A Sales Compensation Plan is Complex and Varied

by on June 19, 2009 · 0 Comment POSTED IN: HR Info Center

A Sales Compensation Plan Needs To Fit Your Organization

Most organizations actually have a sales compensation plan. In some cases, they have more than one sales compensation plan. It’s by far, the most complex area of compensation, more so than even the executive compensation can be. The reason is that there are so many variables that need to be mixed and matched in order to develop an effective sales compensation plan for your organization.

The variables are such things as you may have different products that need to be sold. You may have different profitability margins on those products. You may have different channels that you sell in to. Your organization will be or the sales organization will be organized differently than other sales departments.

Some Human Resources people run into some problems in this area. It is a difficult area to get a handle on and not too many people really know sales compensation very well. Because you also need a skill set to be a participant in the design of a sales compensation program.

You generally need not only understanding for the sales organization but you also need to have some financial skills and even some Human Resources skills to do this properly. But Human Resources have generally in most organizations responsibility for compensation – the largest expense an organization has.

In a sales compensation plan, Human Resources can also have a say in how revenue comes into the company. You do have to understand however how the company makes its money in fairly detailed kind of a way if you’re going to be effective in designing sales incentive programs.

Look at your sales compensation plan every year to see what kinds of things could be tweaked for the coming year to make it more effective.

There’s been a big switch for example between having a goal of revenue and trying to measure profitable revenue because there’s nothing better than increases in revenue except for one thing, and that’s increases in profitable revenue.

You eventually will migrate into something called a “quota system” which essentially says that every sales person is given a quota, “We’ll pay you a certain percent of your target incentive based on how well you do against that quota.”

So, lots of organizations are moving to that type of formula especially when they get larger. They may be changing the mix between base pay and incentives. They may also be instituting or changing certain things about accelerators, thresholds, caps or maximums or what the upside potential may be for their sales people.

Some of the questions you’re going to have to address in setting up a sales compensation plan are what the market pays for target total cash.

What you essentially want to do is set up your system to actually pay market target total cash levels. And that means what the market says the base salary is combined with what the market says the target incentive is. Try not to use actual incentives out there.

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

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