ARCHIVE: Sales Incentive Plans: 10 Essentials

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SAVVY SELLING - NOVEMBER 17, 2006

Sales Incentive Plans: 10 Essentials

by Michelle Nichols

EXECUTIVE OVERVIEW
How to create a plan that works for both sellers interested in earning more and business owners and managers pushing for profits

Creating the perfect sales compensation plan is a struggle for companies of all sizes. Salespeople want to make the most money with the least effort. Business owners and managers want the most profits and the fewest hassles. I addressed this issue in a column over three years ago (see BusinessWeek.com, 5/29/03, "May the Salesforce Be With You!") and continue to hear from readers asking what they should do.

There's no one-size-fits-all recipe for sales pay plans. Within the sales profession, compensation packages vary widely—from $20,000 to $500,000 a year! They can be based on straight salary or pure commission—or some combination of salary and commission. They can also involve bonuses which can be based on personal sales, overall business profitability, group sales, product demonstrations, and other criteria. The rewards can also differ for various product lines or types of customers.

Andris Zoltners, Prabhakant Sinha, and Sally Lorimer wrote a definitive book on this topic, The Complete Guide to Sales Force Incentive Compensation: How to Design and Implement Plans that Work (Amacom, 2006). It's about 500 pages long and costs $65. That may sound expensive until you realize that's the cost of about 30 minutes of consulting, and less than the price of one "please don't leave us to work for our competitor" lunch. I highly recommend it.

What Are You Paying For?
According to the authors, when you offer sales incentives in your pay plan, whether they're commissions or bonuses, the implications go beyond the finance and payroll departments. Properly constructed, they can energize the sales force, communicate what's most important in terms of products or customers, help attract and retain the best salespeople, and develop a sales-oriented culture. Of course, if sales incentives aren't well thought through, the opposite can also occur.

I believe the best place to start when creating your sales pay plan is by determining what your customers want. If they would prefer more service and expertise, you might want to pay your salespeople more salary and less commission. If your customers prefer less hand-holding, or if a group other than your sales team handles customer service, then setting up a plan that offers more—or all—commission might be right for you.

The authors warn that switching from an all or primarily salary-based plan to the opposite type will probably result in an almost complete turnover of sales staff. By their nature, "farmers," or those who prefer to cultivate existing clients, can't become the "hunter" types who uncover new accounts overnight, and vice-versa.

Here are 10 essentials to consider when constructing your plan that I gleaned from the book.

• If you want your reps to sell more of a particular or new product line, consider adding a bonus or increased commission. However, be careful not to make it so attractive that they stop selling your established, bread-and-butter lines.

• If you pay your sales force too much, they may get complacent and not go after new business. If you pay them too little, you'll have high turnover and high training expenses. If you pay the top performers too little and the low performers too much, you'll lose your profit-generators and keep your expense-generators.

• If you determine your commission percentage based only on volume, you may encourage your sales reps to discount more than necessary, resulting in lower profitability.

• If you pay bonuses based on customer-service scores, customer service will improve. However, you must guard against sales reps seeking customer satisfaction at the expense of additional sales.

• If you want your reps to sell new products or a new product line, you might want to offer a reward per demonstration, even if they don't make a sale right away.

• If you offer a monthly overachievement bonus, salespeople might be motivated to sell more every other month. When I sold on monthly quota, if an order came in at the end of a low sales month, we sometimes held it for the next month, hoping it would be better and put us over our monthly goal. We called this "putting an order in the drawer."

• If you let the sales manager decide how much bonus will be paid each month, sales reps will spend more time trying to please their managers than they spend trying to sell to their customers.

• If you make the plan too complex, your salespeople will ignore it. My stockbroker recently told me his pay plan was so convoluted that he just did what he thought was best and waited to see how much they paid him.

• If you're going to change the sales-compensation plan, compute how it will affect your top 20 sales producers. If a proposed plan hurts them, find another plan.

• If you have only a meager budget for bonuses, you can make a big deal out of the presentation, offer a humorous and symbolic award (one company I know gives a fake stuffed beaver, because the beaver is the hardest working animal in the forest), or provide a lasting memory, like putting their name on a prominent plaque.

Just as an army travels on its stomach, a sales force travels on its compensation plan. You can't throw one together at the last minute or copy one from another organization. You also can't change it too often, and you can't make it too complex—or too simple.

Once you've decided on a plan, consider how you'll sell it to your sales force. Show them how it benefits them personally, then send them out to sell some more. Happy selling!

Michelle Nichols is a professional sales speaker and consultant based in Reno, Nevada. She welcomes your questions and comments. You can visit her web site at www.savvyselling.com or contact her at michelle.nichols@savvyselling.com. Her toll-free number is (877) 352-9684.

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