Good Sales Compensation Programs

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Sales compensation plans are the carrot that company management uses to motivate its sales teams. However, not all compensation programs are created equal. A good compensation plan will meet the needs of both the company and the sales team. A compensation program helps the company by motivating salespeople to make the sales that will help the company meet its goals. And it helps sales teams by providing guidance about which sales to make and by rewarding the salespeople for doing their jobs.

Plans that work well tend to share a few basic characteristics.

Steps for a Compensation Plan

First, sales compensation plans should match up with one or more company objectives. For example, if a company's current goal is to increase market share, the compensation plan should be weighted to pay more to salespeople who successfully take customers away from the company's competitors. As the company's goal changes, so should the compensation plan.

Second, the plan should be clearly explained to the sales team and should be fully documented. If a salesperson doesn't understand the rules, she's not going to succeed – which is bad both for her and for the company. If a salesperson has a concern about how the plan is structured, her sales manager should take her concerns seriously. Salespeople spend their days dealing with prospects and customers directly, so they may have a better grasp of potential flaws in their compensation than the company's executive team.

Third, the compensation plan needs to be updated on a regular basis. The marketplace is always changing, so a sales compensation plan that worked well last year may be out of alignment with reality this year. Of course, no one knows exactly what the future will bring, so even the best plan may need to be altered after it's in place.

For example, if the plan calls for selling $5000 worth of product for a salesperson to receive full commissions, and the product is suddenly (and publicly) recalled due to safety problems, it's unlikely that the sales team will be able to sell as much as the plan anticipated.

Fourth, sales managers can and should use compensation as a tool but it can't replace day-to-day management. Handing out rewards for accomplishing certain goals is a great motivator, but sales managers need to also take the time to work with salespeople who struggle to meet those goals. Regular training is also important for salespeople at all levels of experience.

Fifth, compensation should be neither too easy nor too difficult to get. Every salesperson on the team should be able to meet his goals with some effort. It's the sales manager's task to monitor the situation and use what he discovers to plan the next year's compensation program. In extreme circumstances – say, if the entire sales team meets their stretch goals in the first quarter of a one-year plan – he may need to change the program immediately.

Finally, the compensation program should be in line with what the company's salespeople expect. A change in the marketplace or in the company's goals may result in a radical change to the compensation structure.

In that case, the sales manager needs to take extra time to explain the changes, including why these changes are happening.

Of course, a compensation plan is only as good as the sales goals it supports. As a general rule, the more detailed and specific a goal structure is, the better it will work to focus the sales team's efforts in the desired direction. Goals should ideally reflect both the type and number of sales that a salesperson should make. Compensation can then tie directly into those goals, regardless of the compensation program type.