How to Set Up Sales Performance Salary for Employees

Compensation plans can create perverse incentives.

Using financial incentives to motivate employees and drive sales is a tricky business. When done right, compensation plans that include incentive- or performance-based pay can have employees achieving more. However, it's easy to misjudge and create a divergence between the employees' and the company's best interests. Executives and managers developing sales strategies must consider the short- and long-term effects of a compensation plan before implementing it.

Instructions

1. List the sales and behavior objectives you have for your sales force. Don't just include sales figures, but also how you want them to behave toward customers and with other employees. Your goals might include, "generate at least $500,000 in sales," "provide the best customer service in the industry" and "work closely with distribution and marketing departments to create a seamless experience for customers." Try to make your list exhaustive.

2. Consider how various forms of compensation affect your goals. If your only or primary goal is to drive sales volume, then a straight-commission or primarily commission-based sales plan can reward performance. You may even create extra bonuses or increased commission rates for higher sales. However, if you want your sales force to take time to tend to customer and post-sales service, then compensation that mixes salary and performance rewards might be more effective. After all, follow-up work and tending to customer needs can take time away from selling and, at minimum, employees shouldn't be penalized for achieving company service goals.

3. Draft a sales force compensation plan that describes in detail how each part of an employee's compensation will work. This should include any base salary or hourly wages, draws, commissions and bonuses--including monthly, quarterly and annual ones. Your wording should remove any ambiguity to avoid later disputes, squabbles and potential lawsuits.

4. Ask several people in your organization or advisers you trust to review your sales compensation plan--looking both for clarity and to ensure the plan will create incentive for the behaviors you seek. Request people to look for perverse incentives--rewards that make it so that employees' interests diverge from the company's.

5. Revise your plan based on feedback and verify that the final version is financially viable for your company. A plan you can't afford won't last long. Have your company's human resources people and attorney review the final version.

6. Present your performance sales plan to your sales force. Explain each element carefully, including what you're hoping to achieve with it. Highlight how your salespeople stand to gain and why the new plan can help make them more successful. Elicit feedback and address questions. Keep an open ear because changing an employee's compensation can have legal repercussions for the company. You need your employees to feel comfortable with the new plan and be, at minimum, willing to give it a try.

References

• "Inc."; How to Set Up a Sales Compensation Plan; Elizabeth Wasserman; December 2009
• "Inc."; Compensation; October 2000
• Compensation.BLR.com: How to Design an Effective Sales Compensation Plan; January 2006
• West Virginia Employment Law Letter; Designing a Performance Compensation Plan; January 2007
• "Wall Street Journal"; Crazy Compensation and the Crisis; Alan Blinder; May 2009