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How Do You Construct Compensation Programs for Sales and Non-Sales Employees?

By: Sandy McMahon

A company wants to revise its compensation plans. They are considering offering two options to sales personnel - base/draw plus commission, or no base/draw and larger commission. They also want to offer an incentive-based compensation plan to non-sales employees. Does it make sense to offer two alternatives to sales people? Are there better options to consider for both sales and non-sales employees?

Advice from a group of CEOs:

Make sure that your sales incentive plans are attuned to your company objectives. Here are two examples of sales compensation programs, one of an aligned system and one of a dysfunctional system:

* American Hospital Supply Corportion - sales reps were 100% commission (including expenses) with no caps on income. The rules were simple: to keep their jobs, reps had to achieve a minimum of 85% of their revenue goal. However, commissions were calculated on the gross profit that they achieved on their sales, and reps were provided with software to calculate this. This was one of the successful systems in medical supply sales and consistently met company margin targets.

* Oncology Therapeutics Network in the early 2000s - sales reps were paid a base plus commissions calculated on achievement of revenue goals and paid quarterly. The net result was that they had no incentive to preserve gross margins. This system was dysfunctional, created ongoing friction between the sales and finance teams, and only started to improve once reps' commissions were converted to a combination of revenue and gross profit.

One consideration is the contribution of the rep in a technical sale. For example, is the rep is a door opener or does the rep actually close the sale? If the former, what percent of the close is attributable to the rep's efforts? Do they deserve a commission on the portion of the sale attributable to others' efforts?

A construction company educates their teams, and develops systems through which foremen compete on project quality, cost containment, and other measures. Foremen's bonuses are based on a mix of team performance, project difficulty and individual initiative.

A manufacturing company uses year-end bonuses, but places more emphasis on frequent small recognitions - a pedicure or manicure, going out for a meal on the company - things that let the employees know that they are appreciated on a regular basis. This company is looking to replace annual bonuses with generous contributions to employee retirement funds. Incentives are based on a mix of individual and team performance.

One company has completely eliminated bonuses. Salaries were raised to make up the difference, and incentives are created and paid along the way. When incentives are paid, the company is specific as to why they were earned, and the individual performance that earned them. Incentives are a mix of team and individual performance.

One company is very generous with bonuses - up to $5-10,000 at a time at the discretion of the CEO. These are paid out face to face by the CEO and the individual is congratulated on performance. However, the recipient of the bonus signs a paper pledging not to talk about the bonus. If they tell others about their bonus, they are eliminated from the bonus pool. This company also uses company annual awards, performance-based monthly awards, shirts, etc. that are public. Interestingly, over time they have determined that the smaller items and recognitions appear to have the most impact.

Summary: an effective compensation system assures that incentives are aligned with company goals, financial realities and company culture. Consider a combination of team performance recognition, with additional individual recognition for superior contributions.

Article Source: http://articles.tiptopweb.info

Sandy McMahon is publisher of Ceo2Ceos (Ceo2Ceos.com), a non-commercial site for executives to share best practices. He is also President of Executive Forums of Silicon Valley. With over 20 years of executive experience, Sandy has a BA from Brown, an EdM from Harvard, and an MBA from Duke.

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How Do You Construct Compensation Programs for Sales and Non-Sales Employees? addthis_pub = 'ex_plo_rer';

How Do You Construct Compensation Programs for Sales and Non-Sales Employees?