Designing Your Sales Force Compensation

Sales is the lifeblood of any company. If your sales depend mostly on your sales force, then it is clear that having a suitable compensation scheme is crucial to its profitability. However, for most companies, setting up a compensation scheme for its sales force is not a simple matter.

Many factors affect the designing of sales force compensation, such that entire books have been written on the subject. For entrepreneurs who do not have qualified HR personnel to handle the compensation structure, or for those who want to learn more about what must be taken into account, here are some vital considerations in setting compensation:

The more difficult it is to get the sale, the higher must be the compensation. Consider if sales leads are coming from advertisements, and how much the sale depends on the skills of the sales person. There is a good reason why inbound sales are compensated lower than outbound; it is because those calling the company are already interested and so much easier to sell to. Those who have to sell outside the office are also paid higher than office-based sales personnel due to the hazards and difficulties they face.

The difficulty factor also extends to the particular products or accounts. You may have products that are in demand and needs little or no selling effort; these deserve less compensation. But there are products or services that take a lot of time and effort to sell, like life insurance or multi-million peso industrial equipment. In these cases, bigger incentives are justified. Also give better incentives for obtaining sales from new accounts because they are harder to acquire.

Be aware of the potential problems of too much pressure. Very often you can read in the newspaper news about billions of dollars being lost due to anomalies by traders who were pressured to meet their targets. What was notable is that in most of these cases, the traders were not stealing the cash, although they benefit indirectly. Extreme pressure can produce great sales but it also may lead to some sales people resorting to unethical or even illegal means to reach their sales targets. Having too high quotas and incentives may tempt susceptible individuals to cross moral or even legal boundaries.

Consider the need for team work. Should sales incentives be based on individual or group sales or a combination of both? When incentives are based on individual performance, more effort is exerted. Unfortunately, this often comes at the price of team work. There is little motivation to help a co-worker and useful ideas are often hoarded for one’s self. In the pharmaceutical industry, at least, this has caused enormous problems. Since sales in this business are usually not obtained directly, there are medical representatives that sell outside their territories. This move unfairly reduces the sales of the sales person in the area.

Consider the legal aspects. Benefits, once established, cannot just be taken away. You may be giving too generous a compensation without thinking about difficulties that will arise when sales go down the in future. Be aware, too, that sales incentives may form part of base pay when computing separation benefits. Consulting a labor lawyer may be a wise investment to guide you in these matters.

Some benefits are valued more than cash. It may seem irrational but there are some benefits that are more important to people than their cash equivalent. On studying this apparently illogical behaviour, there are indeed some rational reasons. One major reason is that it is cheaper for the company to provide these benefits than if the employee were to purchase it himself due to volume discounts. In the case of medical and insurance benefits, it may be in the long term interest of the company for their employees to be healthy; then, they become more productive. A type of benefit that is very costly is providing car plans. However, it has been proven that companies that offer car plans attract more high quality applicants and helps a lot in retaining talented people.

Adequate base pay is important. Many people do not equate commission only sales jobs to regular work, even if there is a much higher compensation. At the very least, people want fixed compensation in order to pay their daily expenses; they fear the lack of predictability in relying on commissions and incentives alone. Most applicants look at the base pay and consider the incentives as a bonus.

Compare your compensation scheme with competitors. You are not competing in a vacuum. What you think is a fabulous offer may be inferior to what similar companies are offering. Not only will you attract less talented people, but even your current sales force may defect to competitors.

Compensation structures must be reviewed from time to time. Situations change and what may be an appropriate compensation is no longer optimal. Since this aspect is so critical to a company, it is prudent to examine its suitability at least once a year. Do not wait until damage has been done before taking action.

Setting up the compensation package for your sales force demands a lot of time and study because of its profound impact on a company’s sales and income. While the entrepreneur is the one ultimately responsible, it is also critical to get feedback from all stakeholders to get support and to avoid blunders in the implementation. If you get this right, your sales force has a stronger chance of delivering the profits.

*Originally published by the Manila Bulletin. C4, Sunday, July 15, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.