Published On: Wed, Apr 24th, 2019

What are the Secrets to Smart Sales Compensation?

Offering sales associates a fair compensation plan that motivates them to perform at or above expectation is an important goal for any sales organization. While most sales managers intuitively know this, they also realize their responsibility to keep profit margins as high as possible.

It can be a complicated juggling game. One of the most important things an organization can do when determining sales compensation for the upcoming year is to build a team of compensation experts from several key areas of the company.

photo/ Gerd Altmann

Who to Include in Sales Compensation Planning

It’s important to take a big-picture approach when building a sales compensation planning team since what takes place in sales impacts the entire company. The following are some key personnel to invite to participate:

  • Finance: A representative from the finance department can review the proposed cost of the sales compensation plan for the year and outline how it will impact different areas. This person will ensure that the proposed budget closely aligns with goals for the entire company.
  • Human resources: This team member has the closest association with industry pay standards, regulations, tax obligations, and other factors that influence how much the company can pay its sales associates in base pay and bonuses. He or she can also establish job descriptions and career paths for those interested in eventually working their way up from a sales associate position.
  • Sales vice president or director: The role of this person is obvious since it will affect his or her job and direct reports the most. He or she can also add valuable insight into how compensation affects the ability to recruit and retain top talent.
  • Strategic services, consulting, and other outside experts: It’s always a good idea to bring in someone to provide an outside perspective on the fairness and feasibility of the proposed sales compensation plan.

The person creating the team and extending the invitation may also wish to consider including a compensation analyst, senior marketing representative, or a legal department representative. If that isn’t feasible, the head person in each of these areas should receive a report on what the team discussed.

Sales Compensation Plans Based on Commission

The most effective commission-based sales compensation plans account for up to 85 percent of the salesperson’s salary. However, companies need to consider that a small base salary plus commission won’t work for the newest employees. They need time to build their customer base and practice their sales techniques before managers expect them to perform at the same level as established employees. The ability to have such a dramatic impact on their own paychecks does seem to highly motivate people to perform well.

Commission Based on Tiers

Increasing the amount of commissions salespeople earn for reaching new tiers is another great motivator. The manager should announce the dollar amount of each tier and the percentage of commission at the beginning of the year to avoid complaints of unfairness. Top performers tend to do especially well under this system.

Bonuses and Contests

These types of compensation are in addition to base salary and commission. Most companies choose to award bonuses annually to the top performers and run contests at various times throughout the year to increase excitement and competitiveness.

Whichever method a company decides on, regular monitoring to determine effectiveness of the plan is essential.

Author: Andrew Armstrong

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