Compensation is a vexing topic because there are few rules that apply. There are many options when it comes to designing a compensation plan. Because the best ones mirror the culture of the employer, employers should establish a compensation philosophy, and a plan that is structured in line with what they want their salespeople to achieve.
Recipe for success
A mix between basic salary, commission and incentives is the best recipe. It’s how you put it all together that counts. There will be instances where a substantial fixed salary is required because circumstances make it difficult to measure the results of your salespeople’s efforts.
In structuring the compensation plan, determine what type of salesperson you are dealing with. Some are consultative and the results of their efforts may only come to bear some years down the line. Others are transactional.
More like order takers, they sell high volumes of product. In the first instance, marketing strategy plays a minor role. In the second, marketing plays a much bigger role in moving products than the salesperson actually does. See how the compensation structures here need to be different? The transactional salesperson should earn more of a salary for ‘doing the work’. Incentives can be used to drive particular products or promotions.
The consultative salesperson must also have their costs covered, but should be compensated handsomely when a strategic breakthrough has been achieved. Strategic account managers are highly qualified in their particular area of expertise. They have experience, and they are articulate, intelligent and presentable. Those who are able to generate more sales than their colleagues should obviously get super compensation.
Encouraging the right behaviour
It’s about finding the right calibre of people and creating a structured compensation package that encourages them to act and behave in a certain way for the benefit of the business. If the package is too highly commission-based, people who have family and financial commitments will find it difficult to make it through hard times. On the other hand, a fixed salary provides no incentive for anyone to work harder.
There’s an art to paying a salary that attracts good people and then providing an incentive that means there’s no ceiling on what that individual can earn. Remember, if you cap the commission, they will work only as hard as they must to each that figure and no more.
Making the calculations
It’s important to ensure that you have calculated the business’s profit margins correctly so that you can make a call on how much of that you are prepared to give away. You also need to define which products to sell, which are most profitable and which should be encouraged over others. You want to make it worthwhile to sell products that have a higher margin. All this information has to be fed into the compensation plan if you want it to drive the correct behaviour.
Consider also, what phase the business is in, and what phase the product is in. You may want to change compensation related to more mature products versus brand new ones. You may want to distinguish between high- and low-margin products. You may also want to tie the plan to your strategy so that bringing in a brand new account comes with a higher incentive, while repeat business is rewarded differently.
Testing and monitoring
Compensation is one of the elements that can either drive or stymie the sales team, and should therefore not be changed frequently or without due diligence. But that does not mean it must be cast in stone. On the contrary, compensation should be forever evolving. Change the plan if there are compelling reasons for doing so.
Due diligence is important because you should understand the ramifications of the change. It may sound like a good idea, but you need to take the time to analyse the who, what, when, where, why and how. Any proposed changes should be put through a series of probability tests. Sales compensation plans must be thoroughly evaluated before being implemented. Once you know what is workable, run all the ‘what ifs’. Too many compensation plans fail and do not achieve the desired result because the sales director has not taken into account the best and worst case scenarios. You need to know what change in behaviour the new compensation plan will enable, and what the results will be. Run hypothetical sales results and the corresponding compensation.
They must also be closely monitored once in place. Miscalculate and it could cost you far more than you anticipate. Having to change an existing plan can have far-reaching consequences and may demotivate your team, leaving you with a disaster on your hands.
Keep it simple
The motivation value of a sales compensation plan will decrease as its complexity increases. If you have lots of calculations and complex commission structures, noone will know what to expect when. Keep it simple and clear and ensure everyone understands it.
Ask these questions:
- What are the business goals?
- What market are you selling to and how easy or complex is the sale?
- How valuable is the product? Is it commoditised or not?
- How long is the sales cycle?
- What type of salesperson do you need to do the job properly?
- What can the business afford to spend on compensation?