By Jennifer Blake, PerformancePoint LLC

What is converting prospects into customers worth to your business? Your organization might have a phenomenal product, but if no one buys and uses it, its value will stay your little secret. Motivating salespeople to get your goods into customers’ hands is essential to the product’s success. Properly rewarding your salespeople reinforces and encourages their future successful performance. Read on to learn more about how to set up an effective sales compensation plan.

Basic Considerations

The framework for a sales pay plan can be intimidating to HR practitioners, even those experienced in compensation design. A basic understanding of the sales compensation’s purpose, however, and the building blocks used to design a plan is well within the reach of most HR pros.

The compensation plan’s goal is to support your efforts to attract, retain, and reward the best salespeople who will directly contribute to the organization’s profitability. Several principles are important in guiding your plan design. For our purposes here, we’ll focus on aligning incentives with different sales roles.

Sales compensation plans typically use a base salary (or fixed pay) and incentive pay:

• Base salary provides the security of a steady income, even if it’s a small part of the total pay.
• Incentive pay represents variable pay that changes based on the type of sales and the salesperson’s specific role.

The challenge is finding and using the optimal combination of fixed and variable pay to reward and incentivize the salesforce.

Case Study

First, let’s review a case study demonstrating what not to do. The XYZ Company paid account managers a straight commission to sell high-cost industrial products and service agreements. The account managers were responsible for maintaining a strong relationship with each of their customers and were encouraged to cross-sell and up-sell when opportunities arose. They received commission payments on the initial sale and all subsequent revenue generated by the same customer.

Over time, the VP of sales observed the company’s sales volume decreasing while the account managers continued their “relationship building” on the golf course, among other venues, and enjoyed a comfortable standard of living. The customers became attached to their account managers, giving them the leverage they needed to discourage management from implementing any changes to the compensation plan. The pattern continued until the company was no longer in business, in part because of the mismanagement of sales compensation.

Typical Roles

In almost any sales organization, multiple individuals are involved in the sales process. Assume the following three job descriptions:

• Inbound sales representative: receives calls and answers questions from prospective and existing customers; processes routine customer orders; refers orders or leads over a certain dollar amount to sales rep or account manager;
• Territory sales representative: acts as a point of contact for existing and potential customers within an assigned territory; sells the company’s products to customers within the territory; and
• Account manager: manages sales and relationships with specific customers; focuses on customer retention as well as generating new business.

Better Way

Using a combination of fixed and variable pay, let’s look at another plan design that may have been more successful at XYZ. To determine the split between fixed and variable pay, you’ll need to answer some questions about the sales process:

• How much influence does each role have in the purchasing decision?
• Does the salesperson have any pricing authority? Is an incentive paid on the number of units, sales revenue, or gross margin?
• What drives the buying decision, e.g., proprietary features, price, service, brand loyalty, and/or image?
• What is the level of expertise required to persuade potential buyers? Does the expertise reside with the salesperson, or are other team members involved?
• How complex and what is the duration of the sales cycle?
• Are sales reps generating their own leads, or is someone else providing them?

Pay Mix

Now that you understand the roles and have analyzed the sales process, how do you design a pay plan that will reward employees for production, not just time and effort, and incentivize more of the same? In our case study, the straight commission plan with no cap encouraged account managers to spend their time in relationship management, not generating new business.

Arguably, one of the most important parts of the sales process is persuasion—convincing prospects of their need for your company’s product. The roles with the most responsibility for influencing and persuading customer decisions typically have the most pay at risk (i.e., variable pay):

• Inbound sales rep: 90% base pay, 10% incentive pay;
• Account manager: 70% base pay, 30% incentive pay; and
• Territory sales rep: 50% base pay, 50% incentive pay.

Bottom Line

Once you have articulated your pay plan’s goal, identified the sales roles needed to achieve it, and pinpointed the amount of pay at risk for each role, you are on your way to designing a sales compensation plan. Your next steps will include determining the measures of success for each role, the tools you will use to measure, and the steps to communicate the plan and assess its success.

Jennifer Blake is a consultant with PerformancePoint, LLC. You can reach her at jblake@performancepointllc.com or 901-291-1577.