Establish Boundaries in your Sales Compensation Plans

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

What Your Sales Compensation Plans Need To Have

In designing effective sales compensation plans, consider what the market pays for target total cash. You want to look at target total cash, not actual cash because actual cash will vary from one year to the next and target cash is really what you want to target your target cash levels to.

So the mix between salary incentives is in many respects, an internal decision. Although you have to be somewhat cognizant of what the market mix of pay rates are. And so you can’t vary too much from the marketplace but you do have some variability. Remember too that the mix that you have between incentive and variable compensation will have a lot to say about the type of people that you attract.

And generally, you can put the type of people that you want to attract on a continuum. On one end, we have hunters and on the other end, we have farmers. The hunters are the guys who go out and get new business or the red meat. And the farmers on the other end of the spectrum are those who actually make sales but also maintain customer relations with existing customers. So somewhere in that continuum are most sales jobs and they’re paid differently. Hunters are paid generally less in salary than farmers but have more incentive opportunities.

So you really have to ask yourself what do we want these people to do. Do we want them to be hunters or farmers or something in between? Put this in writing if you can. Really, when you get right down to it, the formula is the plan. It generally has these kinds of dimensions. It has a threshold. Although lots of incentive plans do not have thresholds. There has to be some sort of minimum level of sales performance in order to get paid anything.

And there are lots of sales compensation plans or incentive plans out there that do not have thresholds. Lots of sales compensation plans don’t have thresholds but group plans or incentive plans for companywide bonus programs generally do. And it may be 70%, it could be 80% achievement of a revenue or profitability goal, et cetera.

At target, meaning when the company and/or the individual achieve the goals exactly, we want to pay our target incentive rate out. And there may be even a maximum established in the sales compensation plans. Sales guys don’t like maximums and lots of plans don’t. But generally, you have to have at least a maximum on group plans, otherwise, to protect the company in windfall kinds of situations.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri

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