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Sales Compensation Plans - The Right Incentive!


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Perhaps the item most often implemented incorrectly within sales organizations is the Sales Compensation Plan. Many of the compensation plans I look at have just the opposite effect they're intended to have-sales people hate it, management hates it, and accounting hates it.

They each have their own personal reasons why it doesn't quite work for them, but the negative result is the same. An effective compensation plan needs careful consideration in the following six areas:

  • Pay Mix. How much of the salesperson's target income is salary and how much is variable pay.

  • Quotas. These should not be set AT company goal, as only 70% of the sales team will meet “quota. "

  • Leverage. Include both an upside for big payout if target is grossly exceeded and a downside if a minimum threshold is not met.

  • Variables/Levels. Variables include factors from which compensation is based on, such as revenue, product mix, new vs. existing business, etc. and levels refer to the number of payout brackets there are, such as 3%, 4%, 5% based on performance within variables.

  • Payment/Credit Timing. When are sales booked to commissions and how are credits handled for future refunds or bad debt.

  • Shortfalls/Windfalls. A shortfall is an accommodation for changes made midstream that are out of a salesperson's control, such as company re-orgs that suddenly change their territory, products that are unexpectedly dropped, etc. A windfall is a large sales event that occurs outside of a salesperson's influence.
  • Each of these areas must work together so that 1) you are compensating your sales team for where you want them to focus most and 2) a salesperson can quickly calculate their income at any time (this allows for them to be more proactive in their behavior).

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