Sales Force Dynamics: Instituting an Ideal Compensation Plan

[S]ales compensation is a crucial factor in motivation. It is the sales executive’s best strategic tool to drive sales performance and motivate specific selling behaviors. When designing sales compensation plans, one of the most important steps is to identify the appropriate measures on which your sales representatives will be paid. A combination of salary, commission and bonus is usually most effective. The question then becomes how to successfully blend all three that will entice achievers, as well as reward them according to performance. Nevertheless, the plan needs to be kept as simple as possible.

The total compensation mix: what does it entail?

Total compensation depends on the complexity of the sales person’s selling tasks. The mix between performance and fixed pay depends on:

1)     Balancing salesperson and company needs;

2)     The type of salesperson you want to attract;

3)     The salesperson’s influence on the sale;

4)     The type of product or service sold; and

5)     Rewarding the salesperson’s specific actions or results most important to the company’s success.

Sales force compensation involves not merely salary, commission and bonus but also fringe benefits and reimbursed expenses – though these last two are considered non-compensatory since they are not influenced by sales results.

An ideal compensation plan should:

-        reward positive action and superior results important to the success of your company;

-        the mix between fixed and performance pay should reflect the type salesperson you wish to attract and the salesperson’s influence on the sales;

-        the total level of compensation ought to reflect the complexity of the sale.

Types of sales force compensation

DIRECT COMPENSATION consists of:

-        Fixed pay (salary)

-        Performance pay (commission)

-        Deferred performance pay (bonus)

-        Fringe benefits (Social security/insurance, group insurance, optional profit sharing etc.)

-        Reimbursed expenses

Constructing a total compensation plan

In constructing a compensation program, you first decide on the total dollars of compensation for a top salesperson in your industry – the “target” compensation. Your next decision is dividing those dollars between fixed and performance pay. The total compensation appropriate for a successful salesperson is determined by the complexity of the sale and type of selling. You define a “successful salesperson” as someone who ranks in the top 25 percent of your sales force in terms of results (based on annual dollars of sales or margin and growth). The following are simply a guideline.

• A successful/top salesperson involved in a long, complex, multistep, consultative, partnership sales process should receive over US$100,000 (or your currency equivalent) annually in compensation regardless of the mix between fixed and performance pay.
• A salesperson involved in multi-level relationship sales, which includes the re-purchase of existing systems, which may require some post-sale service, generally receives US$60,000 to US$100,000 (or your currency equivalent) annually in total direct compensation regardless of the mix between fixed and performance pay. These people use more transactional sales to hunt or harvest and have titles such as “Territory Representative” or “Account Manager”.
• A successful salesperson involved in route sales of homogeneous products or services, requiring a multitude of daily customer visits and feature selling and order taking from a person delegated by the buyer’s decision maker generally receives under US$60,000 in total direct compensation, regardless of the mix between fixed and performance pay.
• Salespeople selling and servicing grocery stores with food products, drugstores and giftware, midsized businesses with temporary help services and manufacturers with die casting or injecting molding products generally receive annual direct compensation of under US$60,000 (or your currency equivalent).

Experience shows that more fixed dollars of compensation paid allows the management to more easily direct/control a salesperson.

Surveys exposed

According to Equation research, their 3,000 respondent, 2005 sales compensation survey results indicated the following:

-        Top sales people averaged with a total compensation of $157,234, midlevel performers with an average of $94,872 and for low performers with $64,844.

-        Fifty to 60% of the total compensation was fixed pay for all three of the above groups.

In a 2009 Watson Wyatt survey on sales force compensation and management reveals that sales and HR executives (129 respondents), at large cross-section of North American industries, are confident in the current alignment between sales performance and sales compensation. Seventy-nine percent report their top performers earn the highest levels of sales compensation, indicating a strong link between pay and performance.

Correct mix of performance and fixed pay

The mix between performance and fixed pay depends on:

1-     Balancing the company’s and salespeople’s needs – [The company needs to attract, retain and motivate salespeople who produce a desired level of sales at a cost that generates profits and allows necessary percentage returns on sales and invested capital. It must reflect the company’s culture, strategy and position on the growth curve.];

2-     The type of salesperson you want to attract – [Fixed pay oriented compensation plans generally attract salespeople who are team players, ambitious to climb the executive ladder, steady rather than top performers, farmers rather than hunters and more comfortable selling presold products. On the other hand, Performance pay type compensation plans generally attract aggressive career salespeople, hunters rather than farmers and those with little ambition for promotion into management.];

3-     The salesperson’s influence on the sale – [Ex: A company with all performance pay means the salesperson has a great deal or total influence on the sale.];

4-     The type of product or service sold – [An order taker type of salesperson rather than an active seller, whereby he/she has less influence on the sale];

5-     Rewarding the salesperson’s specific actions or results most important to the company’s success – [The sales force compensation plan must reward actions and results on the part of salespeople that are most important to the company’s success. Generally, a commission is used to reward results and a bonus is used to reward activities or exceeding goals. A group bonus might also be considered to reward teamwork.]

If sales people have a pricing window and/or discretion to give discounts, allowances and promotions, a portion of their compensation should be based on dollars of gross margin rather than revenue for their territory. For example, a women’s apparel manufacturer pays a commission rate on gross margin dollars because salespeople have some discretion to negotiate price.

To prevent making your compensation plan too complicated, limit the performance pay metrics to three actions or results – all of which are controllable by the individual.

It is suggested that each year, the company’s sales leadership should re-evaluate the sales force compensation program as business constantly evolves.

New product placement

Many firms reward new product placement through their compensation plans. A salesperson exerts the most influence on a customer’s decision during a product or service’s introduction and the least during a product or service’s decline. As such, some firms pay a higher level and rate of performance pay on new products and a lesser level and rate of performance pay on mature or declining products or markets.

Transactional versus consultative selling

Salespeople involved in transactional sales will receive rewards in fewer performance areas than those involved in the more complex consultative sales. Salespeople involved in farming or maintenance will receive less variable pay than those involved in hunting or new account acquisition.

Support personnel

If your firm supports direct salespeople with product specialists, sales engineers or customer service representatives, consider performance pay for these people as it will encourage them to be team players for the good of the organization.

Channel partners (outside/independent representative organizations)

Brokers, distributors and outside sales representative organizations generally receive 100 percent performance pay from the firms whose products they sell. However, channel partners need specific rewards for positive action and results important to the success of your company. For your indirect sales force to become partners rather than adversaries, they require training and correct monetary incentives. Apply the same criteria for your indirect sales force that you did for your direct people. Generally, your channel partners compensate their salespeople with a plan similar to the one you use to compensate the channel partners.

Change management and implementation

One way to sell compensation changes to the sales force involves including them in the decision-making process. Select a representative group to participate in the analysis, suggest changes and anticipate problems. Address concerns by showing how the new compensation plan can increase annual pay. Annual performance changes must be announced before the year begins so that salespeople have time to adjust their thinking activities.

When it’s all said and done

Sales compensation is a tricky business as there are a number of payment models to choose from and each method has its pros and cons. Commissions motivate employees to sell harder, while salaries create loyal employees. To attract, motivate and retain the best salespeople, you pay them what they are worth. Performance pay that rewards positive action along with results can create windfall earnings for salespeople and increased revenues for the company. However, in the end, it is the sales manager’s job to make the salespeople successful so they can fully monetize on the reward plan.

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Tags: sales compe, Sales Management