How to Create Sales Force Compensation Systems that Achieves the Right Results
The two broad elements of a sales force compensation system are base salary and incentives, such as commissions on revenue or profit margins, bonuses, and/or stock options. Generally, incentives constitute about 30 to 50 percent of the total compensation package, depending on factors such as the stage of the product life cycle and the profitability of the product. Regardless of the type and proportion of incentives, an overriding concern of many organizations is to ensure it motivates the sales force to demonstrate desired behavior. All other considerations notwithstanding, people primarily work for money and invest their time on what best suits their financial interests. A good sales compensation plan needs to understand and incorporate this fact.
Reward Both Performance and Results
Make sure the sales compensation plan rewards both performance and results. Link rewards to the sales staff complying with organizational systems and procedures as well as the extent to which they work to delight the customer. Develop a specific plan for each sales staff, incorporating both work methodology and targets including rewards for compliance. Make sure individual performance goals remain in alignment with the marketing campaign and overall organizational-level goals and targets. For instance, if the organization plans to increase average sales revenue per customer, servicing existing customers should constitute desirable performance that attracts rewards. Similarly, provide time for a new salesperson to assimilate into the company environment, establish a sales territory, and learn about the product. Include parameters such as mastery of the business or territory, the ability and willingness to call on prospects, and product knowledge as elements of success. Mastery of such key elements invariably leads to results.
Judging solely on results may tempt the sales force to indulge in shortcuts and unethical methods, such as lying to customers, encroaching on another salesperson’s turf, and so on. Similarly, considering only performance and not results could lead to obsessions with doing things correctly but remaining oblivious to the purpose of doing such things, or opting to perform in easy territories with low sales potential.
Ensure sales compensation plans remain consistent across the board, with the entire team rewarded for the same set of objectives and behavior, even though specific targets may vary across employees and levels. Sales managers may be rewarded for identifying new markets, increases in popularity ratings for products, and for the performance of sales staff. On the other hand, sales staff may only receive direct commissions on sales. But, if sales managers try to push marketing activities geared towards increasing sales to existing customers because they are rewarded for increasing revenue and profitability per customer, while salespersons concentrate their energies at acquiring new customers and ignore existing customers because they are rewarded for bringing in new customers, the team will work at cross-purposes. The result is a dysfunctional organization.
In the example quoted, a good way to structure compensation is on increasing gradient sales, with salespersons compensated a certain amount for netting a new customer, and provided with a gradual increase in incentives as existing customers generate additional sales. Also, make sure to reward specific duties for which the employee remains accountable. For instance, if rewards depend on sales, the sales territory becomes crucial. In such cases, link rewards to sales not just for the sales staff, but also for the sales manager who chooses the sales territory for the sales staff in the first place.
The best sales force compensation systems are flexible enough to resolve any critical issues that arise. Hold periodic reviews to judge not just performance but also review the effectiveness of the compensation plans. Assess whether the plans serve the purpose of attaining sales targets and providing the desired compensation for employees. For instance, a common perception holds that a flat commission basis, where the more the employee sells, the higher the commission, motivates people to sell more. The reality is that such plans motivate only a handful of overachievers. The vast majority stop selling after reaching a level at which they find income sufficient and such plans cease to motivate thereafter.
Make changes as necessary, but make sure employees understand this concept upfront. Making arbitrary changes de-motivates and does more harm than good. Effective communication that convinces employees of the need for change, and describes how the change in compensation plans would benefit them holds the key to ensuring such changes serve the desired purpose.
History shows that the right incentives modify behavior. Almost 12 percent of the total workforce in the United States find full-time employment in various sales occupations, making the need to structure compensation plans that motivate them crucial not just for the company, but for the overall economy in general.
- Yang, Wei-Tzen. “A Practical Approach to Sales Force Compensation Plan in a Small Business.”The Journal of Entrepreneurship. September 1996 vol. 5 no. 2 209-222. Retrieved from https://joe.sagepub.com/content/5/2/209.abstract on May 25, 2011.
- Salz, Lee. “Compensate to Motivate Your Sales Team.” https://www.leadershiparticles.net/Article/Compensate-to-Motivate-Your-Sales-Team/13560. Retrieved May 25, 2011.
- “Sales Compensation.” https://www.salary.com/advice/layouthtmls/advl_display_Cat14_Ser6_Par23.html. Retrieved May 25, 2011.
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