When designing a new or revised compensation plan, always begin with one that is supportive of your best or most successful salesperson. After all, isn’t this the way you would like all the members of your team to perform? In designing your plan, you should consider both the needs of the organization and the needs of the salespeople.

Needs of the Organization

Your plan should attract, retain, and motivate top salespeople to produce at a desired level of sales at a cost that generates profits and desired rate of return on sales expenses and invested capital.

Needs of the Salespeople

In addition to the needs of the business, your plan should supply the salespeople with a package that meets their financial obligations, gives them pride in what they do, reflects their competencies and experience, and is creatively superior to the package offered by the competition.

The total direct compensation package must reflect the complexity of the sales process. The mix between at-risk or performance pay and salary or fixed pay must reflect the general organizational objectives, the type of salesperson, the salesperson’s influence on the sale, and the type of product or services sold. In addition, an effective package must reflect superior sales performance. On the basis of your strategic plan, and to meet organizational goals, look to reward those who perform at a higher level in the areas that are most important. Some methods for doing this are:

Straight Salary

• Advantage. Straight salary provides the sales professional with a consistent income and alleviates the pressure to produce more and more orders. A salary plan emphasizes the importance of nonselling activities, encouraging the salesperson to concentrate on customer relationship building or servicing activities. Because payouts are the same for each period, this form of salary plan is the easiest to administer, and sales expenses are easy to forecast.

• Disadvantage. This plan, by itself, does not drive sale closure behavior, shortened sales cycles, new product introductions, and market penetration or expansion.

Straight Commission

• Advantage. Straight commission is a high performance measurement that brings immediate rewards to the sales professional. Increased sales means increased compensation. It encourages short sales cycles, sale closures, and prospecting to expand selling opportunities. An additional advantage is that it minimizes the fixed selling costs by linking payouts to actual sales. As sales go up, the expenditures go up. When sales go down, the expenditures go down.

• Disadvantage. This approach discourages relationship building and nonselling activities. It can be a problem when there is channel conflict or required teaming. It also introduces a certain amount of insecurity for sales professionals during periods of weak sales. One result is that an organization that operates on a straight commission basis usually has a higher turnover of sales personnel.

Bonuses

• Advantage. Bonuses are an excellent approach to rewarding positive actions and superior performance. If paid quarterly, rather than annually, they allow for a more concentrated focus on desired behaviors that are needed in any rapidly changing market. Some examples of a desired focus might be number of new accounts, increased product portfolio mix across customers or target markets, increased gross margins, percentage revenue growth, cross-organizational team activities, specific skills (i.e., financial, technological, or negotiation skills), call reports, etc.

• Disadvantage. Many sales people feel that a bonus program does not accurately reflect the realities of their territory or accountability. This is based on a belief that the data to which the bonuses are tied are unreliable, distorted, uncontrollable, or delayed or old. Unfortunately, this is often the case.

Combination Plans (Usually Around 50 Percent of Total Compensation)

• Advantage. Combination plans, which integrate fixed and performance pay with a bonus incentive, allow an organnization to focus on a group of behaviors that will best meet whatever the organizational objectives are. The salesperson can be quickly rewarded for specific short- and long-term supporting behaviors, while feeling a sense of stability and security.

• Disadvantage. This approach eliminates the simplicity of the other plans and, as a result, can be difficult to administer, understand, and forecast. One trap is that many companies spread the compensation package over too many different behaviors rather than emphasizing the most desired one(s).

Benefit Plans (Usually Around 25 Percent of Total Compensation)

• Advantage. Benefit plans are not only a valuable compensation-added incentive for attracting and retaining talent, they have become a necessity for the average employee. By providing a menu of benefits, such as insurance and education packages, the organization is providing the salesperson with a highly flexible, and personally adaptable, compensation program that will meet their individual needs and wants. This program often reduces the turnover rate when it is tied to increases in years of service.

• Disadvantage. The primary disadvantage to this is the cost of procuring and administering these benefits.

Expense Reimbursement Plans (Usually Around 25 Percent of Total Compensation)

• Advantage. This package increases with the success of the salesperson and with years of tenure. Automobile, home office, entertainment, etc., are all reimbursed at some level, thereby decreasing the personal monetary expenses of the sales professional.

• Disadvantage. This approach needs to be tied to an expense management system that encourages control of expenditures. It also must have some flexibility to be adaptive to individual territory requirements. Additionally, this compensation program requires that the salesperson be reimbursed promptly so that it does not become an area of dissatisfaction.

One other point on this form of compensation: Check with your HR and accounting departments to determine the tax ramifications of both the benefit plan and the expense reimbursement plan. In some instances, the packages can result in additional tax burdens on the sales professional