Sales Force Compensation: Tailoring is Key

Sales force compensation options are plentiful—commission based on sales, blend of stock options, incentives and special bonus plans. Successful plans are always aligned to fit the overall goals of the company.

Threads
The list of variables to consider in a compensation plan include: new product introductions, product emphasis (new, most profitable), personnel recruitment goals and customer service, overall industry and the company’s position, orders vs. bookings, delivery cycle length, long delivery cycle, start-up vs. established, new client objectives, average order size goal, selling expense reduction, critical activities (cold calling, customer touch points). The best methods of compensation depend on assessment of these areas.

There are also issues to consider with respect to the composition of the sales team. Do you need to attract new sales people with characteristics that differ from the existing team? Do you want to retain sales people to build a long-term client-based sales organization or is turnover acceptable? How much turnover is acceptable? Holding down sales compensation may be a fast way to reduce selling costs and enhance profits, but in the long run, you get what you pay for. If you offer low levels of compensation, you may attract poor performing sales people. Similarly, if you hire good salespeople but compensate them poorly, turnover is high.

Cost of Sales
Calculating the cost of sales (COS) is an important part of planning a compensation package. For a quick COS ratio, simply add salary, commissions earned, and potential bonus opportunities; divide the total by the revenue associated with each salesperson. A more sophisticated approach adds in marketing expenses, corporate overhead, direct expenses paid to the salesperson and expenses related to sales support costs.

You must understand how COS relates to profit margin. Acceptable COS will help fine-tune a commission plan. The financial officer can help nail down elusive numbers and confirm that the plan meets the organization’s financial objectives.

Styles
Compensation plans can be based on regular, periodic results and most include several revenue and profitability metrics. All compensation plans should include "accelerators" such as increased commission rate when sales people achieve target levels. Here are a few examples:

Tiered Profit-Based Plans—Commission rates change as profit levels increase. These may be based on invoice, product or monthly averages.

Revenue Quota or Unit Placements Plans—Compensation is based on sheer volume achieved over the previous sales period or on a percentage of quota achieved.

Break Point Plans—Break points, or target levels, are based on attaining specified levels of production.

Balanced Plans—These include compensation for profit, revenue and account growth.
Customer Service and Customer Satisfaction—These plans are based on improvement as shown in customer surveys and account growth.

Third Party or Distribution Supported Sales Compensation—Most of these plans include a base salary with limited commission geared to revenue growth over previous periods.

Alteration
With these compensation options in mind, here are some scenarios matched to the type of plan that works best. If your company has high revenue growth objectives in a boom market with little competition, use Break Point plans or programs with higher base salaries and lower commission plans. An advantage is that strong sales skill may not be required.

If your company has a "protect and grow" revenue objective, slower growth and many competitors, use a profit-based plan and gear compensation to account growth with bonuses for new accounts.

If your company’s goal is to maintain revenue and focus on new account conversion programs, use a program focused on the percentage of growth or quota-based compensation. This scenario requires strong sales compensation with quarterly bonus emphasis on revenue gains from new business.

Compensation isn’t limited to salary and commission, but includes the overall package of benefits. A good package may include profit sharing, stock options, vacation, insurance and other company-sponsored plans.

Guideines
With your goals and options in mind, here are some final points to consider when customizing your plan:
1. In new organizations where expanding within existing markets is the goal, your compensation plan will be dramatically different from that of a mature organization in same industry.
2. New organizations in new markets need compensation plans that reflect a volatile environment, usually with higher-than-average base pay.
3. A new company or a company in some form of transition or turnaround will experience a higher COS ratio. You may also need morale-building, team-building and open communication.
4. Organizations in transition or positioned for high growth should develop programs based upon a six-month period. This time length allows management to test theories, make adjustments and protect the company. This also protects the salesperson from unrealistic programs that limit their income opportunity.
5. Don’t ask salespeople to do too many things at once. Most compensation and incentive plans link rewards to only two or three aspects of job performance. They should be linked to the firm’s highest-priority sales and marketing objectives.
6. Get input from your sales team prior to the roll-out of the new plan. This will ensure their buy-in and raise questions and concerns to be ironed out.
Taking time to create an effective plan that fits properly pays off for salespeople in earned commissions and the organization in achieved corporate goals.