The Perfect Fit
The Best Sales Compensation Plans Are Tailored To Your Needs
By Ken Thoreson
Contributing Writer, Minnesota Technology magazine

When it comes to paying sales people, there is no one-size-fits-all costume. Some companies pay commission based on sales while others blend in stock options, incentives and special bonus plans. The options abound, yet one common thread runs through all successful sales compensation plans: truly understanding the goals of the company. That's because a sales compensation plan can have tremendous impact on achieving not only sales goals but also the overall goals of the corporation.

Sizing It Up

Sales managers must consider many variables when tailoring a compensation plan including new product introductions, emphasis on a particular product, personnel recruitment and customer service. Compensation plans must take into consideration the overall industry and the company's position. Are your sales goals orders- or bookings-based? Do you have long delivery cycles? Are you a start-up? Are your objectives to secure new clients, increase average order size, to reduce selling expenses? Do you want to open new lines, focus on the most profitable products or increase certain activities such as cold calling? The best methods of compensation depend on your answers.

In addition, your sales leader also needs to closely consider the sales team. Do you need to attract new sales people with characteristics that differ from than the existing team? Do you want to retain sales people to build a long-term client-based sales organization or is turnover 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.

Understanding Cost of Sales

Calculating the cost of sales (COS) is an important part of planning a compensation package. For a quick COS ratio, simply take the salary plus commissions earned and potential bonus opportunities; divide by the revenue associated with that person. 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 COS as it relates to your profit margin. Determining the COS that your company finds acceptable can help fine-tune your commission plan. Use your financial officer to nail down elusive numbers and to confirm that the plan meet the financial objectives of the organization.

Examining the Styles

Compensation plans can be based on regular periodic results and most include several measurements of revenue and profitability. All compensation plans should include "accelerators" such as increased commission rate when sales people achieve target levels. Here are a few examples. Imagine these in your sales department:

  • 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 a 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.
Choosing the Best Match

With these compensation options in mind, let's look at some scenarios to see what type of plan 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 a 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.Remember that compensation includes not just salary or commission, but the overall package of benefits. A good package may include profit sharing, stock options, vacation, insurance and other company-sponsored plans.
Tailoring Tips

With your goals and options in mind, here are some final points to consider when customizing your plan:
  • 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.
  • New organizations in new markets need compensation plans that reflect the volatile environment, usually with higher-than-average base pay.
  • 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.
  • 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 still protect the company. This also protects the salesperson from unrealistic programs that limit their income opportunity.
  • 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.
  • 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. Taking time to create an effective plan that fits properly pays off in earned commission dollars and achieved corporate goals.

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