The Best Sales Compensation Plan

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A Sales compensation plan is not something that you can afford to draft carelessly. It becomes even more significant considering today’s aggressive market, where retaining good employees is becoming the topmost priority for organizations.


The basic objective of the sales compensation plan is to compensate sales people on the basis of their performance. Organizations have different selling patterns and, over the years, various types of sales compensation plans have been developed to address these needs. This article lists some of the best sales compensation plans prevalent in today’s sales industry.

Straight Salary Plan

  • This sales compensation plan works only with organizations that have assured sales volumes, for example furniture showrooms. The salary compensation plan defines different salary structures based on the employees marketing skills, qualifications and responsibilities. It also has provisions for salary increments and the criteria for the same.

    Salary increments can be periodic or flexible depending on the organization’s policies and the same is clearly mentioned in the plan. This plan however, is not recommended for volatile markets with unpredictable sales volumes.

Commission-Only Plan

  • This plan does not accommodate any other source of compensation for employees apart from commission on sold items. Many organizations prefer this mode of offering commission on sales to compensate their employees, since compensation can be directly correlated with the performance of an employee.

    Commission-only plans mention the different commission levels with respect to sales volume or time. (For example 1% commission on sale of first 100 items, 1.5% commission on the sale of next 100 items or 1% commission for 100 items in month, 1.5% commission for 150 items in a month).

Salary plus Commission Plan

  • This plan came into existence due to a major shortcoming of the commission-only plan. The commission-only plan is not of much benefit to a new employee who needs time to settle into the position. Therefore, to compensate such employee during this initial period, he is offered a minimum fixed salary for a period of time and the commission-only plan becomes effective thereafter.

Bonus Plan

  • This sales compensation plan cannot be used as a standalone plan and must be combined with any one of the three plans discussed above. Adding a bonus component to the sales compensation plan can bring a significant change in the manner in which employees are compensated.

    This plan includes the criteria for awarding bonuses and the time of payment, which is generally the year end. In case an employee is eligible to earn more than one bonus, the cumulative bonus calculation is also included in the plan. Bonus components are always paid as a fixed sum per attained objective and not as percentage of sales.

Sales Incentive Plans

  • This plan works similar to the bonus plan with the only difference being that sales incentives are always non-monetary, such as gifts and other items that may be useful in improving the employee’s lifestyle. The sales incentive plan can be considered as an alternative to the bonus plan. Sales incentive is generally an integral component of any sales compensation plan.

    A good sales incentive plan always mentions amount rather than mentioning the actual items. (For example, instead of mentioning car as sales incentive, it will say item worth $10,000). By doing so, such a plan offers flexibility in giving sales incentives according to the needs of the employee.

    A comprehensive sales compensation plan can be developed by having a good balance of all the four components: salary, commission bonus and sales incentive in a single plan. Lastly, the sales compensation plan will serve its true purpose only if it is easy to comprehend and execute at all levels.

References

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