e are some examples of what not

Here are some examples of what not to include in your compensation plan. Therefore, quota and customer assignments are difficult to determine, making other types of compensation plans too costly or too complex to administer. Some companies simply make bonus arrangements on a discretionary basis. Its motivation by way of punishment, and it changes the goal salespeople will work toward. The cost of maintaining medical, accident, life, and dental insurance programs on a personal basis is significant, so fringe benefits constitute an important part of the total income of every company employee, including the sales force. It gets away from the words incentivizing, Dorsey said. We expect you to be average. In my many discussions with sales executives over the past two years, the subject of profitability of sales kept coming up. Its on the sales leader to figure out what resources they need to provide to the team to help reps hit their new numbers. If they cant, he knows he either needs to provide more resources to help the rep or lower the quota. Below are some of the most common compensation plan examples. The three grades used in the Dartnell study are trainee, semiexperienced (one to three years), and experienced (more than three years). Each territory has a minimum requirement for gross profits and gross sales. The most frequent percentage split reported in the Dartnell study was 80% base salary and 20% incentive. A successful sales contest should include these basic elements: well-defined objectives, simple rules, short duration, goals attainable by most salesmen, inclusion of wives and families when possible, and follow-through program to sustain enthusiasm. Provides little, if any, financial incentive for the salesman. If he had his choice, hed opt to offer salespeople a salary just like any other employee. Makes possible a favorable ratio of selling expense to sales. Having a clearly defined clawback policy can be a useful tool to hold reps responsible for the customers theyre bringing on. This compensation model involves paying sales reps the same way other teams are paid through an annual salary. Sales reps are paid commission on the year-long value of the contract. These can include guaranteeing a monthly minimum income, generous draws, and starting new men on a salary-plus-commission plan until commissions reach a desired level. This is his challenge in the years ahead, and he must meet it if he is to survive. Any discussion with sales executives would bring forth a consensus that compensation is the most important element in a program for the management and motivation of a field sales force. A 5% commission, based annually and paid quarterly, on all sales volume over predetermined sales base. Throughout the year, sales leaders will often hold contests offering sales performance incentive funds to encourage activities like selling a new product or feature that boost revenue or reach a new company goal. This is repeated for the second half with bonus paid in January. Churn isnt always reflective of a bad deal, and a salesperson shouldnt be punished for that. Can, unless a decreasing commission rate for increasing sales volume exists, result in a windfall of new accounts and a runaway of earnings. Success in selling demands a high degree of self-discipline, persistence, and enthusiasm. Advantages are that the combination plan: To round out the basic compensation data, it is worth noting that in the past 25 years, average earnings of the experienced salesperson have more than tripled, rising from $7,200 in 1952 to $24,500 in 1977. Exhibit VIII shows the participation by companies broken down by the three basic compensation plans and for all companies responding to the survey, regardless of compensation plan used. This model is a useful way to incentivize middle performers to keep working toward a higher target, while giving high performers a boost for exceeding their quota, according to a guide from sales software company Xactly. Thats never a good thing.. At most, she recommends sales leaders incentivize two or three activities. However, the unusual boom year of 1973 produced a 26% increase in earnings over 1971. As general company benefits to all employees increase in scope, the salesmans benefit package will likewise increase. This is one of the more common compensation strategies in sales today. And again, let us consider the unique aspects of the salesmans job: limited personal contact with his manager; extended periods of travel which brings loneliness and inconvenience; decisions that require a high level of motivation (when to make the first call of the day, how many calls to make, objectives to be achieved on each call, when to quit for the day); and emotional swings between the elation of obtaining a large order and the frequent frustrations of orders lost to competitors and missed shipping dates. The salary model is rare in sales as leaders question the ability to motivate reps without commission. Perhaps of more significance, earnings have doubled in the past 10 years. Developing and executing sales and product training programs for distributors sales forces. When Page unveils her comp plan to her team, shell often give them a tool to calculate how much money they can earn to get them excited. Likewise, if a company wants to expand its reach within its existing companies, it can incentivize those deals. So a sales rep might earn, say, 5 percent commission on the first $50,000 in revenue they earn, then 7 percent on deals until they reach their quota and, finally, 9 percent on deals that exceed their quota. An accelerator pays a rep a higher commission rate for any deals a rep closes beyond their quota. It permits greater incentive than a salary or commission plan and provides better control of the incentive or variable income than is possible with the commission plan. While payment rates may be uniform both under and over the 100% goal, increasing the rate beyond the 100% mark adds an additional incentive with a lower cost factor. Pay relates directly to performance and results achieved. Exhibit VII Percentage of Companies Using Nonfinancial Methods of Compensation, by Compensation Plan, 1977. This kind of plan, in which salesmen are paid fixed rates of compensation, may also include occasional additional compensation in the form of discretionary bonuses, sales contest prizes, or other short-term incentives. Still, Dorsey argues that its an effective strategy for sales reps who are driven by security, and it can be used to hold your team to a higher standard. Though many of the successful techniques have been available for a long time, it has just been within the past 10 to 15 years that sales executives have begun to realize their importance. The average annual compensation broken down into the seven distinct varieties of compensation is shown in Exhibit V. Exhibit IV Average Earnings of Experienced Salesmen, All Plans, 1952 to 1977, Exhibit V Average Annual Compensation and Median Range, by Compensation Plan, 1977. Exhibit I shows the use of the three basic plans in recent years. Some salesmen may be tempted to skim their territories. Companies pay by one or more of these typical methods: 2. Its an effective way to measure performance and drive sales activity toward specific goals. Sales has a lot of ability to influence whether a person churns within a short period of time. Dorsey has paid bonuses to reps for bringing on customers who paid for the length of their contract upfront, or for selling a particular product to three customers in a month. This model works best if you have well-defined and balanced sales opportunities in each territory. A rep should be able to read it and know exactly what they need to do each month, said Laurie Page, VP of sales strategy at the sales consulting firm The Bridge Group. Combination plans dominate the compensation package makeup despite the complexity of administration and control. How to Make Sales Compensation Plans Fair and Effective, Ditch Commission and Pay Your Reps Full Salaries. While there is some risk that the company could end up paying every rep for overperforming, fair quotas and accelerator caps can help to keep payouts within budget. We note in these data that from the eight-year period of 1964 to 1971 the average yearly gain was 7.5%. From there, hell determine whether the SDR team can give the rep enough pipeline to hit those numbers. Its much more of a morale thing, and, by then, theyre probably looking for a new job.. Techniques that principally provide salesmen recognition, status, and a sense of group belonging are generally referred to as psychic income.. The more focused a salesperson can be around one or two bonus payouts in a quarter, the better the results will be. When management desires to maximize incentive, regardless of compensation levels in other company functions, or prefers a predictable sales cost in direct relationship with sales volume, the commission plan is appropriate. What I am talking about are the incentives that make a salesman work harder all around. These incentives can be financial, nonfinancial, or a combination of the two. Salesmen may sell themselves rather than the company and stress short-term rather than long-term relationships. To accomplish this, some elements of guarantee must be added to the compensation package, especially for new salesmen. If youre going to be below average, youre going to make less. Little or no loyalty to the company is generated. Ive literally spoken with sales reps who have said, I dont know what Ill get paid at the end of the month or the end of the quarter, Page said. It can be designed as a team-wide competition or structured around additional sales targets. The plan works well at the start of a new business where the market possibilities are very broad and highly fragmented. To ensure incentives align across the entire customer journey, customer success managers and account executives are paired with each other and the two are rewarded jointly for retaining and upselling customers. If a commission plan is desired, the disadvantages must be offset. The worst thing is for reps to feel like, This [quota] is impossible, and they give up, Li said. A good example of a sound compensation plan incorporating the elements of base salary and incentive pay of a percentage of gross profit and gross sales generated in a territory is one set up by the sales executive of an eastern electrical component manufacturer. Journal of Accounting, Auditing and Finance. The average age of todays industrial salesman is 36 years, and about 60% have some college training or are college graduates. Without providing the proper support, you could risk reps rushing deals to close to earn commission. Suggesting ideas for new products and promotional programs; recommending changes or improvements in existing products. Compensation plans will typically include an on-target earning that represents their full income if they reach their quota. Base salary is paid every two weeks. In the incentive portion of the combination plan, three basic forms of reward can be considered: a commission, a bonus, and a commission plus bonus. It can also be the most complex. The salary plan is appropriate where it is difficult to evaluate who really makes the sale, where a salesmans contribution cannot be accurately separated from the efforts of others in the company such as inside personnel and technical service persons. In addition, a combination plan provides the salesman with a greater range of earnings possibilities based on a steady base income. Over the years, as the role of the salesman has been redefined and enlarged, many companies have conferred more meaningful titles on members of their sales forces to improve their status with customers, to give them personal status symbols, and to more aptly describe their functions. Improperly used or used for the wrong reasons, they can create dissension and dissatisfaction within the ranks. However, itd be a mistake to assume that, to get reps to work harder, they just need a bigger carrot. Above average, youre going to make more, Dorsey said. House or divisional manager accounts are excluded from quota, commission, and bonus calculations. And dont be late. The rationale of paying commissions on gross margin dollars is the assumption that such an arrangement will motivate salesmen to improve both product and customer mix and therefore to improve territory gross margin. More on Sales CompensationDitch Commission and Pay Your Reps Full Salaries. The salary plan has advantages for both salesmen and their companies because it: However, the salary plan does have disadvantages, in that it: The two lists do not necessarily cancel each other out. And that perspective shapes how he approaches building his teams compensation plan. That period of time, though, is different, depending on the size of the customer and the region, Li said. In this model, reps are paid a base salary that is supplemented with their commission earnings. 5. A proper adjustment is made with the final quarter payment. One great advantage of the commission incentive is the frequency and regularity of the reward, usually monthly. While an effective quota should be a stretch to motivate reps, it shouldnt be outside the reach of an average salesperson on the team. Excessive turnover of sales personnel occurs when business turns bad. Compensation plans have become more complexthe three basic methods of paying salesmen have stretched into at least seven kinds of plans, and possibly more will be designed tomorrow. The trend toward obtaining profitable sales, as opposed to sheer sales volume, could well lead to defining a sales territory not only as such but also as a profit center with the salesman as the sales and profit producer in a given territory. As a former sales leader, Page used to poll her team around what rewards theyd want for a quarter and then design competition around that. A bonus incentive plan is more difficult to establish and administer than a commission incentive. Prior to joining Built In in 2018, he has worked as a staff reporter for the Las Vegas and Reno Gazette-Journal. Find startup jobs, tech news and events. These are sales expenses and extra incentive plans. Costs are predictable, results are usually successful, and rewards are immediate. Salesmen are more quickly motivated to keep or exceed performance levels with the rapid tie-in between performance and reward. For as long as sales has existed, commission has been considered the only way to motivate salespeople by many. All these methods are inexpensive and convey a sense of personal communication that salesmen value highly. But theres also the risk that underperforming reps are allowed to stick around because theyre being paid less, Dorsey said. Problems arise in cutting territories or shifting men or accounts. These temporary bonus payouts can be one of the most effective ways to accelerate sales behavior around a specific goal. Take another look at Exhibit III to see how the experienced salesperson on a combination plan has fared historically. If the reps goal is $100,000 in revenue each month, and the average deal size is $10,000, that means the rep will need to close 10 deals, Dorsey said. Todays salesman wants a challenging job with good prospects as well as payoffs now. Its easy to tweak quotas to meet the new revenue target, but without a plan in place, salespeople will be quick to feel demoralized or start gaming the system. Communicate it, and get them excited for their compensation plan, Page said. Because bonus incentives are usually paid quarterly, it is not recommended that the full amount be paid when due. Properly used, contests can create a competitive atmosphere that will stimulate sales and provide additional rewards. To dramatize the significance of fringe benefits for salesmen in the total compensation package, I compared current data with that of 1958, 19 years ago. Allows a greater latitude of motivation possibilities so that goals and objectives can be achieved on schedule. All that changes is a salespersons peace of mind, he said. That makes it impossible for the salesperson to figure out how much theyre going to get paid. Commission accelerators can also be an effective tool to get the most out of sales reps, Page said. Heres what your job is, now go and do it.. Rejection by customers and prospects is a constant negative force. Unit sales costs are proportional to net sales. The percentage of companies providing hospital insurance increased by 16%, life insurance by 10%, educational assistance by 36%, and club or association memberships by 14%. Provides greater range of earnings possibilities. He believes most salespeople are motivated by the same things as everyone else: security, creativity and autonomy. While a compensation plan should represent the companys overarching sales strategy, there are often new products and priorities that crop up over the course of a year. Salary-plus-incentive plans tend to be more complex than the other two methods. After close examination of the salary plans of many companies, I have identified the following basic advantages and disadvantages of the salary plan approach. Imagine starting a new year without any idea how much youre going to be paid. The earned percentage of gross profits and gross sales is paid monthly. The variations include base salary plus commission on all sales, salary plus bonus. Offers participants the advantages of both salary and commission. Increasing amounts of fringe benefits add to the total income package of a salesman. The field engineer calls on distributors. For example, 1971, a recession year, was a poor commission year, while the boom year of 1973 produced commission earnings that, in many cases, were totally out of proportion to the sales effort put forth. The disadvantages are far overshadowed by the flexibility in providing meaningful incentive pay tied more directly to sales performancethat is, applying commission and bonus to single and/or multiple sales goals. Also, rewards paid on a quarterly basis are not as effective motivators as weekly or monthly commission payments. Most plans will also include potential bonus pay called sales performance incentive funds. Exhibit II shows selective use of the three basic plans in 34 SIC industries. In making individual adjustments over the years, one should be careful to avoid a gradual loss of uniformity in the plan. It makes recruiting more difficult because income isnt guaranteed, and the stress involved in earning that income leads to high rates of employee churn, he said. Ultimately, its all about tying a reps compensation to a quota they can attain, Dorsey said. Such a plan includes straight commission and commission with draw. The strategy aims to incentivize reps to sell larger deals and disincentivizes discounts that can lower the revenue a company generates on a deal. This trend should continue. If the company wants to prioritize new businesses, they can offer a higher commission rate for deals that bring in a new company. Gives salesmen greater security because of steady base income. For an account executive, that could be a commission tied to bringing in new customers, whereas a sales development representative should earn commission for setting up meetings. Other productive ways to recognize individual good performance or encourage effectiveness are: distinguished salesman awards, honorary job titles, publicity, personal letters or telephone calls of commendation, face-to-face encouragement, and individual help with responsibilities. Sales of technical products commonly involve this form of team selling. In my opinion, when people say compensation plans are a mess, its usually a downstream manifestation of upstream sales problems, said Li. The clawback provides a check on sales reps to make sure theyre not selling customers on packed deals that they will cancel within a month. While this approach offers more flexibility than the other two types, it is more complex and more difficult to administer than any other plan. Sales has a lot of ability to influence whether a person churns within a short period of time.. The swift economic swings from 1971 to 1973 forced sales executives to seek more stable compensation arrangements, as shown in the decrease in use of commission plans and the increase in combination plans previously referred to in Exhibit I. Gross profit is defined as the difference between the selling price of an item and the cost to purchase the goods, freight to transport, labor and/or materials that must be added to make the goods salable as represented to the buyer, and other costs directly related to the transaction. Dorsey has experimented with a salary structure for a portion of his team. To him, its about setting targets and quotas that the average rep can reach to earn their commission, along with incentives to encourage the high performers. Theres nothing worse than when I talk to reps in February or March, and they say, I dont have my comp plan yet. Thats just crazy.. His duties include: Many durable goods industries experience cyclical sales patterns, which makes a salary plan more compatible with the salesmans efforts and avoids the sharp swings in income that can occur in a commission plan. Similar to the commission model, sales reps are paid a portion of money for each deal they close. Respondents to the Dartnell survey indicate that 92% of the companies paid all or some of their salesmens expensesin addition to compensation payments. In his plan, a base salary level is determined on a discretionary basis. Most companies in the study favored a combination plan, but such plans have some disadvantages to offset their obvious attractiveness. The plan is typically released before the start of the year and includes the reps annual quota target, weekly or monthly performance metrics, and how their salary will be calculated. And if only 70 percent of customers actually show up to the meetings theyre scheduled for, a rep will have to schedule 45 demos in a month to hit the target. Bonuses are paid on a variety of sales results, but gross margin goals are used most frequently. 2. A few significant observations regarding expense practices should be noted: No matter how well a compensation plan is formulated and executed, another dimension is necessary to achieve best results. Makes it simple to switch territories or quotas or to reassign salesmen. A bonus on attainment of quota. Contests usually run for one or two months, but some as short as a week can produce results. If they overperform, they have the opportunity to earn bonuses. The need for keeping a tight rein on sales-generated expenses, which have a direct effect on profits, was never more evident than in the recent turbulent economic years. Without taking that step, the company runs the risk of incentivizing the wrong behavior or setting targets that go beyond a reps responsibilities. Here are the elements of a good salary, commission, and bonus plan used by a midwest fabricated metal products company: 1. The sales executive will have to educate and reeducate himself in this expanding sphere of profit consciousness. If quota for either of the six-month periods is not achieved but annual quota is achieved, 1/2% for the year is paid but not the 1% for period in which quota is not achieved. Thus a total of 1 1/2% of annual sales is paid as a bonus. Fails to give balanced sales mix because salesmen would concentrate on products with greatest customer appeal. When management finds it difficult to develop adequate measures of performance against which an equitable bonus or commission can be paid, a salary plan is desirable. In sales, theres often a direct line between how a sales rep operates and their compensation plan. No matter how well designed the compensation plans strategy is, there is still the risk that salespeople bring on ill-fitting customers or pack deals with unwanted features. Exhibit VII shows the percentage of companies (by compensation plan) using broad nonfinancial methods of motivation. 6. Ceilings on incentive payments are usually part of combination plans. It gets away from the words incentivizing. Its about defining your job. Making a compensation plan work is all about balancing whats best for the company with what a sales rep can control, Dorsey said. Heres what your job is, now go and do it.. A properly designed and implemented compensation plan must be geared both to the needs of the company and to the products or services the company sells.

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