increase the flow of orders but are under the control of the compensation program and are often ignored or get lip service. Affixing compensation to activity targets could increase the likelihood of manipulation.

When they receive their compensation

The payment of commissions on orders can cause salespeople to rush onto their next project and decreases their enthusiasm for execution and delivery.

A delay in payment till the customer is able to pay disconnects the success of sales with the commission, reducing the commission plan. In some schemes, salespeople may not get the commission earned from sales for a period of six months or more.

In my first days at Sun Microsystems, many of us were spending a significant amount of time looking over incomprehensible commission statements as well as examining paychecks. We also got engaged in collecting outstanding debts.

Like you’d think, such situations work against the goals for commission schemes. It was a blessing for sales personnel, and also for Sun, the plan was enhanced.

The measurement method

The concept of performance pay based on profits steers sales staff to offer any product or service that has the highest profit margin regardless of the management’s intentions. Distributors and resellers, this is advantageous in providing continuous feedback on trends in the marketplace and opportunities. This also helps in reducing the costs of sales.

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For larger businesses, it can hinder the marketing strategy. The commission paid on revenue is less the interest on the price that is paid and aids in increasing the market and also strategic clients. On the other hand, profits margins are more difficult to manage.

Accelerators

Variation in the value of commission based on the performance of salespeople pushes them to work harder in the event that the target number is perceived as being within reach or even achieved. This could result in increased cost pressure from the salesperson so that they can purchase business forward.

Accelerators can also trigger the practice of sandbagging. If a salesperson believes that the desired goal of the accelerated commission rate is not achievable, the salesperson will likely sandbag in order to keep orders in mind for the next time. Accelerators generally increase motivation, sales, as well as profits. Accelerators can be difficult to plan for if more than the anticipated percentage of salespeople earn an increased commission.

The clarity of your goals, careful evaluation, consultation, and testing are vital to creating even the most basic commission plans.

If the responsibility falls on you, take on a sarcastic attitude and imagine that you are an individual who is receiving. Consider how the proposed plan or change will affect your income and actions. Have your colleagues take the same approach. Invite your sales personnel to provide you with feedback. Request your accountant or director of finance to find holes in your imagined plans before they’re released.

Resolving any mistakes made following the time a compensation plan is released is often costly. Salespeople have committed to targets in accordance with the published compensation plan. If changes could result in lower earnings, they’ll cause a loss of motivation.

Planning effort yields dividends in sales outcomes and reduces the requirement for managerial intervention. When sales compensation is in need of adjustment, keep in mind the 1 10 – 100 rule. The first time right is only one time. The second time is ten times. The third time right costs 100 times.