Sales Compensation Plans and Issues- FOR SOME decades now, marketing textbooks and professors have assiduously distinguished between sales and marketing. Theodore Levitt’s 1960 definition is still the classic: “Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering, and finally consuming it.”1 Nonetheless, whatever else marketing encompasses, it certainly includes selling—the getting and keeping of customers and revenues. As the old saying goes, “In most companies, sales is the only revenue-generating function; everything else is a cost center.” Sales’ importance as a source of revenue tends to define the form and substance of companies’ marketing programs—for both good (e.g., close attention to buying processes at specific accounts) and ill (e.g., confusion between sales and marketing).
Of all sales issues, compensation is probably the most discussed. It is now the focus of a vast and varied literature with enough folk wisdom and quantitative studies to satisfy most managerial temperaments.2 But the great bulk of this literature focuses on what might be called “compensation hydraulics”: push this pay lever, is the typical claim, and get this kind of field sales behavior. Lost in this approach is a recognition that sales compensation is an area in which data analysis, values, and the motivation of complex human beings are inextricably linked. The frequent result is that managers, focused on the hydraulics, forget that addressing the fundamental question, “How should we pay the people responsible for dealing with customers?” inevitably implicates a range of issues involved in sales management, as well as other aspects of the business. The emphasis of the sales compensation plan will affect the quantity and kinds of orders received by manufacturing, the cash-flow profile managed by finance, the recruitment and training needs faced by marketing and personnel, and the daily organizational interactions between sales and all of these other functional areas.
Sales Compensation Planning
- Total Compensation – an important step is determining the typical total compensation for each of your sales positions based on your product or service price and the yearly sales goal for each sales position. Industry salary data can be used to determine this number.
- Base Salary – Determine the base salary percent of total compensation. Base salary is typically 50% to 60% of total compensation, but there are wide variances. The base salary as well as total compensation must fit within your overall cost and expense structure. In some large companies and/or short sell cycle situations, the commission can be as much as 200% of base salary. In these cases base salaries are set much lower than in the typical case.
- Establishing Affordability – based on the expected productivity of your sales people and the revenue goals for the year, determine how many sales people are needed. Then calculate the total expense for these people within your overall expenses for the year. This becomes the overall amount of money you can spend on sales people, including commissions, and will be the basis for quota setting.
- Sales Quota – One of the most difficult numbers to decide is the sales goal or sales quota. Without a sales quota company objectives and company sales growth with not occur. Often we talk about “stretch” goals. This is setting the sales quota higher than the expected attainment of the sales people. Sales quota setting will be the focus of a future Paladin and Associates newsletter.
- Sales Commission – Another base rule of thumb is that the sales commission at 100% sales quota attainment should be set to the estimated total compensation minus base salary. When this number is calculated the company needs to confirm that it can afford this compensation amount, along with any commission for over attainment, within the overall cost and expense structure of the company.
- Over Attainment Commissions – Sales compensation plans typically increase the commission rate at attainment beyond the sales quota to provide an incentive for continued sales growth. The right number is determined based on what is affordable by the company within the overall cost and expense structure. Doubling the rate is aggressive. Increasing the rate by 25% is more typical.
- Management Commissions – Should be tied to the attainment of the sales team the manager manages. Since the sales person and the sales manager both get paid a commission on the same sales, the company needs to be sure that this is affordable within cost and expense structure of the company. This does not imply that the manager and sales person commissions are the same amount. The manager may have a higher base salary and lower commissions.
