Sales Compensation and Expense Allowances

Why a Separate Sales Compensation Plan?

One of the biggest management challenges for a growing organization is compensating salespeople effectively. It becomes obvious that you need an incentive plan that encourages your sales team to land new accounts and continue to upsell to existing customers, but where do you begin when designing the best way to compensate them?

Keep in mind, sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. Recognizing and rewarding good performance in your sales team is one of the fundamental keys to business success and will attract and help retain top sales talent.

Sales compensation plans are necessary, and the following important challenges should be considered when developing these plans:

• Sales incentive plans should link clearly to business goals and improve sales force motivation.
• The sales compensation plan should be geared toward meeting or exceeding the sales objective.
• Effective sales compensation plans provide cost control and reduce the cost of the sale.
• Sales compensation plans should be effective in attracting and retaining the right sales talent for the business market.

Link sales incentive plans to business goals

Sales incentive plan objectives should always align strategically with the organization's business goals. Too often this step is overlooked and results in good compensation plans with poor business performance because the objectives of the plan and the organization were misaligned.

At regular intervals, all sales compensation pay plans should be reviewed and monitored for effectiveness. A more focused and strategic assessment should be conducted when business objectives are reset for a new year or after a new organizational change. This type of assessment should evaluate how well the existing plans are performing or would perform against newly defined business objectives.

Increase profitable sales

While most sales managers want to design sales compensation plans that "pay for performance" and increase profitable sales, there are inconsistent and conflicting views about just what "successful selling performance" means. Meeting quarterly sales quotas can be one measure of performance, but what if those quotas are met by selling products at a deep discount? How should those count? Meeting the needs of current customers is also important, but you may question whether product sales to an established account deserve to be rewarded in the same way as bringing in a new customer.

"Successful selling performance" may well depend on your business objectives. The key is identification of sales-related actions and behaviors that support larger business objectives and increase the type of profitable sales that the organization is targeting.

Effective sales compensation plans take into consideration profit at the high end of the range of profitability appropriate to the market stage, i.e., start up, fast growth, penetration or saturation. There are different ranges of profitability that are realistically attainable at different phases of the product or service life cycle for an organization's primary business.

So, how do you reward for profitable sales? There are many variables that might be considered but you might focus rewards on one of these:

• Gross margin dollars, which is defined as sales price less cost of goods
• Gross margin percent, which is sales price less cost of goods divided by cost of goods
• Price realization, which is the sales price divided by list price
• Net profit, which is the sales price minus the cost of goods and allocated costs

Cost control

The cost of sales compensation will vary from industry to industry and company size. A separate sales compensation plan provides the opportunity to align sales expense to business performance. A bonus or commission payment is a single payment that does not add to overall labor costs beyond the time of the earnings period. This allows the rewards to be large without having a detrimental effect on labor costs.

Sales are vital to an organization's well-being. Sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. A separate sales compensation plan will let your organization encourage specific accomplishments, such as finding new clients, pushing overstock, meeting quotas, etc. In addition, a separate plan will give your organization the flexibility to change goals (and targets) when necessary.

Attract and retain qualified sales employees

Characteristics of sales employees typically differ from those of other employees. Sales employees can be described as social creatures. In order to motivate them you need to have an incentive plan geared toward their talents and drives. Also, the openness of salespeople can extend to the workplace, as salespeople often freely reveal how much they earn to other salespeople inside or outside the company. Whether their motivation is to validate, commiserate, boast or just share, salespeople like to talk about what they earn. This makes them unique compared to other roles in an organization.

Studies show that successful salespeople are relatively:

• aggressive/ambitious
• outgoing
• self-motivated
• materially oriented
• high achievers

This last trait – high achievement drive – was examined by psychologist D.C. McClelland.

He found that high achievers have distinctive characteristics.

1. Desire to take moderate risks. The risks are achievable but not easy to reach. These individuals like to choose the risks for themselves.
2. Need for immediate feedback. The person must be able to see that he or she is moving toward the goal.
3. Enjoys the hunt, more than the prize. Achievement is more important than the rewards that may come from it but the rewards are regarded as a measure of success.
4. Consumed with the goal. High achievers are preoccupied with the task. They focus on the goal and keep at it until it is achieved.

If we put the last two characteristics together, we can see why the high achiever often feels a letdown upon reaching the goal: it was the pursuit and not the reward that was stimulating.

The characteristics just discussed typically call for compensation plans that provide:

• challenging goals that engage the employee.
• transparency of the incentive program so that the plan will not be perceived as unfair.
• performance feedback and
• meaningful rewards and recognition.