Sales Compensation Schemes (also called Sales Incentive Plans)

Each company needs a strong Sales function to generate income. The role of Human Resources is in setting the rules for the sales compensation plans as the plans are managed centrally and the internal equity is achieved. The sales managers are creative, and they have to develop the incentive schemes in the strictly defined boundaries . The compensation strategy should be the boundary setting document for the sales managers.

The sales compensation plan is a terrific tool to stimulate the salespersons to increase the sales success and to follow up the potential clients of the company. However, when the sales compensation scheme is not set correctly, it can ruin the company. The poor sales compensation scheme can damage the company silently.

What is the sales compensation plan?

Generally speaking, the sales compensation plan is based on sharing the profits from the generated sales volumes between the organization and the salesperson. This is a basic definition of the sales compensation scheme .

The sales compensation scheme allows to salespersons increase their income. They are promised an exact amount per each unit sold, and the payment is guaranteed. The sales compensation scheme is not a bonus scheme, which depends on the overall profitability of the company. The sales incentive scheme is always purely individual or team based and does not depend on the company results.

The sales compensation plan is always owned by the business unit. The business unit guarantees it will work and support the business goals. HR cannot be the owner of the details of the scheme as parameters manage the effort of sales employees.

The sales compensation plan should not be focused on just increasing the sales volumes, but it should set the priorities to the salesperson as the incentives are different for different products. The salesperson tends to select the product with the highest incentive, but it is usually the product most beneficial for the organization (or it should be).

How does the sales compensation plan work?

The sales compensation scheme should be straightforward . The salesperson does not have time to calculate his or her incentive, and it should be visible immediately, how much money will be on the bank account.

The sales compensation plan is based on the idea that the salesperson is motivated to sell products when he or she feels the opportunity to raise the personal income. The incentive scheme sets the exact formula for calculating the payment.

Additionally, the sales compensation scheme can specify the other conditions, which have to be met. The scheme usually contains several products and the minimum thresholds are defined. The organization needs constant sales in different product lines and the thresholds keep the salesperson focused on the entire product portfolio.

The upper caps are also applied so the organization does not sell more than it can make or maintain. The cap also makes salesperson plan the sales over time as they do not try to maximize the revenue within a short period.

What are the common mistakes in sales compensation plans?

The most common mistake in sales compensation schemes is a missing link between the company goals and the plan. The salesperson are making their personal targets, but the net profit of the organization is not met. It is the responsibility of the Sales Management to establish a clear link between the sales compensation scheme and the business plan.

The sales compensation scheme cannot include the items, which are not directly influenced by salespersons. It is quite common to include a restriction into the scheme, but the salesperson has to manage it. When it is managed centrally from HQ, the sales staff will not trust the sales incentive plan, and it will not work.

The sales compensation scheme has to be changed on the regular basis. The goals and priorities of the organization change and it should be reflected in the scheme. Each salesperson should be prepared for changes in the scheme, and he or she should be able to adapt quickly to the changed rules of the game.

What is the role of Human Resources in Sales compensation plans?

HR has to give the clear rules for the development of the sales compensation schemes in the organization. The employees are sensitive to the compensation issues in the organization and the sales incentive schemes can cause many conflicts among employees and managers.

HR should steer clear rules for the incentive budgets as the company is financially secure, and the clear link between performance and incentives paid exists.

HR should carry the systematic reviews of the incentive schemes used in the organization and the top management should be informed about the situation in different areas of the organization.