How to Design a Salesperson’s Compensation Plan

Compensation plans aim to motivate employees to adopt desirable behavior that leads to the achievement of established goals and objectives. Programs appropriate for salespeople can include commissions, bonuses, and stock options. The planning and designing of the right compensation plan starts with the consideration of such factors as its structure, alignment with the overall organizational strategy and human resource systems, competitiveness, as well as performance measures and metrics because the factors determine plan’s effectiveness (Cespedes, 2014). The best way to motivate salespeople to achieve organizational objectives, mission, and vision is to craft an incentive compensation plan that considers low, middle and top performers because they all contribute to a sales strategy.

Incentive Compensation Plans

Each of the compensation plans discussed below are suitable for salespeople, but their suitability depends on organizational goals and objectives. Additionally, an organization can create an incentive plan by combining elements in options below (Cespedes, 2014). It will ensure high employee motivation and the achievement of its goals by considering the level of performance required.

Commission

The commission incentive program is the most popular among enterprises. The structure of the plan is such that salespeople may receive a small portion of a base salary and a percentage of their sales as a commission (Cespedes, 2014). Firms choose to use the salary plus commission plan when market opportunities can support every salesperson and when corporations can establish proper metrics to track performance to ensure accuracy and fairness. The commission-only approach excludes the base salary and involves incentivizing workers by calculating a percentage of their sales (Cespedes, 2014). As such, salespeople experience uncertainty because they have no guarantee of receiving income during tough economic times, when demand is low (Gordon & Kaswin, 2010). Corporations that use the commission-only plan get better value for their money because the remuneration reflects the exact effort of workers (Lo, Ghosh, & Lafontaine, 2011). As such, it is easy to implement because it only requires calculations of the commission using a predetermined percentage.

Bonuses

Bonus incentive plans involve rewarding workers over and above a particular base rate. They aim to motivate employees to exceed set objectives to improve organization’s performance (Kew & Stredwick, 2016). Bonuses may be awarded to workers on the quarterly, semi-annually or annually bases (Lo et al., 2011). Individual characteristics of companies and prevailing conditions determine this timing.

Stock Options

In stock option compensation plans, firms reward performance by allowing employees to own part of the company. When such incentives are available, those who have performed exceptionally have access to their companies’ stocks at discounted prices (Gordon & Kaswin, 2010). The stock option incentive plan is common for rewarding corporate executives to motivate them to have a long-term approach to business. In rare circumstances, companies reward their salespeople using the stock option incentive plan (Gordon & Kaswin, 2010). Those who receive a stock option are overachievers who contribute significantly to the organization’s sales volume. The rationale for offering stock options to salespeople is to motivate them to continue striving for better performance than before and consider staying with the company in the long-term.

How to Plan and Design an Effective Salesperson Incentive Compensation Plan

The best incentive plan encourages the adoption of desired behavior by salespeople for them to be able to achieve organizational objectives, mission, and vision (Cespedes, 2014). Planning and designing such involves the consideration of plan’s structure, its potential to motivate employees, alignment with the business strategy and human resource systems, competitiveness and metrics to measure performance.

The Structure of the Plan

An ideal incentive compensation plan with the potential to motivate employees should be based on bonuses. Some of them should be paid quarterly to salespeople who achieve set goals, while others should be given to those who surpass the target (Cespedes, 2014). The structure does not have too many components that salespeople may find confusing. Its complexity can make calculations tedious and may lead to the loss of morale among employees when they cannot determine their bonuses quickly (Cespedes, 2014). As such, the structure is easy to understand.

Potential to Motivate Employees

The effectiveness of any incentive plan depends on its ability to motivate employees to achieve set objectives. When planning and designing it, it is essential to ensure that it can build employees’ morale that can support organizational goals (Kew & Stredwick, 2016). Quarterly performance bonuses keep salespeople’s momentum going regardless of market conditions (Chung, 2015). Low-level and middle-level performers require constant wins to improve their morale as compared to high-performing employees. Having quarterly bonuses helps them have something to look forward to and ensures their constant engagement in work (Chung, 2015). Such bonuses in the incentive plan need to be cumulative to be effective in the motivation of low and middle-level performers. When the latter fail to reach their quarterly target, they miss out on the bonus, and it can reduce their motivation to work hard in periods when business performance is low. However, making quarterly performance bonuses cumulative ensures that few sales made when market conditions are not favorable can still help salespeople to achieve the next quarter’s target (Chung, 2015). The other set of bonuses reward extra effort that top performers put over and above quarterly goals. The failure to include them in the incentive plan can reduce the morale of top employees. As such, the bonus incentive plan has the greatest potential to motivate salespeople.

Alignment with the Business Strategy

Before designing a compensation program, it is critical to determine such organization’s goals as profitability, market share, or customer retention. Establishing the ones guarantees that the incentive package will align with organizational strategies. The alignment is essential because it ensures that the incentive program contributes to the attainment of organizational goals (Kew & Stredwick, 2016). The bonus compensation plan is best suited to serve organizations, the aim of which is to achieve market growth. The latter requires expansion into new territories. As such, all salespeople must be motivated enough to reach sales objectives that align with the business strategy. Quarterly bonuses serve this purpose because they encourage employees to continue with their effort, even when market conditions inhibit sales (Kew & Stredwick, 2016). Thus, they help to keep the sales momentum because salespeople look forward to the end of the quarter to receive their bonuses. The fact that quarterly bonuses are cumulative offers motivation to workers to increase effort to earn as much as possible, even when they may not attain targets for a particular quarter (Kew & Stredwick, 2016). The cumulative aspect ensures that effort that is put but has not reached the target in the given quarter is forwarded to the next one to promote the further attainment of goals. In the absence of accumulation, some salespeople give up during low business periods because their efforts in such times do not help earn bonuses since they are inadequate (Kew & Stredwick, 2016). However, cumulative bonuses motivate them to seek new customers and thus contribute to the business strategy. Bonuses to top performers promote market growth because they reach and exceed them to earn more. Without such, the number of new customers falls because employees only work to reach targets and do not exceed those (Kew & Stredwick, 2016). As such, all components of the bonus incentive plan align with the business strategy of market growth.

Alignment with Human Resource Systems

Performance management is a human resource process, in which employees and managers work together to establish, review and monitor work objectives, as well as develop ways of how best to improve employees’ input through feedback loops. The human resource information system helps managers to track salesperson’s output and progress towards achieving set objectives (Cespedes, 2014). The system captures the remuneration of each employee and incentive programs in which the one participates, as well as calculates all payments for each worker depending on how the one has met organizational goals. Any incentive program must align with performance management and the HR information system to enable the consolidation of vital information relevant to it. The bonus incentive plan complies with both because it outlines system components and ways of how to determine qualification and how each worker qualifies for various incentives (Cespedes, 2014). Therefore, salespeople and the management can access and review performance and attainment of objectives’ information and discuss areas that need improvement.

Plan’s Competitiveness

An incentive compensation plan must be competitive. A firm can determine its competitiveness by comparing its total compensation and the cost of sales with those of competitors. Companies can use market data for this purpose to ensure that a compensation is competitive as compared to benchmarks in the industry (Snell, Morris, & Bohlander, 2016). The failure to compare has several ramifications. First, a firm that does not benchmark may underpay sales representatives. Second, it may overpay them, which can translate to getting less value from its investment than competitors (Snell et al., 2016). As such, the plan must be both competitive and consistent with trends in the industry. Therefore, the bonus incentive plan must determine a bonus in each market where it is applied to ensure that both employees and firms get value for their effort. As long as rates are consistent with those of competitors, it will be competitive since the pay will be commensurate with employees’ output.

Performance Measures and Metrics

At the planning stage of a compensation package, an organization must decide how to measure the performance of sales representatives. Performance measurement shows employees on what they should focus to meet objectives (Snell et al., 2016). As such, measuring the wrong parameters may encourage a salesperson to develop the wrong behavior that may limit the optimization of his or her effort. It is also essential for corporations to establish metrics to determine performance (Snell et al., 2016). There must not be too many criteria to confuse salespeople, yet they should not be too few in number to dilute employees’ effort. The metric that managers measure when using the bonus incentive plan is the sales volume (Snell et al., 2016). Bonuses are calculated as a percentage of the latter. Thus, the bonus incentive plan meets all planning and design requirements of rewarding salespeople’s output in accordance with their performance.

Conclusion

The best way to motivate salespeople is to create an incentive plan that addresses all performance levels. When each of them, namely, low, middle and top performers, is considered, the entire sales force is motivated. The most widely used plans for salespeople include commissions, bonuses, and stock options. The bonus incentive plan is the best for motivating salespersons because it considers all performance levels and rewards effort. The planning and designing of such an incentive plan requires the consideration of its structure, motivational potential, alignment with the business strategy and human resource systems, competitiveness, as well as metrics and measures.

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