- The role of the sales person. The degree to which a sales person influences a customer's decision to buy a product or service should be at the top of your list in deciding whether to award commission or some type of compensation tied to the sale. In some industries, products sell themselves; in other industries, customers need to be courted and sold on a product or service. "If a sales person plays a critical role, you should recognize that in a fairly rich pay mix that drives their behaviors to be optimized in terms of sales," Stoeckmann says. Conversely, if you have a more collaborative sales process, involving the sales person, a business development person, an application engineer, etc., then you may want to lower the commission ratios. "If you have a number of people involved in the sales process, there should be less aggressive sales compensation," Stoeckmann says.
- The kind of selling. If you're driving new account sales, you may also consider being more aggressive in your pay mix and basing more on commission. "If you're trying to encourage a sales person to go after brand new accounts, you want them beating the bush," Stoeckmann says. "You want them to generate leads and follow up on them." At the same time, you may want to use a more conservative pay mix for growing sales to existing accounts. In addition, if your business has put a lot of focus on selling new products, you may also want to award higher commission for selling those new products than you do for selling older products.
- The sales cycle in your business. The type of business you're in and its sales cycle also should be factored into determining the pay mix. Companies that sell airplanes, such as Boeing or Airbus, have a long selling cycle during which business is booked as much as a decade in advance, Stoeckmann says. That may necessitate less focus on commission and more on steady pay. Conversely, if your business is selling paper, you may be making sales and landing new accounts multiple times in a given year. "Factors to consider would be whether you are selling systems versus commodities, long versus short selling, and complicated high-tech versus lower tech sales," Stoeckmann says.
While a high risk/reward incentive program may be necessary to attract your ideal sales person, you need to think through the possible (and sometimes unintended) consequences. "One factor often overlooked in determining the appropriate amount of at-risk pay is its impact on a customer's experience," Shimamoto says. "Customers who enter a car dealership or a clothing store can have very different experiences, based on a salesperson's incentive plan. A salesperson with too little incentive may not get up from behind the counter or make a compelling sales call. Conversely, a salesperson with a disproportionately high at-risk earnings opportunity may be too aggressive about closing the sale – a tactic that often backfires and turns off your customers."
Understanding the impact of at-risk earnings on their business can help companies better determine the level of risk/reward that motivates the sales force, while allowing them to guard the company's long-term interests and reputation.
Dig Deeper: What's Considered a Fair Sales Quota?
How to Set Up a Sales Compensation Plan: Implementing Your Plan
After devising a sales compensation plan, the more difficult task is putting it into practice. The factors involved in implementing your sales compensation plan include people, timing, analysis of results, and your ability as an organization to make changes if sales goals are not being met. The following are suggestions on how to make your sales compensation plan help you meet business goals.
- Timing. Target the time frame when you want to put this plan into practice. The ideal time is at the beginning of the first quarter of a New Year. In order to be ready to meet this target, you need to start planning in advance. Stoeckmann suggests that businesses start the process by August to be ready to take action Jan. 1. "If you find yourself in the first quarter or later and have a sales force not focused on the goal, you're in trouble," Stoeckmann says.
- Pull the right team together. A typical sales team should consist of a sales manager, someone from the field, a representative of human resources, another representative from finance, and someone from sales administration or operations. "You want to have the sales leadership set the perimeters up front," Stoeckmann says.
- Analyze the current plan. Let the team evaluate the current sales compensation plan to see if it is working. Have everyone at that table to do some analysis, Stoeckmann suggests. The sales managers should give feedback about how the plan is perceived by the sales force. Human resources should look at what other companies are doing. Finance can give feedback on the cost of sales and whether sales representatives are paying their way. The sales operations staff can report on whether the business is rewarding the right people. "Are your top revenue generators getting the top pay?" Stoeckmann asks. "You want to make sure that you're differentiating performance on behalf of the sales force so that high performers are earning the high pay."
- Determine whether you need to make changes. After the results of the analysis are clear, the team should give thought to whether the sales compensation plan needs to be updated – in terms of goals, quotas, or pay ratios. Updating the sales compensation plan in mid-stream is common in business today. "We've seen a fairly consistent trend that on average nearly two-thirds of organizations are changing their sales compensation plans each year," Stoeckman says, citing WorldatWork's latest survey. That change may come even more frequently when business cycles change. Business goals when the economy is moving into an upturn are different than when the economy is going through tough times.
Dig Deeper: How to Keep Your Sales Reps Motivated
