Create a Sales Compensation Plan That Supports Business Objectives
Salespeople are a company’s ambassadors to the world. They actively promote the company and its products and services. They are the front line between the company and its customers, and are typically the driving force of revenues – top-line company growth. These employees have a direct impact on how the marketplace perceives their employer and its products.
The way salespeople conduct themselves is often a reflection of the company’s sales compensation program; and how well the company does is often a reflection of the effectiveness of its commission program. A well designed sales compensation program focuses salespeople on activities that support the company’s business objectives, and, in turn, rewards those salespeople for their contributions.
Base salary, commissions, and sales prizes make up the bulk of a typical salesperson’s compensation package, but the specifics vary by industry. Stock options grants to salespeople are becoming more widespread too.
A salesperson’s commission is typically based on either a percentage of sold revenues or profit margins. Commissions usually account for 30 to 50 percent of a salesperson’s cash compensation package, which means that commissions routinely run between 43 and 100 percent of base pay. The percentage that commissions contribute to a salesperson’s compensation depends on factors such as required technical knowledge, sales cycle time, product profitability, and whether the sale is dependent on the skill of the salesperson.
Commissions will account for a larger portion of pay when the sales cycle is short, the sales highly profitable, and sales dependent on the skills of the sales person. Commissions play a smaller role when the sale requires greater technical knowledge and when the sales cycle is long.
This is not to say that total compensation is necessarily lower for salespeople with greater technical knowledge or those selling products with slower sales cycles, rather, the mix of pay is weighted more toward base pay and less toward commissions so that the total cash pay earned is reasonable. Companies don’t want to penalize salespeople for selling products with less commission potential if those products are an important part of the corporate strategy. Similarly, if a salesperson is responsible for a product that’s an easy sell, the company wants to make sure there is the maximum incentive to sell as much as possible – therefore, less emphasis on base pay and more emphasis on commissions.
Commissions can vary within a commission plan, reflecting the priorities of the company. If the company wants to build market share, it may pay larger commissions for selling products to new clients. Commissions are also higher when new products are introduced., especially if they are more profitable. Clearly, commission plans are constructed with great care. A poorly designed plan can have unintended results such as rewarding employees for the sale of new products that cannibalize more profitable ones.
Most commission plans place no limits on what a salesperson can earn. In some instances, if a certain sales threshold has been met, the commission percentage can increase. Regardless, commissions are one of the simplest and most direct forms of pay-for-performance. Underlying the commission plan is one of the appeals of a sales position: unlimited income potential.