Compensation plans shouldn’t be developed in a vacuum. You’ll need to factor in variables such as new product launches and major promotions, as well as consider your personnel structure.
Ken Thoreson, president of Acumen Management Group, Ltd., a sales consulting firm, offers these pointers:
Understand your cost of sales. For a quick cost-of-sales ratio, take an individual’s salary plus commissions earned at 100 percent of quota and potential bonus opportunities, then divide by that person’s revenues to obtain the percentage. A more sophisticated approach adds in marketing expenses, corporate overhead, direct expenses paid to the salesperson and expenses related to sales support costs. CoS will vary from industry to industry.
Examine the options. There are many variations and we recommend multiple combinations based upon the objectives of the organization.
• Profit-based: Commission rates change as margin levels increase. These plans are generally based on invoice, product or monthly averages of margin generation.
• Revenue/Quota: Compensation is based on sheer volume achieved over the previous sales period or on a percentage of a quota achievement.
• Balanced: Compensation is based on margin, revenue and a third component, such as quota attainment.
• Team: Bonuses go to all team members when quarter-to-date (QTD) sales goals are achieved.
Customize to your situation. The compensation plan in new organizations focused on expanding within existing markets will differ dramatically from that of an established company in the same industry. Companies in transition or undergoing a turnaround typically experience a higher cost of sale; they may be best served by flexible plans incorporating morale- and team-building components.
Thoreson blogs at YourSalesManagementGuru.com.
