Sales Compensation Plans: Improve Your
Plan to Boost Your Profitability
By Gene Siciliano
Most experts seem
to agree that misguided incentive and sales compensation plans were
near the heart of the country’s financial crisis, the effects of
which are still rattling around Europe as this is written. These
compensation plans encouraged aggressive individuals on Wall Street
to over-sell the wrong products to the wrong people and pay
themselves very handsomely in the process.
Everywhere I go,
CEOs complain that their sales compensation plans don’t seem to work
as well as they had hoped. Or they justify their compensation plans
and attribute the poor results to poor selling skills, unmotivated
salespeople, poor sales management, inadequate information systems
and, of course, the economy.
The reality is that
while all these things can contribute to poor sales team
performance, nothing sinks motivation faster than poorly designed
sales compensation plans. Some examples I’ve seen:
Here, the company pays a set percent commission on every dollar
sold, regardless of whether sales levels are below, at or above
where the company wants them to be. This enables salespeople to
decide for themselves how hard they want to work and provides no
incentive for them to work harder, even if the company needs
designed commission plans:
For example, some sales compensation plans pay the same
commission rate for profitable items that they do for
unprofitable or marginally profitable ones. This is often
because the company doesn’t know how to track the details, or
because the company doesn’t know which is which.
plans that cap earning capacity:
Some plans cap salespeople’s earning capacity even though the
profitability of sales above the cap is usually considerably
more than sales below the cap. A really good salesperson wants
to know that the sky’s the limit, even if there’s no real chance
of ever reaching it.
plans that don’t provide incentives:
Some companies have bonus plans that make the salesperson wait
for the quarter-end or even year-end to get financial
recognition. The reward is so far removed from the event that
they’re no longer connected in the salesperson’s mind.
I’ve also seen CEOs
convert their entire sales force to straight salary so they could
better manage the process—not knowing that they have guaranteed
they’ll have a truly mediocre sales force from then on.
If you combine one
or more of these infamous sales compensation plan mistakes with any
of the non-compensation issues mentioned above, you can have a
seriously unproductive sales team—and not know how to go about
A bad sales
compensation plan effectively converts “pay-for-performance” into
“pay-for-non-performance.” If your sales incentive plan
doesn’t create a win-win-win—for you, your salesperson and the
customer—it is bound to fail sooner or later. Here are six key
features of a winning sales compensation plan:
1) It pays more for what you want to sell more of, and less for what
you want to sell less of, relatively speaking.
If you pay the same commission rate for everything, you’re
telling the salesforce you don’t care which of your products
they sell. If that’s true, fine. If it’s not, you’re reinforcing
the wrong message.
2) It pays more for sales that bring more profit to your bottom line. Of course, this means you need to know which products have a
higher profit margin. If you don’t know your margins, you have a
cost accounting issue as well as a sales compensation issue.
Both will kill your bottom line faster than you can say ”money
3) There are no limits on salespeople’s earning capacity. Create powerful incentives for your salesforce to keep
reaching and keep selling, even when they’ve reached their
personal income comfort zone. You do that by sharing the added
wealth that comes from those extra sales—a bonus, a richer
commission rate, a trip to Hawaii, or whatever you truly believe
will excite your salespeople to keep going at full speed until
4) The incentive pay is awarded as close as possible to the event it’s
The idea is to strengthen in the salesperson’s mind the
relationship between the deed and the reward. You can say
they’re related all you want, but if the pay comes months later,
and the salesperson has gone on to put effort in other
directions since then, the association becomes weak, at best.
The best strategy is to pay commissions monthly, every month.
When adjustments are necessary due to breakage, returns or
whatever, deduct those from current payments as they occur.
5) It includes bonuses in addition to commissions. Bonuses are great for rewarding that extra effort, whether it’s for the
top salesperson of the month, quarter or year; for the
salesperson opening the most new accounts during a new campaign;
etc. These are payments in addition to commissions that reward
for exceptional success—not for routine performance, and
certainly not in lieu of sale-by-sale commissions.
6) It’s easy for salespeople to understand.
Explain your sales compensation plan clearly to your
salespeople. If they don’t understand it, they’ll assume they’re
being taken advantage of to the company’s benefit. If you change
the plan, take pains to explain the benefits of the change to
them and how they can best take advantage of the new features.
They’ll figure it out anyway, and you’ll lose some trust in the
process unless you’re up front with them.
Don’t Forget Strong
Okay, having said
all that, I need to say a few words about another critical
issue—sales management. I’m sure you’ve heard that more money can
never compensate for poor management, and that’s very true. If the
person managing your salesforce is not a good sales manager—doesn’t
follow up, doesn’t train, doesn’t create a motivating environment,
doesn’t hold subordinates accountable—then no amount of clever sales
compensation plan design will make up for that.
By contrast, put a
good sales compensation plan and a good product line into the hands
of a good sales manager, and you’ll see sparks fly as the
performance climbs. The difference between your weak salespeople and
your strong ones will become dramatically evident, enabling you to
very quickly build a world-class sales organization with world-class
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