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Building a Sales Compensation Plan That Works

Jack P. Smith, Principal, Collaborative Strategies, Inc.

Just as you cannot find a university in the United States that offers a degree in sales management, the same holds true for finding a consulting firm that specializes in sales compensation planning and design. They simply don’t exist.

However, there are some key issues entrepreneurs can consider and a few basic steps to follow to help ensure a smooth planning process and, most important, a resulting sales compensation plan that is effective for their company.

To begin, it can help to think about the planning process into two parts: The foundation and the design. The foundation looks at those characteristics specific to your company and sales force that have the potential to positively impact sales; the design refers to the actual structure and components of the plan that are built upon the foundation.

The Foundation

Every organization is different, so it makes sense that each sales compensation plan, while best kept simple, will also differ slightly from one another in order to be the most effective.

A good foundation starts with the answers to two questions:

  • What results under the salesperson’s control have the greatest potential for growing profitable revenue?
  • What approach provides the best opportunity for self-motivation within your organization? (See Table 1 Motivation Quadrants in Related media.)

While the questions may seem simple enough, often the answers are not.

Results

The very first step is to identify those one or two results that are most critical to producing sustained growth in profitable revenue. A list to consider would include:

  • Cooperation with and facilitation of internal resources to grow profitable revenue;
  • Maintaining excellent records (e.g., Microsoft CRM, Salesforce.com);
  • Conversion of qualified and targeted projects;
  • New customer development;
  • Existing customer growth;

Self-Motivation

Your company or organization has its own culture. And while everyone is different, certain approaches will work better than others in your environment. For the purpose of sales compensation planning, it helps to determine which Motivation Quadrant (see Table 1 in Related media) best fits your sales force and organization.

The Design

With a foundation based on the identification of your results and Motivation Quadrant you can now begin to design and construct the elements of your sales compensation plan. Note: This approach uses bonuses, focusing more on behavior and results, as opposed to using commissions, which tend to focus a sales-person salary on dollars sold.

The design has three key elements: 1) base salary and bonus guidelines; 2) supplemental bonus; and 3) term.

Base Salary and Bonus Guidelines

Before jumping into the design of the base salary and bonus program, you must first select the correct Motivational Quandrant. What works for the "Team Player” (Quandrant 2) will likely not work for the "Entrepreneur” (Quandrant 4). Picture how an independent sales professional whose results depend mostly on their individual skills and willingness to work hard would react if you compensated them based solely on the performance of the team. Picking the appropriate Motivational Quandrant is a critical success factor of any compensation program design.

After selecting the Motivational Quandrant, follow the respective Base and Bonus Guidelines as indicated in Table 2 (Related media).

Additional Bonus Guidelines

  • Bonuses for all Motivation Quadrants, with the exception of quadrant four, should be contingent upon the company meeting a minimum profit threshold.
  • Bonuses need to be tied to profit-margin dollars and/or profit-margin percentage or a close surrogate.
  • Bonuses need to be calculated and paid (if earned) a minimum of three times per year. (Six to twelve times annually is ideal.)
  • Keep the calculations simple – sales professionals need to be able to calculate bonuses in their heads.

Supplemental Bonus

It’s a good idea to use a supplemental bonus to award achievements toward the desired results identified earlier (e.g., maintaining excellent records, internal cooperation, etc.).

Because of the essential need for both new, qualified customers (your life blood), and new, successful direct sales people, we strongly recommend that a supplemental bonus be paid for achieving success at either: new qualified customer development or new successful salesperson recruiting and development.

(Note: the supplemental commission can be reviewed and paid semi-annually or annually.)

Term

  • The shelf life of any sales compensation plan is approximately three years (one year for start-up or fast-growing businesses).
  • The sales compensation plan needs to be reviewed regularly, to assure its effectiveness and alignment with the organization’s objectives.

Sales Compensation Planning Template

Now you are ready to begin building a sales compensation plan that really works. Use Table 3 found in Related media to help guide you through the steps.

Successfully implementing changes and/or adjustments to a sales commission plan requires a high level of proactive communication, clarity, and persuasiveness. There should be no surprises; surprises can be costly. Rather, management should engage top performers individually in a dialogue to receive their input on potential changes, while at the same time reinforcing the need for achieving acceptable profit levels and the rationale behind any changes to the plan.

Planning, designing, and implementing a sales compensation plan may seem a daunting task to entrepreneurial companies with so much on their plates. Yet it is no doubt one of the most critical elements to their continued success. By defining the key results and following a few, simple steps, your organization can get started on a plan that supports not only a motivated, successful sales force, but also a healthy, growing bottom line.

© 2006 Jack P.Smith. All rights reserved.

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