Course 76: Sales Compensation and Expense Allowances

How often should you evaluate your sales compensation plan' s effectiveness?

A) every year

If your organization requires salespeople to independently obtain and close sales and not participate in non-sales activities, the incentive portion of a combination plan should be:

A) high

Sales incentive plans are best suited to employees who work:

A) independently

Per diem allowances include:

A) lodging, meals and incidental expenses

In Management by Objectives what sort of incentive is used to reward employees?

A) praise or pay incentives

The best time to pay out incentives is when the:

A) sale closes

If you pay an employee's commission at the time of sale, but then the sale falls through, you should try to recover the lost income from the:

A) sales employee or the customer

In salary-plus-bonus plans, an employee receives a bonus based on his or her:

A) sales performance

It would be a good idea to use fixed salaries for sales employees when:

A) the product is highly complex

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Accountable plans In an accountable plan, the employee may be paid: before the expense is incurred, as an advance OR after the expenditure, as a reimbursement or an allowance In either case, in order to be qualified as an accountable plan: the expenses must have a business connection: they must have been incurred while performing job duties the employee must account for the expenses within a reasonable time period the employee must return any excess reimbursement within a reasonable period of time Record keeping The employer may reimburse an employee for travel expenses on the basis of actual expenditures. In this case, the employee must keep and present proof of all expenditures to the employer. The employer may also develop an allowance plan. Under such a plan, the amounts of the allowance cannot exceed the rates established by the federal government. For further information go to www.irs.gov.

If an employee does not meet a threshold standard of sales performance, what should the Sales Manager do?

B) Evaluate the reasons the employee missed their sales plan and initiate corrective action as appropriate.

In a non-accountable expense plan, the organization:

B) considers the travel expense costs as income to the salesperson

In a travel allowance plan the employee:

B) is reimbursed set government rates for travel expenses

The fixed and variable rate method of reimbursement is attractive because it:

B) more fully covers the total automobile costs of the salesperson

People who have high achievement drive:

B) require performance feedback

It is important to receive feedback on a sales compensation plan from:

C) both the sales team and sales management

Straight commission plans suit:

C) money-motivated employees

Missionary work involves:

C) new business sales

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COMMUNICATE THE PLAN Once the plan has been approved, the plan should be communicated to your sales management and employees. You might begin by writing a letter to the sales team explaining why and how the compensation plan is changing. Include diagrams showing each employee how their compensation will work. Remember, the formula should be simple enough that the employees will understand very quickly how their pay is calculated. MEASURE THE PLAN You should evaluate the plan's effectiveness regularly. You'll want to be sure that in practice the plan really achieves the goals you've set out. Here many companies fall short. According to guidance provided by Gartner, "...enterprises will miss the equivalent of 5% TO 10% of annual sales as 'lost opportunities' that could have been captured through improved management of sales territories, quotas and compensation plans." Software Sales program administrative software can be a useful resource when administering and/or auditing a sales plan. This software lets you measure various performance indicators, including: sales and profits per territory gross profits per line of billing profitability per customer and per product sales costs as a percentage of gross profit per territory Software lets you easily audit commission calculations and will automatically conduct analyses for you. Gartner evaluates Sales Performance Management software and publishes their Magic Quadrant of top-rated software and is an excellent reference source when considering new software. Change is Good The Sales Compensation Plan should be reviewed every year. This is because the following are bound to shift: the product market business goals sales employees' career goals Don't forget to establish a career path for salespeople, so that they may have the opportunity to grow and develop on the job. This will help your company retain its best employees. Increased total cash compensation opportunity, whether through increased base salary, commission, sales quotas, or larger territories, can help to accomplish this goal. What to Do in a Soft Economy It is important not to react to short-term dips in the economy. However, when the economy takes a substantial downturn, you should consider reevaluating your sales compensation plan. At times, when product markets level off or drop, competition often grows and customers become more conservative. In this situation, your organization may want to pay what it owes and then redesign the compensation plan to: reduce quotas so they are reachable reduce commissions for repeat sales, but raise them for new business

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Combination Plans Most sales compensation plans are a mix of base salary and commission/incentives. The reasons for this are: the salesperson is not the only influence on sales volume some parts of the sales job do NOT involve direct selling and these responsibilities (e.g. training, recordkeeping, reporting) also need to be rewarded. Done properly, a combination plan should contain the advantages of both straight-salary and incentive plans. What's the mix? A 2017 article in the Harvard Business Review states that 60:40 is the average pay mix for sales positions where 60% is delivered through base salary and 40% is delivered through incentive compensation. The more independent the sales representative is in obtaining and closing the sale, the higher the sales incentive. The incentive portion will be lower where: there is a team sales environment there is a longer sales cycle the direct contribution of the salesperson to sales volume is low non-sales activities are valued by management there are considerable variations in sales over time and between sales areas Sales mixes may be as low as 95:5 and as high as 0:100. Management practices and culture of an organization will also influence pay mix.

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DEVELOP PRODUCTIVITY METRICS After you have chosen the type of plan and measures, it's time to establish productivity metrics. You may begin by specifically defining how much a single resource can be expected to produce. Many companies seek this information in sales compensation benchmarking surveys. Threshold:This is the minimum sales level acceptable. Employees who don't reach this level should not receive incentives. The sales manager should evaluate the reasons for missing the sales plan and initiate corrective action as appropriate.Target: This is a reasonable sales quota that you expect the individual sales person to meet. In setting sales quotas it is useful to consider the: past year's performance economic conditions sales opportunity competitors' strategies Top performer:Because competitive and aggressive employees are drawn to sales, you should expect that at least 10% of your sales staff will surpass their quotas. Reward these employees by paying them at least 2-3 times the incentive that target performers receive. Keep it simple Remember to keep the incentive formula simple. Your salespeople should be able to very quickly understand how they will be rewarded. It is also important to have transparency so that the sales person feels that he or she is getting paid what they deserve, according to their individual plans. Examples: The salesperson will receive x% of the margin on each sale for all margin in excess of y%. In addition they will receive a bonus of $z for every new account in excess of their quota.8 OR $25,000 bonus for achieving quota on item A; $50,000 bonus for achieving quota on item B.

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IDENTIFY BUSINESS GOALS Before designing a sales compensation plan, first ask what your organization's goals are. Ask yourself: "What sales behavior do I want to reinforce that will drive business success?" Business goals may include: Sales Quotas. A sales quota is an individualized sales target that each sales person is accountable to deliver. New Business. Sales to new customers may require a great deal of missionary work — building good will and developing relationships that will lead to a sale. This may include product promotions and demonstrations. Retaining Sales. This is keeping customers from one time period to another. Product Mix. The organization may wish to sell a pre-determined mix of products. This will help the company sell its whole product line. It may include new product marketing. Win-back Sales. These are sales to former customers who are regained as clients. Upselling. This involves selling additional products or more expensive products to current customers. Educating clients. Sales may involve teaching clients how to use products and/or providing technical advice. Listening and relaying customer feedback to the organization. The salesperson is often in the position of finding out what customers need and it is important that they bring this information back to the organization so that it can be used to modify products or create new ones to better satisfy customers. Keep it Simple In order to properly motivate, you should have a clear, simple goal for each part of the compensation plan. "Keep it simple" may be an overused axiom but it is critical for an effective sales compensation plan. In sales compensation terms, this means keeping the plan simple by minimizing the number of measures. A rule of thumb is no more than five measures with three measures as an ideal. The more measures, the more likely it is to dilute the importance of any one element. In all cases, the measures should be concrete, timely, and objectively measured. Example: Increase new clients to at least 25% of your sales made.

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MEASURES OF SUCCESS If you choose to use a straight commission or combination plan, you will need to select the measures by which to judge sales success. Remember: Keep it simple. Use 3-5 measures - 3 is ideal - any more will only confuse your sales staff. Three allows your sales staff to focus on the most important measures. Make sure the measures you choose are: under control of the salesperson easy to track directly related to the bottom line Most sales compensation programs need to reward more than just sales volume. You might also consider quantifying the sales opportunity in customer segments. Any increase or change in mix of revenue must come from a finite market. Organizations can use several methods for sizing that market and its segments by using customer surveys or even statistical regression. Once an organization knows how much revenue and profit opportunity is in the market and how much is accessible to its sales force, then it can determine how much of the sales compensation plan can be delivered from each business segment. Leading sales organizations will quantify the sales potential available and create a model needed to achieve business objectives. Sales compensation plans are effective motivational tools only when two conditions are met: Salespeople must clearly understand the results or task they are compensated for and how much that compensation is. Where results or task completion is not instantly obvious to the salesperson, full feedback must be fast enough to allow the salesperson to recognize which sales methods are effective and which aren't in time to correct techniques that would reduce their compensation. If you want to encourage goals that are NOT incorporated in the compensation plan, then try using management by objectives (MBO). The term "management by objectives" was first popularized by Peter Drucker in his book The Practice of Management. Here's how MBO works: Management by objectives (MBO) focuses on results, not behavior. Also known as appraisal by objectives, MBO involves comparing the employee against a standard of expected results. MBO requires 3 things: a set of clearly defined goals participation of both manager and employee in setting the goals feedback to the employee as to how well he or she is progressing toward the goals The employee is rewarded for achieving goals with praise, or by pay incentives or bonuses. For more information about MBO, see DLC Course 77: Pay-for-Performance.

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OTHER FORMS OF RECOGNITION There are also other forms of recognition for the field sales force outside of the Sales Compensation Plan. Special Performance Incentive Funds (SPIFFs) are used to reward sales representatives for contests and other short-term initiatives such as: new product sales special promotions product sales where quotas are unmeasurable limited to one or two performance periods only SPIFFs are often delivered through prizes or contests. SPIFF awards may be delivered in gift cards, electronics, travel, dinners, memberships, or even cash, etc. The President's Club is a common recognition program for top performers and could include one or both of these: a trip cash This very often is the coveted prize each year for top sales performance. It typically is budgeted at approximately 2% of the total incentive compensation budget. Non-Cash Recognition "Brains, like hearts, go where they are appreciated." - Robert McNamara, Former American Secretary of Defense Travel Allowances Why do employees quit their jobs? Entrepreneur.com recently reported that 82% of employees polled report they don't receive enough recognition. Recognition and praise goes a long way to retain your key sales representatives. Don't underestimate the motivational power of public recognition. People will respond positively to something as simple as a notation on business cards for high achievers, public recognition at a Sales Meeting, or even a "Wall of Fame" on the company's intranet site. BENEFITS We cannot end this course on sales compensation without discussing some specialized benefits that the sales team may receive. In particular, the sales team may be granted two benefits that are not common to other employees: expense accounts travel allowances Expense Accounts Typical expenses covered include: meals with customers cell phones lodging social events with customers company credit cards car allowances company cars mileage reimbursement Ordinarily, the only other employees to have these benefits are executives. Important Note: These expense accounts have the potential for abuse and are watched closely by the IRS. Travel Allowances Sales people travel more than any other group in the organization. Some of this travel is around town from one location to another during the day. Other travel requires the salesperson to be "on the road" for some period of time. This creates costs that must be reimbursed to the employee. The IRS classifies reimbursement plans into 2 categories. Non-accountable plans: Expenses are considered income to the employees, although they may itemize these expenses as deductions on their personal income tax forms. Accountable plans: Expenses are classified as a business expense and are not income to the employees. The next section deals with accountable plans.

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Per diems When employees need to travel as a part of their job, the organization ordinarily picks up the cost. Per diem allowanceA fixed amount of daily reimbursement the employer pays the employee for lodging, meals and incidental expenses. Federal government per diem rates can be determined by using one of the following methods: The regular federal per diem rate.This rate varies with location. It includes all the lodging, meals and incidental expenses. These per diem rates can be found online at: www.gsa.gov The standard meal allowance. This alternative is used when the employee does not have any lodging expense, such as when the employee stays in a company room or with relatives. It covers only meals and incidental expenses. The above source also has calculations for this category of expenses. The high-low rate. This is a simplified computation with one rate for high cost cities and another for regular locations. The amount changes each year. In 2019, it pays $195 a day in most cities for lodging and meals, while it pays $287 a day for high-cost cities. Current high-low rates and high-cost localities may be found in: https://www.irs.gov/pub/irs-drop/n-18-77.pdf.

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SALES CYCLES Next you need to decide when to pay out the incentives. A good rule of thumb is to have accurate and timely reporting of sales and to pay sales personnel as soon as possible after the sale is made. This will motivate them to sell more. If you wait for other events (such as product delivery or payment), you may be holding the salespeople responsible for things over which they have no control. Sales cyclethe time required to close a sale Short Sales Cycles Short sales cycles suit sales compensation plans best. Cycles of 1-3 months are ideal, since they lend themselves to frequent payouts, which increase motivation; however, cycles of up to 12 months are workable. Long Sales Cycles Longer sales cycles are sometimes necessary, but if you use them you will want to avoid: low base salary/high commission plans, which will put stress on the employees' budgets infrequent payouts, which will lower employee motivation One way to deal with long sales cycles (that last more than 1 year) is to have tiered payouts. You may want to pay separate and increasing lump sums for: qualifying the customer a successful demonstration making the sale

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SUMMARY Organizations identify certain groups in order to establish special compensation programs for them. They do this for a number of reasons including organizational tradition, employee expectations, and the nature of the job. Types of Plans Sales compensation plans may be fixed salary, straight commission, or a mix of these two. The latter is the most common. Sales compensation plans also may include non-cash contests and special benefits, such as expense allowances. Plan Design In order to create a sales compensation program, you must: identify business goals and constraints choose the type of plan and coverage design quantify the opportunity and select measures develop productivity metrics determine the sales cycle communicate the plan Remember to keep it simple. Your sales employees should understand very quickly how the plan works. If you want to encourage behaviors that are not included in the compensation plan, then utilize Management by Objectives. After you have created a plan, test and evaluate it to make sure that it is: workable competitive in the labor market acceptable to employees Expenses A second part of sales compensation is the reimbursement for business expenses. The IRS recognizes two types of reimbursement plans: Non-accountable plans are considered income to the employees, although they may itemize these expenses as deductions on their income tax forms. Accountable plans are classified as a business expense and are not income to the employee. Travel expenses The most common program for reimbursement is one that pays for both per diems and automobile expenses tied to federally defined rates. This course showed you how to research these rates online and via ERI's Relocation Assessor software database.

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Special Circumstances You will need special protocol to deal with the following situations: orders falling through departing employees large orders multi-year contracts e-Commerce When an order falls through It is advisable to pay commissions only after a sale has been completed. If you do choose to pay commissions at the time of sale, make sure to enter in the sales contract the method by which lost income will be recovered from the sales employee or the customer if the order falls through. Walking commissions Also, have a policy for when your company will pay commissions to departing employees. This may be when the: customer pays for the order order is shipped order is placed employee has his or her last day Whatever you decide, be sure to pay departing employees what they are due. Large orders When large orders come along, you face having to give employees large incentives based upon the regular commission rate. This can ultimately lead to lower motivation, since an employee makes several months' worth of income in a single sale. Some ways to deal with large orders are to: exclude them from quotas, so that sales staff still have to work to meet their targets provide a reduced rate for these orders (although expect employee resentment if you do this) Inform the sales personnel of your solution ahead of time to reduce hard feelings. Multi-year contracts If your salesperson signs a multi-year contract with a client, you won't want to pay out annual incentives to the salesperson, since that may reduce his or her productivity and drive. Instead, you can: stagger payments over the contract period, with reduced payouts in later years give the salesperson a net present value payment based on the anticipated revenue from the contract. OR provide a signing bonus to the employee, based upon the value of the contract e-Commerce Websites are excellent for marketing products, but salespeople should NOT be rewarded for orders that arrive unsolicited over the Internet. The simplest way to separate sales personnel efforts from unassisted online orders is to have 2 separate websites: one for the general Internet public one for the sales staff-assisted orders Online staff orders can be tagged to each salesperson through the use of a password or token system.

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Straight Commission Plans In straight commission plans, an employee's pay is based upon a set percentage of the total amount that he or she sells. The employee would not be paid a base salary. These plans encourage the quickest, easiest sales and discourage long-term goals and more difficult tasks such as obtaining new customers. Straight commission plans suit aggressive, money-motivated types best. In theory, a commission plan is very simple: the sales representative is paid a commission based on sales volume (or number of units). But the commission percentage should increase or decrease with the effort the salesperson must exert to increase sales volume. Example: no commission for sales under $500,000 5% commission for sales between $500,000 and $1 million 7% commission for sales over $1 million Determining levels You should examine the effects of the commission system before putting it into operation. You will need to estimate what amounts will be paid to sales personnel in the form of commissions and make sure they line up with the: sales costs salary structure income required to motivate employees Sales costs. First ascertain the total cost of selling the product. Make sure these costs are in line with the product's price and the cost of production. Salary structure. Make sure that targeted commissions provide sales representatives with an annualized targeted compensation comparable to their competitive marketplace. You might expect some internal conflict, however, as it is not uncommon for a salesperson (who assumes all the risk and uncertainty) to earn more than his/her manager. This is why some people won't move into management, and others don't want to work on commission. Expected income. An incentive program will only motivate if the employees can realistically reach sales targets and make enough money to find the job worthwhile. We'll further discuss how to evaluate compensation plans later in this course.

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TEST THE PLAN After you have created a sales compensation plan, you will need to evaluate it to make sure it: drives the right behavior and results meets management requirements is cost effective attracts, retains, and motivates a quality sales force Model the impact of the new plan and conduct an associated cost-benefit analysis. Ideally, this should be done with historical data, growth assumptions and other relevant financial planning assumptions. Thoroughly test the plan to find out if targets are achievable and if they will help or hurt the organization's bottom line. It is also appropriate to test maximum payouts for top sales performers as part of the cost-benefit analysis. Is the threshold or minimum payout set appropriately for the desired sales result? What are the total costs from the prior year and prior plan to the new plan? Feedback from sales management is extremely valuable as they are able to see strengths and weaknesses in a plan due to their knowledge of the business. After you have "debugged" the plan and know that it will work, obtain feedback from a sample of the sales force. Doing so will increase the plans effectiveness. It is critical that the sales team understands the plan. Next, you must make sure the plan supports your company in the ability to attract, retain, and motivate a quality sales force. You will need to assess whether your company's pay is competitive in the general labor market. Pay too much and you'll hurt the company's bottom line. Pay too little and you'll lose top talent to the competition. OBTAIN MANAGEMENT APPROVAL Once the plan has been finalized, top management will typically approve the plan. Normally, the management approval document will include: management summary total costs cost-benefit analysis and examples plan document timeline for implementation

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TYPES OF PLANS AND COVERAGE DESIGN Once you have set your goals, it's time to choose the type of plan to use: fixed salary straight commission OR a combination plan Fixed Salary Considered by some to be obsolete, fixed salary plans pay sales employees a base salary with no incentive. For the organization, a fixed salary plan is very simple. A sales employee's salary can be administered just like those of regular employees. Fixed salary plans may encourage loyalty and customer service, but discourage risk taking. They are well-suited to security-minded individuals who are uncomfortable not knowing how much they will make next month, or are unable to budget the good times to cover the bad. Salespeople under a fixed salary plan are more willing to perform the non-sales aspects of the sales job. From the standpoint of the customer, the salesperson on a fixed salary is more likely to provide service and less likely to pressure the customer into a sale and move on. When to use a Fixed Salary It is a good idea to use fixed salaries when the: product is highly complex time it takes to culminate a sale is long sales effort is a team affair industry's regulatory environment prohibits direct sales Disadvantages Compensating salespeople on a salary basis makes it difficult to measure performance effectiveness. Fixed salary plans also may lead to lower motivation, since employees are not rewarded based on sales volume. Finally, from the organizational viewpoint, fixed salaries make compensation a fixed cost rather than a variable cost. This makes salaries a burden in times of low sales.

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Types of Travel Allowances There are two main types of travel allowances - automobile allowances and per diems. Automobile allowances There are two methods of calculating rates for automobiles: The standard mileage plan. This method pays the employee a set rate per mile traveled. For 2019, this rate is 58 cents per mile, but it changes periodically. Updates to this rate may be found at www.irs.gov. Fixed and Variable Rate. The employer reimburses the employee's automobile expenses under 2 categories of costs: fixed and variable. The variable costs are the cents per mile costs of running the car and vary depending on the miles driven. In addition, the employer pays a fixed amount to cover costs such as depreciation, maintenance, leasing and insurance.

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Types of combination plans There are a number of ways to establish incentives: commission-plus-draw salary-plus-commission salary-plus-bonus Commission-plus-draw plans. The employee receives a specified salary each payday. The total amount the employee is paid on each payday is called a draw. Then at periodic times (such as each quarter) the total commissions due the salesperson are calculated. The total draw for the period is subtracted from the commissions due the employee. The employee receives the remainder. If the draw exceeds the commission, the organization must decide whether to: reduce the draw carry over the deficit retain the salesperson in the position Salary-plus-commission plans. The employee receives a base salary AND a percentage of his or her sales. This percentage would be lower than in a straight commission plan. Salary-plus-bonus plans. The employee receives a base salary and a bonus that is tied to the employee's sales performance. A bonus is granted after the employee reaches a given level of sales. These plans can be quite simple or very complex. Simple ones resemble a commission-plus-draw system, with a percentage payment made for sales above a standard. More complex plans have payment schedules that vary with sales volume. Or they make payments for factors other than sales volume, such as: obtaining new accounts reducing sales expenses improving market penetration increasing order size A variation on the more complex bonus plans is the point plan. Here the salesperson receives points for meeting and exceeding goals or quotas in a number of areas. These points are then converted to monetary values. When deciding on the mix, figure out which traits you want to encourage. Base salaries encourage:Commissions encourage:loyaltycustomer serviceconservative employeeslong sales cyclesindependencepersuasionrisk-takersshort sales cycles

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Why Sales Jobs Lend Themselves to Incentives The effect of a sales representative's influence on a customer's decision to purchase a product or service should be a primary reason in determining whether or not to allocate a sales compensation plan to a sale. Sales jobs typically involve: independence boundary spanning measurability Independence When you picture salespeople, you probably envision someone working one-on-one with a customer outside the organization. In this type of situation, it is very difficult to supervise and control the salesperson. Traditional tools such as performance appraisal do not work well in this case, since supervisors often do not see their sales staff in action. This makes it attractive to rely on the outcomes of the job (sales made) to set pay. It should be noted, however, that the degree of independence of salespeople varies with the job situation. There is a great deal of difference between a salesperson who is on the road, one who operates in a store where the supervisor is present, or an inside technology sales representative. Boundary spanning The salesperson represents the organization to the customer. This makes the sales position an important one to the organization's reputation. Likewise, the salesperson represents the customer to the organization. This can create a situation of split loyalties. As boundary spanners, sales personnel must be able to see both parties' points of view. Other employees in the organization may feel that the salesperson is "giving them trouble" in order to serve the customer. These employees may question the loyalty of the salesperson. Having a separate compensation plan in which salespeople are paid based on measurable results can reduce feelings of inequity. Other employees can see that the sales team is paid based upon their individual success. Measurability Sales volume can be measurable and is connected with the efforts and ability of the salesperson. This makes the use of incentives based on sales volume an effective way to: reward performance control costs Keep in mind that the Pareto principle (also known as the 80-20 rule) applies to most organizations. This principle basically means that 20% of your sales force will likely generate 80% of the results. Sales compensation will likely shrink in bad times (when few sales are made) and rise in good times (when organizations can best afford it). Sales Compensation Metrics Sales compensation metrics can be vary depending on the industry, maturity of the organization, and focus issues. Here are some of the metrics that might be used: Annual revenue Order value Renewals First-time sales Up-front cash New accounts References Big deals Regularity of orders Profitability/gross margin Customer satisfaction Forecast accuracy Expense control Management by objectives

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Why a Separate Sales Compensation Plan? One of the biggest management challenges for a growing organization is compensating sales people effectively. It becomes obvious that you need an incentive plan that encourages your sales team to land new accounts and continue to upsell to existing customers, but where do you begin when designing the best way to compensate them? Keep in mind, sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. Recognizing and rewarding for good performance in your sales team is one of the fundamental keys of success for a business and will support the attraction and retention of top sales talent. Sales compensation plans are necessary and the following important challenges should be considered in the development of these plans: Sales incentive plans should link clearly to business goals and improve sales force motivation. The sales compensation plan should support the business in meeting or exceeding the sales objective. Effective sales compensation plans provide cost control and reduce the cost of the sale. Sales compensation plans should be effective in attracting and retaining the right sales talent for the business market. Link sales incentive plans to business goals Sales incentive plan objectives should always align strategically with the organization's business goals. Too often this step is overlooked and results in good compensation plans with poor business performance because the objectives of the plan and the organization were misaligned. At regular intervals, all sales compensation pay plans should be reviewed and monitored for effectiveness. A more focused and strategic assessment should be conducted when business objectives are reset for a new year or after a new organizational change. This type of assessment should evaluate how well the existing plans are performing or would perform against newly defined business objectives. Increase profitable sales While most sales managers want to design sales compensation plans that "pay for performance" and increase profitable sales, there are inconsistent and conflicting views about just what "successful selling performance" means. Meeting quarterly sales quotas can be one measure of performance, but what if those quotas are met by selling products at a deep discount? How should those count? Meeting the needs of current customers is also important, but you may question whether product sales to an established account deserve to be rewarded in the same way as a product sold in a new market. "Successful selling performance" may well depend on your business objectives. The key is identification of sales-related actions and behaviors that support larger business objectives and increase the type of profitable sales that the organization is targeting. Effective sales compensation plans build in an allowance for profit at the high end of the range of profitability appropriate to their market stage, i.e., start up, fast growth, penetration or saturation. Also keep in mind that there are different ranges of profitability that are realistically attainable at different phases of the product or service life cycle for an organization's primary business. So, how do you reward for profitable sales? There are many variables that might be considered but you might focus rewards on gross margin dollars, which is defined as sales price less cost of goods. You might also consider gross margin percent, which is sales price less cost of goods divided by cost of goods. Another measure might be price realization, which is the sales price divided by list price or by net profit, which is the sales price minus the cost of goods plus allocated costs. Cost control The cost of Sales compensation will vary from industry to industry and company size. A separate sales compensation plan provides the opportunity to align sales expense to business performance. A bonus or commission payment is a single payment that does not add to overall labor costs beyond the time of the earnings period. This allows the rewards to be large without having a detrimental effect on labor costs. Sales are vital to an organization's well-being. Sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. A separate sales compensation plan will let your organization encourage specific accomplishments, such as finding new clients, pushing overstock, meeting quotas, etc. In addition, a separate plan will give your organization the flexibility to change goals (and targets) when necessary. Attract and retain qualified sales employees Characteristics of sales employees typically differ from those of other employees. Sales employees can be described as social creatures. In order to motivate them you need to have an incentive plan geared toward their talents and drives. Also the openness of salespeople can extend to the workplace, as salespeople often freely reveal how much they earn to other salespeople inside or outside the company. Whether their motivation is to validate, commiserate, boast or just share, salespeople like to talk about what they earn. This makes them unique compared to other roles in an organization. Studies show that successful salespeople are relatively: aggressive/ambitious outgoing self-motivated materially oriented high achievers This last trait - high achievement drive - was examined by psychologist D.C. McClelland. He found that high achievers have distinctive characteristics. Desire to take moderate risks. These risks are achievable but not easy to reach. These individuals like to choose the risks for themselves. Need for immediate feedback. The person must be able to see that he or she is moving toward the goal. Enjoys the hunt, more than the prize. Achievement is more important than the rewards that may come from it but the rewards are regarded as a measure of success. Consumed with the goal. High achievers are preoccupied with the task. They focus on the goal and keep at it until it is achieved. If we put the last two characteristics together, we can see why the high achiever often feels a letdown upon reaching the goal: it was the pursuit and not the reward that was stimulating. The characteristics just discussed typically call for compensation plans that provide: challenging goals that engage the employee. transparency of the incentive program so that the plan will not be perceived as unfair. performance feedback and meaningful rewards and recognition.