by Dan Schoepf
Compensation plans, like automobiles, come in many shapes and sizes. Like automobiles, they are also designed to move people. Some of them move a lot of people (bus), some mobilize a few people (compact car) and others fall in between. How does your compensation plan move people?
Before answering you must first decide what you would like to accomplish. You must select the objectives before deciding what you’ll pay to achieve them. Stop reading right now if your corporate goals are not established. Formulating compensation plans before goals often overpays (de-motivating for sales people when corrected or adjusted) or underpays (de-motivating immediately).
Incentive plans have a major impact on selling organizations. They clearly establish guidelines for the type of individuals you attract and what they’ll do when hired. Incentive plans for salespeople are controversial issues for other departments. Why do sales people need incentives? Why do they make so much money? They’re never here so what are they doing? As a sales manager you need to sell internally to clear up misconceptions on sales compensation plans.
Three aspects of selling justify the use of compensation plans beyond base salaries. First, sales drive the top line revenue. Nothing happens until someone sells something. In addition, the production of a salesperson is very measurable and often public. The primary reason for incentive plans for salespeople is due to the difficulty of the position. Salespeople face a tremendous amount of rejection, even for the most successful. As Three Dog Night sang, “No, is the saddest experience you’ll ever know.” Few people are resilient enough to hear that devastating two-letter word daily. Sales people work independently from others and social interaction is intermittent.
An effective sales compensation plan accomplishes many things.
- It attracts and retains the best people for your company.
- It pays the market rate and adjusts for industry and market trends.
- The best plans pay for performance and results.
- Compensation encourages activity that is consistent with corporate strategy.
- Incentive plans drive the sales team to the right market with the right products.
- Strong incentive plans balance activity between new and existing accounts.
- Effective compensation plans should encourage salespeople to meet customer needs.
- MOST IMPORTANT: Incentive plans help companies exceed sales and profit expectations.
You know why sales people should have incentive plans and how your company benefits from a well-designed plan. What should you consider when developing a results based compensation plan?
How easily can you measure company and customer results? To what degree do sales increase as a direct result of a salesperson involvement? What percentage of sales occurs as a result of carryover? Is your selling process followed to generate sales?
What is the makeup of your sales team? Hunters? Farmers?
How does your sales culture impact sales? To what degree do salespeople impact the culture?
Answering these and many other questions takes time. However, you must view it as an investment in your company. Incentive plans tied to goals improve sales. This is proven in every progressive selling organization. Goals measure accomplishment, increase motivation, assist in evaluation, reward performance, suggest effort allocation and guarantee customer focus.
There are many variations and types of payout for sales compensation plans. For example:
Linear payout — the same rate is paid for every dollar sold.
Progressive payout — the pay rate increases as progressive sales levels are met. This is the most motivating plan and high achievers are attracted to this model.
Regressive payout — a lower rate paid as sales increase. This plan may work for sales teams that have a low level of causality in the sales process.
Mixed payout — a pay formula with a combination of base salary plus a percentage of sales on a regressive or progressive plan.
INCENTIVE PLAN SECRET NUMBER ONE
The best compensation and incentive plans fit on a business card. If yours does not, you should revise the plan.
Compensation plans contribute directly to the success of your company. You can articulate why and how salespeople are paid and you know the eight drivers of successful plans. What are you waiting for? Start designing a compensation plan that motivates and energizes salespeople to exceed company goals.
“The most important single fact about a free market is that no exchange takes place unless both parties benefit.”
Milton Friedman
Dan Schoepf is the founder and President of Prospects…to Partners a sales and business development consulting and regular contributor www.adastrabusinesssolutions.com.
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