Design Sales Incentive Plans Part 2

Introduction

This is the second part of the article on sales incentive plans.

Salary Incentive Mix

Deciding on the salary incentive mix is an art not a science. It is an average that is designed with historical designs and results in mind and needs to be tested. The following sources may serve as a guide.

Source: A Preface to Payment: Designing a Sales Compensation Plan written by Frank V.Cespedes 15 October 1990 MIT Sloan Management Review

Four Variables

Source: Sales Compensation and Sales Incentives: Design and Best Practices presented by Top Mark LLC

Roles vs Mix 1Roles vs Mix 2

Source: Tower Watson Sales Incentive Design Practices Survey

Roles vs Mix 3

Sales Incentive Plan Components

Most sales incentive plans have 4 components:

  • Commission
  • Spot awards
  • Team bonus
  • Upside

Break Even Number of Sales Person

After any sales incentive plans has been established, the management may want to reevaluate the size of its sales force. Based on forecasts for the coming year, the firm may have room to hire more salespeople, or it may need to reduce the size of the sales force. On the basis of a given value for projected sales, managers can determine the break-even number of employees for a firm as follows:

Breakeven number of employees (#) = {Sales ($) x [Margin (%) – Commission (%)]} ÷ ({Salary ($) + Expenses ($) + Bonus ($)})

Over Emphasis on Sales Incentives

Driving sales performance requires more than having a sales compensation and incentive program. Sometimes, over emphasis by senior management on expectations from changing the program can actually do more harm than good. It is more effective to adopt a holistic approach. An example is Aon Hewitt’s model (source: Beyond sales incentives plan – tackling key people issues, written by Gene Yap)

Holistic Approach

Limitations of a Sales Incentive Plan

“Developing an outstanding salesforce is, in the final analysis, a function of the firm’s total environment, including its external market and internal organization (management, value, and information systems).

While a sales compensation plan affects the company’s revenue stream and its pattern of resource allocations in many areas besides sales, problems with sales compensation are often really symptoms of weaknesses in sales management or other areas of the firm.”

Source: A Preface to Payment: Designing a Sales Compensation Plan written by Frank V.Cespedes 15 October 1990 MIT Sloan Management Review

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