How to Develop a Sales Compensation Plan

by on June 15, 2009 · 0 Comment POSTED IN: HR Info Center

A sales compensation plan has many possible permutations or commutations of how they mix and match

A sales compensation plan is the most complex area of compensation by far. The reason is that there are so many variables involved in developing a sales compensation plan that each company has many possible permutations or commutations of how they mix and match the responses to these variables in developing their own sales compensation plan.

It could be things like type of product, sales cycle, pricing, industry that they’re selling into, size of company, compensation philosophy, type of sales job — all these things have to be mixed and matched. And that’s why you never see the same sales compensation plan in two different companies.

This is not an area where you can just buy a cookbook and learn how to develop or design a plan for your own organization. Yeah, they may give you some principles. But every plan is going to be different for every organization.

Who Should Be Involved?
If you’re not currently involved in the sales compensation area, now is a good opportunity for you to be a real business partner. And I’m generally speaking to the human resources people out there. And that’s been kind of the buzz word, you know, become a real business partner. Well, this is one of those areas that I think you can make a contribution.

If you’re in the human resources area, you already have a lot to say about the compensation expense side of the equation through your compensation programs. And with a sales compensation plan, you actually will have a lot to say about the revenue side of the equation as well.

And so you’ve got the full equation. Revenue which primarily comes from sales, expenses which are compensation expense minus expenses which are compensation expenses primarily equal profits.

So there are many questions that will have to be addressed when you’re – to move forward and outline a sales incentive program. By the way, I actually like – I’m not necessarily a committee type person but this is a nice – a good area for you to have a committee in order to work on this.

Somebody on the sales organization pretty high up can make decisions and actually educate everybody else on what the sales plan is supposed to be doing, and the person who eventually have to stand up in front of their sales people and sell whatever changes you come up with.

So, somebody from the sales organization, somebody from the finance organization. We don’t necessarily want the fox to be guarding the chicken coop. And we need finance’s help in modeling various aspects of our sales compensation plan.

And finally, human resources should be part of this. You have access to compensation data. You can tell what the target total compensation level should be and what generally the mix is in the marketplace. And you should have some – and you also have responsibility for tracking, retaining and motivating people. The sales compensation plan is part of that.

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

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