Guide to Sales Compensation Planning

By: Yueh-huah Lee

Today sales force productivity results from a competent sales team working hard to achieve the company's marketing goals. To accomplish that, a company needs to combine several elements, giving motivation top priority in the process. Human motivation provides the power, while marketing strategy provides the direction. Any company can mesh the power of human motivation with marketing strategy by using a systematic approach to plan sales compensation. This method will result in the sales compensation plan that forces superior sales efforts on the things that count most for the company.

What do you do next? There are five steps in developing a sales compensation plan:

1. Fact-finding
2. Defining objectives
3. Developing plan elements
4. Testing, revising, retesting
5. Documenting, communicating

Fact-finding

Before rushing ahead to find the best pay formula, you need to collect as much factual information as you can get. Armed with sales-related information and the company's marketing and organizational data, you may begin a thorough analysis. At this point, you may have processed a considerable amount of information and could probably prepare a written document on the sale compensation program's strengths and weaknesses. Do not rush to conclusions. It's still early, and you have yet to gain input from the field. Sale representative impressions will expand your understanding of more accurate facts.

Defining Objectives

Defining objectives involves refining the company's marketing objectives and strategy into a set of specific sales goals for the sales compensation plan. The more specific the goal, the greater its usefulness in planing and evaluating a sales pay plan.

Developing Plan Elements

Once you have identified where you are and where you want to go with the pay plan, you are already to develop the pay plan elements. There are four major elements that need you to decide upon:

	Type of pay plan - the general pattern of fixed pay (salary) and variable pay (commission and bonuses) that you want to provide
	Target pay - the amount you want each salesperson to earn at various levels of performance.
	Incentive criteria - the results you want to reward.
	Pay formula - the rate at which you will pay for results

Testing, Revising, Retesting

Designing a sales pay plan, like other complex design tasks, involves a cut-and try process. Your first outline probably will not survive into the final draft of the plan. As you assemble the plan elements, you may find that some conflict with others. So you will make probably changes. It means balancing or compromising among the objectives that you want and dropping those of lesser importance. Everyone concerned with designing the sale pay plan should understand that each part must be subject to change until the total plan is completed and approved.

Documenting and communicating

You are finally ready to convert from a draft outline into a finished document. The document itself reflects the care and concern that management has given to designing the sales pay plan. Beyond the written document, the salespersons deserve a personal explanation of the new sales pay plan. They might have some questions about what the new pay plan will do for them. Clear up questions and concerns with an open attitude. It is certainly preferable to accomplish those things before you launch the plan.

Listed below are web sites that will provide information on developing a pay plan as well as examples of excellent sales compensation:

Reference:

1. Carey, James F. Complete Guide to Sales Force Compensation. Business One Irwin, Homewood, IL, 1992.
2. Keenan, William Jr., ed. Commissions, Bonuses and Beyond. PROBUS Publishing, Chicago, IL, 1994
3. Moynahan, John K., ed. The Sales Compensation Handbook. AMACOM, New York, 1991