Companies that pay their employees through commissions must develop a compensation plan. A sales commission plan must contain several key components including the performance that is expected of the employee, how he will be compensated, terms and the duration of the plan. Some companies use a uniform plan. Others often provide each sales staff member with a personal commission plan. Sometimes this can be negotiated when being hired.
Building your sales commission plan
A sales manager must accomplish departmental goals based on individual effort. Break down your goals for this individual by dollar volume, new business, retention/renewal and other factors. Begin a sales commission plan like a contract. Title the document and list the employee’s name and date.
State the duration of the plan. A sales commission plan is generally valid for one year. Normally the dates correlate to the company’s fiscal calendar. If the fiscal calendar ends on December 31 and the employee is hired on April 1, the plan may only be valid for nine months, ending on the last day of the current year.
List the plan period. Determine how goals and objectives are set and measured for the employee. If the sales quota is measured quarterly, explain how. Plan periods can be monthly, quarterly, twice-yearly, yearly or any other period you determine.
Describe what will be measured. This typically refers to the gross sales by the employee. It can also be calculated through net sales or gross profit. Most commission plans are set up based on gross sales. To build new business, you will want to establish goals for new accounts or contracts. To retain business, you will want to create retention goals.
List your expectations. State what you expect from the employee in terms of sales. If you are measuring the employee’s performance based on gross sales, list the total amount of gross sales you expect for the plan period.
Describe the commission schedule. Include the percentage the employee will earn for each sales dollar or sales level. Include details that describe clearly how and when the employee will be paid. For example, the employee might earn a commission of 15 percent for all gross sales. Five percent will be paid on the next paycheck and the other ten percent will be paid in two months. You may stretch the payment further out to increase retention. If your plan is based on reaching sales levels, make the awards at various increments: 95 percent of goal; 98 percent; 100 percent; 103 percent, etc.
Explain any other details. If the employee can earn bonuses, describe how he must do that and the requirements involved. List any other necessary details of the commission plan. If collections from his customers are a part of the job, make the commission contingent upon collections rather than sales. Some bonus and compensation plans require that the employee be in good standing when the bonus is awarded. This means the employee must still work there and not be on probation for disciplinary matters.