Does the “best” sales compensation solution exist? Sales leaders universally believe sales compensation drives sales outcomes. Easy enough. Is there a single best way to structure compensation plans? Unfortunately, not. Follow these five rules to configure the “best” sales compensation plan for your sales force.
Rule #1: Determine If the Job is a Producer or a Sales Representative.
There are two types of sellers: producers and sales representatives. Producers “own” their book of business and they “split” the revenue with the “house.” Examples include real estate agents, stockbrokers, traders and life insurance agents. Pay the industry commission rate—expand and contract headcount based on market activity. Sales representatives have a market target total compensation split into a base component and incentive opportunity with upside earning potential for exceptional performance. Select performance measures to match fiscal and sales objectives. Change annually as necessary. Use a calculated commission rate if territories are equal; use a bonus formula to reward quota achievement performance when territories are dissimilar in size
Rule #2: Use One Sales Compensation Plan per Job.
Sales compensation plans work best when the incentive plan “speaks” to the salesperson. This occurs when the target pay is competitive and performance measures align with their assigned duties. These two conditions justify the need for unique sales compensation plans per job. Use company sales compensation principles to keep the underlying framework the same for all jobs, but still accommodate unique target pay and performance measures per job.
Rule #3: Balance Risk and Reward.
After determining the target total compensation for the job, split this amount into a base salary and incentive element. A 70/30 pay mix allocates 70 percent of the target total compensation to base salary and 30 percent to target incentive. Pay mixes vary from 50/50 to 85/15. Use a more aggressive pay mix for “high influence” sales jobs and a less aggressive pay mix for “lower influence” sales jobs. Ensure that the best performers—the 90th percentile of performance—can earn three times the target incentive. Don’t cap the plan. Allow 10 percent to exceed this 3x upside earning target.
Rule #4: Pick the Right Measures.
Use no more than three measures. Ensure one of the measures is a sales production measure. Allocate the most incentive opportunity to the production measure. Do not select measures the salesperson cannot influence. Do not use incentive dollars to reward activities or compliance. Avoid using MBO (management by objectives) measures except for major account sellers.
Rule #5: Delineate Sales Crediting.
Pay sales personnel for successful sales persuasion. Do not pay for persuasion twice; pay upfront for recurring revenue but do not provide future credit when no additional persuasion is necessary. Credit supervisors with subordinate sales success. Carefully evaluate any “shared” or “double” crediting to ensure the seller is getting the proper allocation of sales credit results. Finally, sales credit timing should occur when the company no longer wants the seller to think about the order. The most common practice is to credit the sale at invoice/ship timing.
The “best” sales compensation plan rewards sales success, motivates sellers and follows these simple rules of job type, number of plans, risk/reward balance, the right measures and the right sales crediting.
David Cichelli, a Senior Vice President with the Alexander Group, Inc., contributes his knowledge and experience to a wide array of sales organizations. Widely recognized by national professional associations and trade publications for his work in linking sales compensation to management’s objectives, David is a frequent speaker on sales compensation topics and the author of Compensating the Sales Force.