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10 Tips to Creating an Attractive Sales Incentive Compensation Plan

written by: Christopher Kochan•edited by: Michele McDonough•updated: 5/27/2011

A powerful method of payment used to increase sales in many companies is a sales incentive compensation plan. Here are ten tips to follow when trying to create such a plan to increase dedication and motivation among employees in a company.

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    1. Create Fair Compensation

    The first step to creating an attractive sales incentive compensation plan is to provide employees with fair payment for their contributions to the company. The best way to build dedication and motivation through employees is by providing fair incentives, since employees want to properly compensated for their work.

    It's also not a bad idea to be somewhat generous with compensation, as long as the company can financially support higher employee payment. Many employees working by a sales incentive compensation plan base their self-satisfaction working with the company on how much they can actually earn through their work. By providing generous compensation, the employee will be more satisfied with this opportunity to earn money and become dedicated to seeing better results.

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    2. Make Compensation Significant to Total Wages

    If a sales incentive compensation plan is implemented in a company, the best practice is to make the payment based on sales a significant portion of the total wages employees earn. If the payments are a significant portion of the total wages employees earn, the employee will be more inclined to work harder to create positive results for the company, so they earn more money themselves.

    Having a sales compensation plan with a base wage and a small commission rate, the employee will simply work as hard as they believe their base wage compensates them. By having a higher commission rate with a small base wage, or even no base wage; the employee will work harder in order to earn their wages.

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    3. Provide More Frequent Payments

    sales incentive compensation plan Employees working under a sales incentive compensation plan base their work ethic off their performance results. If an employee has to work for a long period of time, such as a year, in order to see the fruits of their labor, they will not be very motivated to keep increasing their work ethic. However, if an employee is able to see the compensation from their work every month, or even every one or two weeks; they will be able to see their improvements more frequently and be motivated to work harder to see better results in the future.

    Having more frequent payments is a key element used in compensation plans to increase motivation and work ethic among employees.

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    4. Compensate Based on Financial Performance

    Every employee must be compensated based on the same measurement, or issues of favoring or jealousy between employees can easily begin. In order to equally measure every employee and prevent these problems, every employee must be compensated based on their financial performance. They must be able to directly affect this financial performance, so they feel in control of how much they get paid.

    Having a set commission rate per sale is usually one of the best ways to compensate employees based on financial performance, as the only way for the employees to earn more is to sell more.

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    5. Don't Rely on Money

    Although it is important to provide financial compensation to employees, it is not good for a company to only offer this one type of reward. Sometimes employees get competitive with one other and issues arise because some are earning more than others. In order to keep everyone working together in the company, implement some structure so that each department or the entire company can benefit if a financially-related goal is met.

    These rewards should NOT be directly money-related. Usually, these awards for a small business include a company party, a day off work, or even a short vacation.

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    6. Compensation Plan for All Employees

    One way to ensure the sales incentive compensation plan is well integrated into the company and can be used to motivate the entire company to increase productivity is to incorporate such a plan into the payment of every employee, from company executives to sales employees.

    Obviously, executives and managers will need to have a specialized plan, since they are not generally out in the field generating direct sales. Most compensation plans for executives are connected to increases in market share, profits, or other financial measurements they are directly affiliated with in the company.

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    7. Create Groups or Teams

    In order to promote communication between employees and overall employee participation within the company, a great idea is to create groups or teams who work together. By having groups or teams within a company, there will be competition to perform better than their co-workers. Each group will be able to work together and generate their financial performance based on a team effort, allowing strong performing employees to directly help other employees build their skills within the company.

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    8. Connect Compensation to the Company's Performance

    sales incentive compensation plan 2 When bonuses are rewarded to individual employees, departments, groups, teams or even the entire company, make sure to always connect the award to the specific performance in the company. This should be explained to the entire company through an announcement, in order to recognize them for their hard work and set an example to follow for the future.

    If a bonus is awarded, hold a meeting to explain why they were given the compensation, what the future strategy of the company will be, and how they can receive more awards in the future. Providing employees this information will give them an clear strategy to follow with a goal to reach, in order to be rewarded again.

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    9. Stick to the Plan

    One of the worst choices by managers or executives implementing a sales incentive compensation plan is to diverge from their constructed agreement. Many times, an executive can become too generous for high performing employees by giving multiple bonuses throughout the year, especially if they are generating good profits for the company.

    Of course implementing bonuses in your company can help motivate employees, but these should be given company wide and sparingly. Bonuses given repeatedly to the same high-performing employees can often times leave the employee wondering if they should be in a higher position or if they should be earning more. Sticking to the original compensation plan and treating every employee equally will be the best way to having a strong buy-in.

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    10. Don't Tweak the Plan Too Often

    Finally, don't tweak your sales incentive compensation plan or modify it too often. Obviously, every compensation plan should be updated from time to time; however, don't make a habit of altering the plan to reflect evey minor change in the company. Having a compensation plan that changes frequently may confuse employees or upset employees who have established personal goals they are trying to achieve. It's best to wait until the end of a calender or fiscal year in order to update a compensation plan.

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    Sources

    Information:

    • Thompson Jr., A. A., Strickland III, A. J., & Gamble, J. E. (2008). Managing internal operations. Crafting & Executing Strategy (pp. 388-413). New York, NY: McGraw-Hill Irwin.

    Images:

    1. Renjith Krishnan - http://www.freedigitalphotos.net/images/Money_g61-Time_Is_Money_Concept_p32291.html
    2. Smokedsalmon - http://www.freedigitalphotos.net/images/Money_g61-Moving_Coin_p33493.html

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