House or divisional manager accounts are excluded from quota, commission, and bonus calculations. 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. While an effective quota should be a stretch to motivate reps, it shouldnt be outside the reach of an average salesperson on the team. Because bonus incentives are usually paid quarterly, it is not recommended that the full amount be paid when due. As was to be expected, commission plan salesmen lagged in all categories. A bonus incentive plan is more difficult to establish and administer than a commission incentive. Companies pay by one or more of these typical methods: 2. Rejection by customers and prospects is a constant negative force. But theres also the risk that underperforming reps are allowed to stick around because theyre being paid less, Dorsey said. 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. While sales executives should never lose sight of their primary objectivesto increase salestop management pressure for profitable sales increases. As much as compensation plans can motivate salespeople and shape their behavior for the positive, theycan also encourage bad habits. 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. Techniques that principally provide salesmen recognition, status, and a sense of group belonging are generally referred to as psychic income.. The difference is that reps in the tiered model are paid an escalating commission rate as they close deals that meet specified benchmarks. It serves as both a blueprint for how the company expects to grow its revenue and what salespeople need to do to make earnings for the year. 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. In his plan, a base salary level is determined on a discretionary basis. In this model, reps are paid a base salary that is supplemented with their commission earnings. Following are the advantages of the straight commission plan: Commission plan salesmen have historically earned more than their counterparts in a salary or combination plan. The best plans take into account historical sales performances and expected win rates to calculate exactly how many calls, meetings and demos it takes to reach the annual quota. At ActiveCampaign, for example, that provision is tied to short-term customer churn. Offers participants the advantages of both salary and commission. Can, where low salary and high bonus or commission exist, develop a bonus that is too high a percentage of earnings; when sales fall, salary is too low to retain salesmen. One great advantage of the commission incentive is the frequency and regularity of the reward, usually monthly. 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. Perhaps of more significance, earnings have doubled in the past 10 years. Every compensation plan is a compromise. Transparency and fairness are key to a successful compensation plan. And that perspective shapes how he approaches building his teams compensation plan. Participating in national and local trade shows; conducting occasional training programs for trade groups and associations. 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. 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. Offers few reasons for putting forth extra effort. Other strategies include a high-risk, high-reward structure in which reps are only paid on commission with no base salary. Dental insurance, stock purchases, profit sharing, and salary continuation programs have been added to the benefit package since 1958 at an increasing rate. Is often complex and difficult to understand. In the area of nonfinancial motivation, sales executives should be doing a better job with the available techniques. Step 3: Over $25,000 a month. Ceilings on incentive payments are usually part of combination plans. 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. One of the most common mistakes Page sees companies make is designing compensation plans that are too complex. As the rewards are closely tied into sales or gross margins, closer supervision and control of the plan are needed as the incentive portion of the plan increases. Compensation plans will typically include an on-target earning that represents their full income if they reach their quota. As long as sales is a commissions-driven role, the compensation plan is still the primary driver of a reps behavior. Below are some of the most common compensation plan examples. Costs are predictable, results are usually successful, and rewards are immediate. The number can help to incentivize or weed out low-performing reps but is not so high that salespeople become disheartened. We expect you to be average. Its much more of a morale thing, and, by then, theyre probably looking for a new job.. Problems arise in cutting territories or shifting men or accounts. As I said earlier, many companies are seeking ways of increasing company loyalty and of providing competitive advantage to attract and retain the commission salesman on the payroll. 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. The position description for a field engineer on salary with a West Coast industrial equipment manufacturer illustrates the difficulty of measuring sales performance for incentive reward. The split is usually determined on the basis of historical sales performance and compensation records. 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. Wide variances in income between salesmen may occur. Gross sales are those of new and/or used equipment invoiced to a buyer within a period of a calendar month. It could be bringing on sales automation tools to boost productivity or hiring additional SDRs to increase pipeline. The author sets out the possible reasons for choosing each type of plan according to the needs of the company. 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. Annual quota is divided in two parts: first six calendar months and last six calendar months. 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. More on Sales CompensationDitch Commission and Pay Your Reps Full Salaries. While the combination plan continues to be most favored, the commission plan has been declining in recent years. It gives reps a measure of security because a portion of their salary is guaranteed each month, and it allows leaders to incentivize over-performance with commission boosters. The most important determination in building a sound salary-plus-incentive plan is the split between the fixed portion (salary) and the variable portion (incentive). Where companies get in trouble is when they dont make it extra they change the comp plan so that reps now have to go do these more difficult things to make their OTE.. Personal contact, recognition, and encouragement are needed to sustain a positive attitude and a high level of morale. Imagine starting a new year without any idea how much youre going to be paid. Therefore, quota and customer assignments are difficult to determine, making other types of compensation plans too costly or too complex to administer. Sales has a lot of ability to influence whether a person churns within a short period of time.. A good rule of thumb is that, if you cant explain how the compensation plan works, then it isnt going to motivate your reps. If you need a Ph.D. to calculate your commission plan as a sales rep, its just not gonna work, Page said. Improperly used or used for the wrong reasons, they can create dissension and dissatisfaction within the ranks. The plan works well at the start of a new business where the market possibilities are very broad and highly fragmented. Theres a common belief that salespeople are purely motivated by money. As a result, salespeople need extraordinary encouragement, incentive, and motivation in order to function effectively. Most companies in the study favored a combination plan, but such plans have some disadvantages to offset their obvious attractiveness. Both lead to high rates of churn, causing the company to lose money, even though the rep is meeting their goals. Take another look at Exhibit III to see how the experienced salesperson on a combination plan has fared historically. The more focused a salesperson can be around one or two bonus payouts in a quarter, the better the results will be. Most plans will also include potential bonus pay called sales performance incentive funds. Exhibit I Companies Using Various Compensation Plans, Exhibit II Type of Compensation by Industry, 1977. Making a compensation plan work is all about balancing whats best for the company with what a sales rep can control, Dorsey said. Another variation of the combination plan is one which pays salary, commission, and bonus. 2. An accelerator pays a rep a higher commission rate for any deals a rep closes beyond their quota. This is an area in which the industrial psychologists have made positive contributions. So the higher the companys profit on a sale, the more money a rep will earn. This fact of earnings plus relative advantages of the combination compensation plan, which follow, reinforces the continuing popularity of this plan. While this approach offers more flexibility than the other two types, it is more complex and more difficult to administer than any other plan. Counterintuitively, this is especially important at fast-growing startups where responsibilities can shift day to day. Salesmen may sell themselves rather than the company and stress short-term rather than long-term relationships. Exhibit I shows the use of the three basic plans in recent years. They may be developed from a moving average of historical sales or gross margin for two or three years plus a one-year forecast averaged into the moving base. 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. 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%. Some salesmen may be tempted to skim their territories. In this strategy, each regional team is paid a commission based on the total revenue they generated in their territory, which is then divided evenly among each rep. Contests usually run for one or two months, but some as short as a week can produce results. And yet, Dorsey frequently sees companies creating on-target earnings and quotas that are impossible for all but one or two reps to hit. Ultimately, its all about tying a reps compensation to a quota they can attain, Dorsey said. The compensation plan should also align with the companys goals. When that happens, expect high rates of customer churn due to bad deals, and, eventually, employee churn. A 5% commission, based annually and paid quarterly, on all sales volume over predetermined sales base. From there, hell determine whether the SDR team can give the rep enough pipeline to hit those numbers. Currently, many companies in most industries are paying part or all of the costs of 12 major benefits: hospitalization-surgical insurance; life, accident, and dental insurance; educational assistance; profit sharing; pension plans; stock purchase; personal use of car; club or association memberships; moving expenses; and salary continuation program. Without taking that step, the company runs the risk of incentivizing the wrong behavior or setting targets that go beyond a reps responsibilities. Often, thats the result of incorporating different commission payouts for bringing on new business, new logos, reaching a specific gross margin and for customer retention. Similar to the commission model, sales reps are paid a portion of money for each deal they close. Theres nothing more demoralizing than an impossible-to-reach quota. Sales reps are paid commission on the year-long value of the contract. At different rates by product category. If a commission plan is desired, the disadvantages must be offset. 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. Combination plans dominate the compensation package makeup despite the complexity of administration and control. Free for a limited time! Shaping compensation around clear responsibilities helps ensure that each person has incentives tied to outcomes they can control. Other factors used as a measure for bonus goals are market share, product mix, new accounts, nonsales activities, higher unit sales, and increased sales from existing accounts. This is one of the more common compensation strategies in sales today. Several sales executives cited examples of extraordinary commission earnings for that year which they felt were undeserved and totally disproportionate with sales effort expended. If quotas for both halves of the calendar year are attained, an additional bonus of 1/2% of all sales for the year is paid. 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. The author sets out the possible reasons [], A version of this article appeared in the. HBR Learnings online leadership training helps you hone your skills with courses like Leading People. Can, unless a decreasing commission rate for increasing sales volume exists, result in a windfall of new accounts and a runaway of earnings. If compensation structures arent aligned with sales strategy, reps can game the system by stuffing deals with unnecessary add-ons, making promises your product cant deliver on. No matter what obligations a sales leader may have, its their responsibility to distribute the plan by the start of the year. Churn isnt always reflective of a bad deal, and a salesperson shouldnt be punished for that. More salesmen are using air travel, with 84, There has been virtually no change in expense policies in the past six years80. More on Sales CompensationAre Your Quotas Too High? Still, its important the clawback provision is within a reasonable timeframe that a rep can influence during a deal, Li said. If they overperform, they have the opportunity to earn bonuses. Exhibit II shows selective use of the three basic plans in 34 SIC industries. Todays salesman wants a challenging job with good prospects as well as payoffs now. 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. Salesmen have the greatest possible incentive. This gives them the freedom to earn as much money as they can, but with no guaranteed income. Three basic compensation plans are available to sales management: salary, commission, and combination (salary plus incentive) plans. This structure helps ActiveCampaign align its sales strategy with its customer success goals and reduce churn, Li said. The result? This is repeated for the second half with bonus paid in January. This compensation model involves paying sales reps the same way other teams are paid through an annual salary. Heres what your job is, now go and do it.. Step 2: Sales volume from $18,000 to $25,000 a month. Two observations about these data are worth noting: average total earnings have increased 163% in the past 13 years; and total earnings in 1977 increased 20.6% over 1975, showing the highest increase of the three basic compensation plans for that period. 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. 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. This model works best if you have well-defined and balanced sales opportunities in each territory. If youre going to be below average, youre going to make less. If the company wants to expand new logos and increase sales of a particular product, then structure the contract to prioritize those types of deals. Sales has a lot of ability to influence whether a person churns within a short period of time. The main source of data used throughout is Dartnells 19th Biennial Survey of Salesmen.1 The data are based on studies of 380 companies in 34 Standard Industrial Classifications throughout the United States and Canada which employ a total of more than 15,000 salespeople. 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. These temporary bonus payouts can be one of the most effective ways to accelerate sales behavior around a specific goal. Sales of technical products commonly involve this form of team selling. Accelerate your career with Harvard ManageMentor. Above average, youre going to make more, Dorsey said. The three grades used in the Dartnell study are trainee, semiexperienced (one to three years), and experienced (more than three years). 3. Also, rewards paid on a quarterly basis are not as effective motivators as weekly or monthly commission payments. 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. That makes it impossible for the salesperson to figure out how much theyre going to get paid. The most common format for a compensation plan is a 50-50 commission structure, in which 50 percent of a reps earnings are their base salary and 50 percent on commission. Base salary plus 10% of gross profits plus 1/2% of gross sales. Li makes sure she develops a clear definition of each positions role and responsibilities before she builds her plan. Some companies simply make bonus arrangements on a discretionary basis. Contests are like a double-bladed sword. If one rep is selling software in Silicon Valley and another is selling it to Alaska, their quotas need to represent the demand in their territories. Service aspect of selling may be slighted. Gives salesmen greater security because of steady base income. A proper adjustment is made with the final quarter payment. In my many discussions with sales executives over the past two years, the subject of profitability of sales kept coming up. 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. In this article, I will focus on the basic types of compensation plans, current levels of pay, and the compensation-related areas of expense practices, additional incentives, and fringe benefits. Salesmen are more quickly motivated to keep or exceed performance levels with the rapid tie-in between performance and reward. With the cost of sales calls constantly rising and with increased traveling and lodging costs, companies must periodically examine their expense policies and procedures and make adjustments in order to draw that ideal fine line where expenses are kept under proper control and reimbursement to salesmen is fair and reasonable. Structuring the salary portion of the plan requires establishing salary grades for the sales force. If you have a sales team that sells to businesses on the West coast, another for accounts in the Midwest and a third on the East coast, then a territory volume compensation plan might work best for your team. 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. The salesman expense policies I have examined over the last five years indicate that sales executives are exercising good judgment in controlling and administering field expenses. Such a plan includes straight commission and commission with draw. The plan works well when the main objective is missionary work or requires a lot of time for prospecting, or if the salesmans primary function is account servicing. Secondary objectives of increasing sales from existing accounts and opening new accounts require special incentive treatment. Prior to joining Built In in 2018, he has worked as a staff reporter for the Las Vegas and Reno Gazette-Journal. This is his challenge in the years ahead, and he must meet it if he is to survive. It can be designed as a team-wide competition or structured around additional sales targets. For as long as sales has existed, commission has been considered the only way to motivate salespeople by many. If quota is attained for the first half, bonus of 1% of all sales during that period is paid in July. If he had his choice, hed opt to offer salespeople a salary just like any other employee. SPIFs can also bring out the competitive side of salespeople. 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. It gets away from the words incentivizing. Its about defining your job. Using the results of a survey of 380 companies in 34 industries, this author examines three basic types of compensation plans: salary, commission, and combination (salary plus commission). 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. Bonuses are paid on a variety of sales results, but gross margin goals are used most frequently. Makes it simple to switch territories or quotas or to reassign salesmen. Unit sales costs are proportional to net sales. If they overperform, companies can bake in higher commission rates or incentives that allow the rep to make more money than their on-target earning specifies. The following three step formula is applied: Step 1: Sales volume up to $18,000 a month. 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. Earn badges to share on LinkedIn and your resume. 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. These stabilizing elements should help in recruiting and keeping men. The most frequent percentage split reported in the Dartnell study was 80% base salary and 20% incentive. Competitive analysis of other company programs, the base salary needed to keep good men, and an estimate of incentive potential should also be considered. The plan will often include an on-target earning, which represents a reps full pay if they reach their goals. 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. In my opinion, when people say compensation plans are a mess, its usually a downstream manifestation of upstream sales problems, said Li. Most companies in the study favored a combination plan, but such plans have some disadvantages to offset their obvious attractiveness. The process starts all the way back with the companys strategy point of view, but Ive observed that a lot of sales leaders dont think that far back when it comes to commissions.. Here are the elements of a good salary, commission, and bonus plan used by a midwest fabricated metal products company: 1. Each territory has a minimum requirement for gross profits and gross sales. Commission accelerators can also be an effective tool to get the most out of sales reps, Page said. There are several different ways to structure a compensation plan, but the right one for you will depend on your sales strategy and team. If theres one clause that Dorsey will never incorporate into his compensation plan, its a cliff.
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