How to Develop a Sales Incentive Program
If you inherit an existing sales team when you start as a sales manager, you also inherit their compensation plan. Even though there are only three ways to pay salespeople, there are many different ways to twist and turn how you reach the end result. Your choices are:
Salary: Salespeople are compensated with no regard to the sales they make or the profits they generate. They receive a predetermined base salary or hourly wage. They earn the same amount every pay period no matter what they sell.
Commission: Under this plan, salespeople are paid exclusively based upon their sales or the gross profit they generate. In other words, no sales, no money.
Salary plus commission: This hybrid usually pays each salesperson a base salary plus a commission based on their sales or profits.
You could make an argument for any of the above in one situation or another, but it boils down to what drives salespeople in the first place: desire.
If a salesperson truly has that burning desire inside she doesn’t want to be on salary because she doesn’t want a ceiling on what she can earn. At the same time, being strictly commissioned can expose someone to financial issues if she falls ill or can’t work for a week or two for any number of reasons.
By and large, the most successful (and wealthiest) salespeople in the world work strictly on commission — they eat what they kill. And if they don’t kill, they don’t eat.
A salesperson who goes to work every day worried about how she’s going to pay the mortgage or buy groceries will reek of desperation. You’ll know it, their coworkers will know it, and most importantly, their prospective customers will know it. It’s not a good look, promise.
Your job is to not only create a compensation and/or incentive program; but to create one that works for both you and the salesperson. What’s good for you must be good for your sales team and vice versa.
The most popular compensation route is generally the salary plus commission option. If you choose this route, be prepared to set the base salary just below what someone needs in order to get by. If you set the base too high, you might as well put people on salary only because they’ll have little motivation to produce. At the same time, if you set the base too low, you run the risk of the desperation mentioned previously.
You have to find that sweet spot where your sales team can survive but are still driven to sell, produce results, and grow.
You walk a very fine line when it comes to commissions. The salesperson must be able to change her income by increasing her sales and/or gross profit. You don’t want to set the commission percentage so low that even if your salespeople move mountains it has little, if any, effect on their finances.
After you settle on a commission rate, you must decide what you’re going to base the commission on. Is it on sales? Gross profit? Net profit? A good rule is to base it on what the salesperson can control.
Never hold your salespeople accountable — especially monetarily — for something they can’t control. If they have no control of their gross profit, then base commission on sales. However, if they can impact your profitability, then by all means tie the commission program to that number. Give them incentive to drive your profits. Sales are great, but remember profits are what makes the world go ’round (and what will help you keep your job).
If you have to make adjustments based on territory, area, or other outside factors, make that adjustment in the base salary so everyone’s commission is based on the same performance.
For example, if Jane’s territory is one where everyone knows margins are significantly lower than elsewhere, perhaps you elevate her base salary a bit. In the end, you want to level the playing field, but to do that you sometimes have to prop up certain parts of it.
The hardest part of this entire process is coming up with a plan that’s fair to all of your salespeople regardless of the size of their territory or the geography they work.