Compensation schemes which motivate

Now you have your targets in place you can build a sales compensation scheme to reflect both the KPIs and the behaviours required to achieve those targets. This will usually be a blend of a fixed amount (salary) and a variable amount (bonus or commission).

In recent years, often driven by economic turmoil, it has become more common that packages are entirely variable so there is no basic salary; if you don’t sell you don’t earn.  While a lot of companies see this as a way of reducing their financial exposure it can have the opposite effect as people need enough money to live and if they are not earning it with you they will turn their focus elsewhere.  A secondary factor to consider is that if people are entirely dependent upon making sales to live it may distort their judgement and in some recent bad cases this has led to the various mis-selling scandals of recent times.

I believe employees will deliver their best performance when they are rewarded properly and with sales people this involves paying a reasonable basic salary whilst still leaving them hungry enough to put in the extra effort to exceed their target.

I am often asked what the difference is between bonus and commission and strictly there isn’t one in so much as they are both variable amounts which correlate directly with the amount sold by a sales person.  Generally, a bonus will be a lump sum such as a fixed amount per unit sold and commission is generally a percentage of revenue or margin.  In the latter case, if the sales person gives discount this will reduce their commission whereas a bonus would be unaffected by discount.

Another approach to paying variable compensation is based on a bonus pool created in line with overall company, or perhaps division or branch office, profitability.  The pool is then distributed according to pre-determined rules.  This approach is valuable if staff other than direct front line sales people, are involved in helping to win deals.  This would cover situations where sales is supported by functions such as; technical engineers, pre-sales support, technical & proposal writers, etc.

There are undoubtedly many other approaches but the core philosophy is to have a fixed sum plus a variable amount and the variable elements must be tied directly to the targets that have been agreed with the individual sales person.

While there are no hard and fast rules about the ratio between fixed and variable amount there are often trends or norms for particular industries.  Another factor is geographic location where basic salaries and often complete packages include a premium for London and other major cities.  Recruitment consultancies are a good source of advice on this but a word of caution, many will want the salary to be as high as possible for their own fee earning purposes.  As a rough guide packages will typically range between 1:4 to 1:1; basic to variable.

The primary purpose of a compensation scheme should be incentive and reward but I have seen plenty of situations where the scheme is used by the employer to find ways to reduce the amount paid.  I have also seen schemes where the sales person has to make sufficient sales, usually determined in margin terms, to cover their basic salary and employment costs before their sales efforts will go towards calculating commission or bonus.  No other class of employee has to cover their costs so why sales people?  These approaches are disingenuous and will ultimately lead to a lack of trust which will probably also reduce sales achievement rather than increase it so the approach is in effect counter-productive.

Tips on creating variable compensation schemes:

  • The simpler the better.
  • Ensure the scheme triggers the behaviours the business wants from the sales people.
    • If the overall objective of the business is to grow revenue then the scheme should be based on revenue and should allow the sales people to give discount within a defined range.  The sales manager should have the authority to offer further concessions again within guidelines.
    • Alternatively, if the business objective is to improve margins then the commission scheme should be based on margin which means any discount given will reduce the commission.

These are just two common examples of how a commission scheme should be tuned to align with the KPIs and overall company objectives.

  • Make sure the compensation scheme is directly tied to the agreed targets and that KPIs and other measurements are aligned between targets and the scheme.  This creates a logical link between the arguments that supported the creation of the targets and the compensation scheme; following the philosophy of SMART objectives will provide a good framework.
    • Consider the pace and rhythm of your business and market.  For example, if your business is seasonal you may wish to tune the compensation scheme to incentivise increased effort to match.  Alternatively you may view it the other way around and wish to apply additional incentive when the market is traditionally slow.
    • What if a sales person misses their monthly or quarterly target but makes it up later in the year?  There isn’t a standard answer to this but it must be considered when designing the scheme.  If achieving period targets is crucial for the business then, provided the sales people know this, it is fine that they lose commission for missing the period target.
    • A scheme based on performance bands, each giving increasing amounts of compensation, will provide further incentive for sales people to perform and will also be fairer to the sales person with a difficult customer list.  This is better in terms of motivation than an all or nothing approach.
  • Leave some headroom to add special one off bonuses when, for example, the company is running a special promotion that will require additional work over and above normal activity.
  • Consider overrides for sales people.  If a sales person will earn £X by achieving their target then an override e.g. extra 10% on all sales made beyond target, will create additional Incentive to go beyond.
  • Sales managers should be compensated through override on the achievements of their sales people.  An example override system would be; for a team of six sales people, the sales manager would get equivalent of 20% of the commission earned by each sales person that achieves or exceeds target.
  • Ideally, a sales manager should not own a sales territory but if they do, the majority of their variable compensation should come via the achievements of their sales people rather than their own selling efforts.

In summary, compensation schemes should be designed to create the required behaviours and provide sales people with the incentive to do what is required to achieve their targets.  If those targets are directly tied to what the company needs and measures, successful sales people => successful company.  The final piece in the jigsaw is to ensure the sales manager’s targets, objectives and compensation are directly tied to the success of their sales people.  Everyone will be singing from the same song sheet, pulling in a single direction, focused on a common objective.