Steps in Devising a Good Sales Compensation Plan

Sales are the ultimate goal for any business as it incurs a profit which is the lifeblood for the organization. Sales representatives play a crucial role in an organization as they are the one who actually knows the needs and wants of customers and what they expect out of the company. There job is the most challenging one in the organization as they experience more rejection than acceptance while approaching a customer. Yet they try their best to turn the proposal into sales with full dedication and passion. What do you think drives them to be passionate about their work even after so many rejection? The three things that keep the sales representative motivated and encouraged are personal growth, recognition and compensation. The sale compensation plan is a catalyst for motivation that encourages the employees to achieve a desired target to attain benefits that come with it. It is an integral part for employee sustenance and survival as it carries a motivational factor in it. It brings balance between compensation and sales performance ensuring that the employees feel content and motivated.

To get the desired result, you have to design a good compensation plan in such a way that it work towards the overall fulfillment of organization’s objectives and improve employee performance and retention. Here are 6 steps in which a company draws up their sales compensation plan:

  1. Build your team
    To achieve something great, building a team is important and a right team gives you the desired result. The sales department is linked with every other department so while creating a sale compensation plan it is necessary to include key players in your team from the entire organization as it will affect everyone in one or the other way. It includes senior management from marketing department as sales and marketing works closely and inter-dependently. HR managers and financial analysts are also included to take the responsibility of cost management and market survey which will help in designing the plan. Sales person will work together as a team then only the targets can be achieved, this plan is to make employees unite and create healthy competition. There should be an alignment between different departments of the organization to work as a complete system.
  2. Identify the objective of the plan
    This step is crucial because identifying the objective is the result we want to achieve at the end of the day. The management has to determine the organizational objection as well as the objective of the salespeople while developing the plan. Organizational objective may include annual sales volume target, market penetration, period-wise sales target, new product mass distribution, developing new customers etc., while objective of sales people include recognition, engagement, incentives, personal development etc. By evaluating these objectives, the sales manager can now easily finalize the other aspects related to the type of compensation plan based on the objective to attain.
  3. Alignment of compensation and sales performance
    Every company has a different culture and philosophy of compensating the performance of its employees. Compensation analyst does a market survey to get an idea of how to pay its sales representative. The compensation plan should be fair enough to attract and retain the employees and keep up their motivation. Some companies have a tendency to pay higher incentives to senior sales representative and lesser to junior ones. But this should not be the case. The companies should follow the policy of differentiating the low and high performer employees. Compensation should be imparted according to the performance and number of targets achieved. High performers should be rewarded more but also ensure not to overpay. This creates a fair pay environment in the organization and results in good compensation plan.
  4. Decide Pay mix and structure of plan
    In this step, the sales manager decides which method of compensation plan should be adopted based on the objective of the company. Some companies use a pay mix plan. Pay mix is the ratio of basic salary to variables, which can be determined on the aggressiveness of the company. More aggressive pay mix is where base salary=variable whereas less aggressive is where base salary>variable. The type of aggressiveness is decided on the basis of the role of sales employees and how difficult is their approach.

    Some companies work on quota basis where each goal is assigned with a fixed amount of incentive or remuneration, achieving to which will make them eligible to attain it. There are also commission plan, bonus model, profit sharing, travel awards, gifts etc. the compensation plan can also include  benefits such as vacation, paid time offs, insurance, pension, legal assistance etc. The sales manager has to decide what type of structure to use in the compensation plan and work accordingly.
  5. Communicate your plan
    After the plan is establishes, the first step comes is to communicate your compensation plan with your sales representative and management. It is the vital process in your compensation planning as proper communication will give you desire result. Miscommunication will lead to disagreements and the entire purpose of the plan will become futile. The best way for effective communication is being transparent with your approach and it should be rendered from a high level authority to ensure credibility. Transparency will avoid confusion and will put across the plan objectives effectively. Focus on to communicate the amendments made in the plan from the previous year and how it will help the organization and employees.
  6. Monitor and evaluate your plan
    The last step is to monitor and evaluate whether the plan is effective or not and is able to fulfill the purpose. Implementation is the crucial part and once implemented you should monitor it to see whether it requires any mid-term adjustments or not. The sales manager needs to measure the performance of the sales representative to get an idea of the effectiveness of the compensation on their performance and motivation. Evaluation is an ongoing process and should be adaptive to new market trends to get the desired result. A mid-year evaluation helps you to take major decisions on your compensation plan for future goals.

    A strong compensation plan requires strategic and calculated approach with a team of key players that will help in building good compensation plan. It should align with the performance of the employees and should focus on company goals. A compensation plan is tailored to serve both individual and company’s goal that will ultimately help them to combat competition.
Author avatar

Post a comment

Your email address will not be published. Required fields are marked *