Wallace Management Group

When you bring a new sales representative into a territory, he will often ask about a “draw.”  The first time you hear the term, you may not know what it is or why it’s important.  A draw is a pay advance against expected earnings or commissions.  It can be important to both your sales representative and your company, but for different reasons.

Importance to Your Sales Rep

Selling high-priced, complex products or services can involve a lengthy sales cycle.  From first contact through the close of a sale, months may elapse.  The time needed to develop a fully productive territory can range from as few as three months to a year or more.  During this ramp-up period, your sales rep may experience severe personal cash flow shortages.  His or her base salary is usually significantly less than the total expected compensation plus commissions haven’t kicked in yet.  To help your sales rep get through this initial period, you may pay your rep a draw – an advance against future commissions.

Sales cycles can also be seasonal.  In the utility industry, energy demand is highest during the summer and winter months; it is significantly lower during the spring and fall.  As a result, companies that service the power generation equipment for utilities experience a well defined seasonal sales cycle.  Sales reps earn much greater commissions in the spring and fall months; summer and winter month commissions can be near zero.  Draws can help smooth out your rep’s seasonal cash flow in these situations.

The draw provides several benefits to your sales rep:

• Provides a “living wage” during the period when a territory is being developed and commissions have not yet been earned.
• Reassures your sales rep that the company has faith in his or her ability to be successful in the territory.
• Smooths cash flow across seasonal earnings.

Importance to Your Company

As a company, you have two key interests when placing a new sales representative in a territory.  First, you want your sales rep to succeed, developing relationships and driving sales.  Second, you do not want to lose the substantial investment your company makes in hiring and training a new sales representative.

By paying a draw, you can help promote these interests.  The draw reduces your sales rep’s cash flow concerns.  Instead of worrying about meeting monthly cash flow obligations like rent or mortgage payments, your sales rep can focus on learning the territory, developing customer relationships and moving customers along the sales cycle.  Without immediate cash flow concerns, your sales rep is also less likely to look for a new job which is less risky from an income perspective.  The draw reduces your sales rep’s perceived income risk and keeps him or her focused on the job – selling your products and services.

Recoverable vs. Non-recoverable Draws

Draws can be either recoverable or non-recoverable.  Recoverable draws are loans against future commissions or bonuses.  Each month during the draw period, you pay your sales rep the draw amount. If your sales rep earns commissions that are less than the draw amount, you pay your rep the commissions.  However you only pay enough draw so that the commissions plus the draw total the amount of the full draw.   The outstanding draw amount accumulates from month to month.  When earned commissions exceed the draw, use the excess commissions to repay the outstanding draw.  Once the accumulated draw is repaid, all commissions are paid to the sales representative.

In the event that a sales representative leaves your company owing an outstanding draw, most companies will write off the outstanding debt.  It is very difficult, if not impossible, to collect monies paid to a departed employee.  Some companies will deduct the draw amount the sales rep owes from other amounts the company would normally pay, such as unused vacation, severance, etc.  However, before withholding benefit payments, check with a labor attorney to ensure you meet local regulatory requirements.

Non-recoverable draws are also loans against future commissions or bonuses.  However, a non-recoverable draw guarantees your sales representative a minimum level of income for each commission period.  If earned commissions are less than the draw amount, your sales rep receives the draw amount.  No accumulated draw is carried to the next commission period.

Recoverable draws are more advantageous for your company.  Non-recoverable draws are more advantageous to your sales rep.  There is a trade-off.  How much risk is the sales rep willing to accept to work for your company versus how much is your company willing to pay your sales rep?

Time Limits

Draws should have a time limit.  The length of the draw period should give the sales rep enough time to establish his or her territory plus the time needed to repay the accumulated draw.  Usually, this works out to one to two sales cycles.

Draw Amounts

The amount of the draw can vary by sales representative or by territory.  I generally look at several factors when determining the draw amount.

• On Target Earnings (OTE) – What are the OTE for the sales rep?  An aggressive draw can bring the rep’s base salary plus draw to 85% or more of OTE.
• Territory – What do I expect the territory to generate in revenue and commissions?  Based on this information, I may increase or decrease a planned draw amount.
• Sales Rep Experience – How quickly do I expect the sales rep to get up to speed?  How much revenue or commissions do I think this particular sales rep will generate?  Again, using this information, I will target a draw equal to 65%-80% of my expectations.
• Market Expectations – What draw amount and for what time period will it take to get the sales rep to agree to work for my company?  Depending on the competitiveness of the market and how badly I want a particular sales rep on my team, I’ll increase or decrease the planned draw amount.

As with all sales compensation issues, there are no right or wrong answers when determining your draw structure.  You need to consider the goals of your business, the level of risk (draw repayment) you are willing to assume, and how much competition exists for attracting the best sales team you can afford.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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Most sales reps and managers focus on the commissions section of the sales compensation plan.  This is where your sales rep figures out how much he or she can make – “if I sell x dollars of revenue, I’ll make y dollars in commissions.” It’s equally important to understand the terms and conditions section of the plan which dictates how and when commissions are paid.

This section provides management with the tools it needs to administer the sales compensation plan while protecting your company’s interests.  Let’s look at some of the key terms and conditions that I include when writing sales compensation plans.

Commission Earned – This defines the point at which you recognize that commissions are earned – between when the sales rep completes his work and when your company is assured the sale will close and revenue will be collected.  Trigger points can be:

• Receipt of purchase order
• Installation or delivery of product
• Invoice to customer
• Receipt of payment from customer

Commission Paid – Commissions are paid days or weeks after the commissions are earned.  This time lag allows your company to prepare commission statements and checks on a regular cycle.  It also offers additional confidence that customers will not cancel the sales on which commissions are paid.  Commission payment cycles usually fall at the end of the month or quarter in which the commissions are earned or sometimes in the month or quarter immediately following the period in which commissions are earned.  Some companies pay within a defined number of days of commissions being earned.  I recommend keeping to a regular schedule tied to normal payroll periods.

Recovery of Payments – Sometimes customers will rescind a sale after commissions are paid.  Or by mistake you may overpay or make incorrect payments.  For these situations, you need to include a clause that allows your company to recover overpayments.  This term may also be used to define recovery of draws or payments resulting from misrepresentation by the sales rep.

Disputes – Disputes can arise from disagreements on the amount of commissions, when commissions are earned, shared commissions or territories.  Who’s the final arbiter?  I recommend naming your vice president of sales or president of the company or business unit to make the final call.

Shared Commission Credit – As with disputes, the vice president of sales should decide when commissions should be shared among contributing sales representatives.  These situations arise when a sale is spread across multiple territories or when more than one sales rep makes key contributions to closing the sale.

Windfall Business – On occasion, business comes in without any work or contribution by the assigned sales representative, based solely on the company’s reputation.  In the case of true “windfall business”, your company should reserve the right to pay all, partial or no commission.

Misrepresentations – Your company should reserve the right to deny commissions on any business that results from misrepresentation on the part of the sales representative or the customer.

Acceptance of Transactions – Your company should also reserve the right to accept or reject any transaction brought to it by the sales representative.  You decide what is acceptable business, not the sales representative.

Partial Year Participants – Over the course of a year, you will hire new sales reps, fire reps, have reps resign or retire, and reassign sales reps to new territories or new responsibilities.  Your plan should address how commissions are handled in these situations.  Try using these terms:

• New sales reps will be paid commissions on business they close and for which they made a direct contribution.
• Sales reps assigned to new territory will be paid full commission on business they closed in their old territory.   Full commissions will be paid on business they initiate and close in their new territory.  Split commission or partial commission (according to value of their contribution) will be paid on all other business in old and new territories.
• Sales reps assigned to new responsibilities (non territory sales) will be paid full commission on business they closed in their old territory.   Split commission or partial commission (according to value of their contribution) will be paid on all other business in the old territory.
• Sales reps who retire will be paid full commission on business they closed in their old territory.   Split commission or partial commission (according to value of their contribution) will be paid on all other business in the old territory.
• Sales reps who resign or are fired forfeit unpaid commissions and commission credits upon leaving employment of the company.  (Be sure to review this clause with your company’s employment attorney to ensure that it conforms to applicable laws.)

Changing of Plan – To allow your company to adjust to changing market conditions, include a clause that allows you to change or amend the sales compensation plan at any time.

Interpretation of Plan – Situations will arise that do not fit neatly into the sales compensation plan as it was envisioned or written.  Include a clause that defines who will interpret the plan in these situations.  I recommend assigning interpretation of the plan to the vice president of sales.

These terms and conditions should cover most situations.  However, you may want to include additional terms that your company needs to address its specific needs and control its business. You need to present a balanced and reasonably fair document to your sales team.  If the sales plan has too many administrative terms and heavily favors the company, it may kill sales rep motivation.  However, a sales plan with too few terms may leave the company exposed to reps who take advantage of every loophole and opportunity.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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The variable compensation portion of your sales compensation plan can be made up of three components:  commissions, bonuses and performance awards.  Commissions are earnings tied to sales.  The more sales your sales representative makes, the more commissions the sales representative earns.  Bonuses are earnings tied to pre-defined goals.  You may pay bonuses for surpassing quota, achieving target product levels or surpassing the company’s profitability threshold.  Performance awards are payments designed to reward superior performance, recognize contributions to achieving business milestones or otherwise compensate your sales reps for positive activities not otherwise recognized by commissions or bonuses.

Your business’s goals such as revenue, margin and product volume are usually assigned to sales representatives in the form of quotas.  Quotas become the basis for measuring performance and paying commissions, bonuses and awards.

Quota

Sales quotas are targets you set for your sales representatives, teams and management.  You can set quotas for revenue, margins, new customers, products or any goals you can think of.  Quota levels can be assigned based on sales rep ability, past territory performance, market expectations or any combination.  The key is to set quotas that are relevant and realistic.

Quotas should be relevant to the company’s goals.  They should drive actions that support the company’s targets.  Quotas should also be relevant to your individual sales representatives.  Assign quotas that make sense for each rep.  Don’t assign a small-to-medium business quota to a rep who has only large account responsibilities.  Similarly, don’t assign a new account quota to an established account manager.  Quotas not relevant to a rep or a territory work at odds with your company’s goals.

Quotas must also be realistic for them to have any meaning.  Your sales representative must believe he or she can achieve it.  Quotas that are set too high will either de-motivate your sales representative, or your sales rep will simply ignore the quota, discounting any associated commission or bonus opportunities.

Finally, quotas can be set for either total business generated or incremental business.  Incremental quotas require sales representatives to grow their territories year after year.  Sales that are lost must be made up with new sales before progress against quota can be achieved.  Incremental quotas place a high value on relationships and growing existing customers.  Total business quotas simply count all revenue or margin generated in a territory without regard to lost business.  Total business quotas are useful in new business development territories.

Commissions

Commissions usually make up the bulk of a sales representative’s variable compensation and typically are paid based on sales revenue generated by the sales representative.  Sales commission plans can be either absolute or relative.  Absolute commissions are a fixed amount or percentage tied to sales volume.  For instance, your sales compensation plan may pay commissions equal to 2% of revenue.  If your sales rep sells $100,000 of products or services, you pay the rep $2,000.  If your sales rep sells $500,000 of products or services, you pay the rep $10,000.  Whether your sales rep has a high base salary or a low base salary, you pay the same commissions for the same absolute volume of sales.

In a relative sales commission plan, commission payments are based on attainment against quota and the sales representative’s base salary.  This type of plan gives the company more control over the total commission payout per year.  When I worked for IBM, sales representatives were paid on a relative commission plan.  If a sales rep’s “base” salary was $100,000.  IBM paid that rep 65% of his or her base salary each pay period.  The rep had to earn the $35,000 balance through commissions by performing against quota.  IBM’s sales plan (commission plan) was fairly complex at the time.  Reps were paid by product, sales, installations and markets (i.e., mid-range products or small/medium business).  Each area had its own quota and quotas were weighted by importance relative to the company’s goals.  To simplify this example, let’s assume IBM paid strictly on sales against quota.  If reps achieved 100% of assigned quota, they would make 100% of their “base” salary.  Commission payments in this relative plan equaled [base salary] X [35%] X [sales/quota].  If a rep exceeded quota by 10%, the rep would earn 103.5% of his or her base salary.

Commission payments in a relative commission plan are governed by base salary and quota.  If you have a higher base salary, your commissions for a given transaction may be higher than a colleague with a lower base salary.  If you have a lower quota, you will earn more commissions for the same sales volume than a sales rep with a higher quota.  As a result of the effect these factors have on earnings, sales representatives participating in a relative commission plan focus more effort on increasing their base salaries through performance raises than sales reps participating in absolute commission plans.  Similarly, sales reps on a relative plan will focus much more effort on their assigned quotas than will reps on an absolute plan.

Capped versus Uncapped Commissions

To control commission exposure, some companies cap commissions or earnings.  They define an earnings level which they believe is competitive in a market and adequately (or handsomely) compensates the sales representative for his or her contribution to sales.  The rationale is that sales levels that exceed the cap are a result of the company’s reputation and market position, not the efforts of the sales representative.

Commission caps, unless they are unlikely to ever be reached, are generally de-motivating to good sales representatives.  Sales representatives dream of landing the ultimate customer, making the BIG sale, and getting the pot of gold at the end of the rainbow.  Caps on commissions or earnings rob them of these dreams.

If you are truly concerned about having to pay commissions on “bluebird” sales which come about regardless of the sales rep’s efforts, you can address that in the sales compensation plan’s administrative terms and conditions – to be addressed in an upcoming blog.

Commission Kickers

Commission kickers provide additional incentives to achieve goals.  Most commonly, commission kickers are used to motivate reps to achieve quota, emphasize specific products or focus on particular markets.  Kickers are additional commissions paid when the goal is achieved.  In the case of quota attainment, a commission kicker may pay 150% of commissions for all revenue generated over quota.  To emphasize products or markets, kickers may be paid on revenue generated in specific areas, such as small-to-medium sized businesses, for an identified time period, i.e., second quarter or the month of June.

Bonuses

You may pay bonuses to your sales representatives when they achieve specific milestones.  Or, you may pay bonuses on a regular calendar (quarterly or annually) based on milestones achieved during the time period.

Typically, bonuses are performance based.  Personal performance bonuses may be paid based on surpassing quota or landing targeted customers.  Corporate or team bonuses may be paid based on whether the company or sales team makes agreed upon targets.  Targets can be revenue, margin, earnings or any other goal that is important to the business.  The important point is to tie bonuses to achievement of professional, team or corporate goals.

Performance Awards

It’s important to recognize individuals who make outstanding contributions to your business.  In these situations, you will want to leverage the impact by making a public award.  Performance awards allow you to recognize key activities, individuals or accomplishments.  They are awarded at management’s discretion to motivate both individual and team activity.  A performance award provides both a monetary award and public recognition which is a powerful tool to create role models, motivate teams and drive behavior.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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As discussed in “Sales Compensation Plan – Goals” (10/22/09), your sales compensation plan needs to be based on achieving specific goals – corporate, personal and sales team retention.  To design your plan, you will incorporate compensation elements such as quotas, awards, bonuses and commission payments that motivate your sales personnel to achieve the plan’s goals.

Each member of your sales team plays a specific role in the sales cycle.  Within your sales team, you may have a wide variety of functions, including:  new account reps (hunters), account managers (farmers), inside sales, field sales, large account reps, small-medium business (SMB) reps, lead generators, lead qualifiers, closers, technical sales support reps, channel reps, channel partners, manufacturer’s reps, etc.  The compensation plan for each sales team member should drive the behavior and results you need from that position.

Let’s look at how to design your compensation plan to achieve specific corporate goals.

Increase Revenue

If your company seeks to drive revenue, you may offer field sales reps a highly leveraged commission structure with payments only on incremental revenue generated. This type of plan motivates the reps to grow the revenue base each year.

Expand Market Share

If your company’s goal is to expand market share, the plan should have provisions to compensate your sales reps for winning new accounts and growing revenue.  This might be done with a new account bonus and higher first-year commission rates for new customer accounts.  When combined with commissions paid for incremental revenue from existing accounts, your sales force should drive increases in market share.

New Accounts

If new business is your priority, you may dedicate part of your sales team to focus only on new business.  For these reps, you pay commissions only on revenue generated from new accounts.  New business should command a higher commission rate than existing business because it’s very important to your company’s growth plus it’s more difficult to win new business.

Key Accounts

Many companies focus significant sales resources on developing or expanding their largest or most important customers.  These key accounts often account for up to 80% of a company’s overall revenue.  Given their value, companies assign dedicated sales reps or teams to ensure they provide sufficient attention to key account decision makers and influencers.  To motivate key account managers to provide excellent service and develop revenue from existing accounts, you may elect to compensate them via a higher base salary and commission payments based on revenue generated from sales to their key accounts.  Higher base salaries encourage field sales reps to spend more time on account management issues and less time driving new business.

Account Management & Customer Service

Some companies assign account management and customer service responsibilities to an inside sales force. This is often the case with established customers that are not key accounts.  Inside sales representatives need a different set of incentives.  You may choose a base salary supplemented with commission payments based on revenue generated from established accounts.  You can also pay discretionary bonuses or awards for outstanding achievements, pay commissions on achievement of sales milestones, or simply give salary raises based on performance reviews and accomplishment of agreed upon territory goals.

Rewarding Sales Process Activities

The inside sales team can also be paid to identify and qualify sales opportunities.  I worked with one company that paid fixed dollar commissions for calls that resulted in a conversation of substance with a decision maker or decision influencer.  The inside sales team was also paid increasingly higher amounts for advancing the sales process.  Commissions were payable for:  opportunities identified, field sales appointments made, requests for proposals received and proposals generated.  No commissions were tied to specific revenue generated.  Each payment reflected the increased value of the sales process step taken by the inside sales rep to move the customer closer to doing business with the company.

New Product Introduction

If your company’s goal is to successfully introduce a new product or service, reps might have a specific quota or a higher commission rate for sales of the new product.

Winning Back Lost Customers

If your goal is to win back lost customers, your compensation plan might pay 150% commission for six months on revenue generated from previously lost customers.  Another tactic is to pay a “bounty” for competitive win-backs.  For instance, for every former customer lost to a competitor that returns, you might pay a $500 bonus in addition to regular commissions.

Clear, Easy to Understand, Easy to Administer

When you create your sales compensation plan, design it with a clear understanding of what you want to accomplish.  Use specific incentives targeted at specific sales team functions to drive the behaviors that will produce results.  Read and re-read your plan before implementing it.  Make sure it is easily understood by your sales representatives.  They should know what behaviors and results you expect from them.  More importantly, they should easily understand how they earn commissions.  Finally, make your plan easy to administer.  You need to be able to track performance, progress towards goals and commissionable events.  At the end of each commission period, whether it’s weekly, monthly, quarterly or annually, you must pay sales commissions in a timely fashion.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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In today’s economy, I see many postings by companies looking to hire sales professionals on straight commission. Their logic is that if a sales representative is good, the rep will have no problem “eating what they kill.” Straight-commission sales reps are inexpensive to bring on board, do not add to your company’s overhead, and are highly motivated to identify and close business.

Sounds too good to be true, huh? Well it is, because you usually “get what you pay for.” Let’s look closely at the logic of this argument.

Eat What You Kill

Many very successful sales representatives eat what they kill. They’ve developed a business within their territory which generates high commission payouts. For some, their commissions far exceed their base salary, if they even have one.

Even the most successful sales reps do not start their territories or careers with an established book of business. They build it. And it takes time, often years of patient effort, to build a revenue-producing territory. Plus, when you hire a sales rep with experience in a territory, the rep cannot immediately replicate his or her previous level of success. Two major obstacles cause initial lower sales production: the sales rep’s non-compete contract with his or her former employer and customers’ loyalty to their vendor companies, not their sales reps.

Non-Compete Agreements. Competitive companies limit their sales risk by requiring their reps to sign non-compete agreements. These agreements stipulate that if a sales rep leaves the company, the rep cannot sell a competitor’s products to their former customers for a specified period of time, usually one, two or three years.

Customer Loyalty. Unless the product is a price-driven commodity, customers are usually reluctant to switch vendors or service providers simply to follow a sales representative. They recognize the risks associated with switching vendors. Product quality, availability and customer service levels may not be comparable. They may also need to negotiate new contracts and pricing.

A successful sales rep who joins a new company, even one who remains in the same territory, must invest time with customers to rebuild relationships before significant sales are achieved. During this territory development period, the sales rep will need supplemental cash flow to survive.

Straight Commissions = Low Cost of Sales + Motivated Reps?

Here’s another false argument. Hiring straight commission sales reps can reduce your cost of sales and motivate reps. I’ve often heard business unit managers say, “Let’s hire reps at 100% commission. If they don’t work out, we’ll replace them and they haven’t cost us a penny.” Even at 100% commission, bringing new sales reps into a company involves expensive “hidden” costs:

• Training – New sales reps need training on your company’s culture, products, processes and procedures. They need to learn your contract terms and pricing. They may need training on your preferred sales approach.
• Benefits – Unless you are hiring an independent contractor, you may need to include your new sales reps in the company benefits plans.
• Time – New sales representatives demand more time from your managers and executives while they learn your company and its systems.
• Equipment – New sales reps need to be equipped with appropriate sales tools such as phones and computers.
• Territory expenses – As new sales reps work their territories and visit headquarters, they may incur significant travel and entertainment expenses.
• Customer satisfaction – New sales reps are visiting your customers and prospects. You want to make sure you have the right rep in place, delivering the right message, the right way. The cost of customer dissatisfaction can be enormous and ripple through to other customers and prospects.

Straight commission can provide tremendous motivation for sales reps who generate sufficient cash flow to meet their basic personal needs. However, sales reps who have not yet established their territories and are struggling to make ends meet can quickly become disillusioned. If your sales cycle is longer than a month or two, dissatisfied reps may leave for new job opportunities. Then your investment in that “no cost” sales representative is lost. Customer satisfaction may also decrease as customers perceive higher turnover within your sales team. Finally, the sales rep you spent time and money training may take your investment and go work for your competitor.

Base Salary + Commission – What’s the Optimal Mix?

The debate is ongoing about what percentage of total compensation should be base vs. commissions. Ideally, you want to pay enough base salary so that your sales rep doesn’t need to worry about meeting basic obligations such as food, rent/mortgage and car payments. But you want to avoid paying too much. You don’t want your rep to feel like he can live comfortably off the base salary.

In general, I try to target the base salary at about one-third of the total compensation (base + commissions) at 100% quota attainment. This ratio can vary based on the level of total on-target earnings (OTE) and the length of the sales cycle. When the OTE level is higher ($300K and above) or the sales cycle is short (less than one month), I may offer a maximum base salary of 25% of OTE. When OTE is lower or the sales cycle is long, I’ve seen base salaries offered as high as 75% of OTE.

When you set base salary as a higher percentage of OTE, this reduces the risk borne by the sales representative. Given this situation, I suggest reducing the commission rate paid as a percentage of revenue or margin.

Base Salary – What Should I Expect in Return?

No sales representative earns his or her base salary for just “showing up.” Your sales compensation plan needs to specify clearly the activities for which reps are paid a base salary. Here’s some language I’ve used in the past:

Base salary is paid for the timely and accurate completion of administrative and other tasks associated with the generation of business volumes, including:

• Managing account relationships
• Prospecting for new business
• Ensuring profitability of deals
• Competitive reporting
• Forecasting business volumes
• Negotiating master agreements
• Assisting in the collection of accounts receivable
• Expense reporting
• Personal education/skill development
• Completion of all required documentation

Draws Against Commissions – Why offer these?

As an alternative to base salary, you can offer draws against future commissions to address sales reps’ needs for start-up or short-term cash flow. A draw is a loan your company provides to a sales representative that is repaid by earned commissions. Draw amounts are usually negotiated with sales representatives for a defined start-up period when they are hired. The draw is designed to provide the sales representative with nominal cash flow while he or she is focused on developing the territory. For businesses with seasonal cycles, draws can also be used to provide reps with more consistent cash flow.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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Overview

Your sales compensation plan needs to motivate your sales representatives to accomplish three goals:

• Achieve your corporate revenue goals
• Realize their personal and professional goals
• Want to work for you and your company

In addition, the sales compensation plan should enable you to attract new sales reps as your organization grows.

How do you design a plan to accomplish these goals?  Let’s take a look at them individually.

Corporate Goals

The primary purpose of your sales organization is to sell products and services, driving revenue.  There are many steps involved with selling from identifying opportunities and prospects to qualification, presentation, closing, service and collection of receivables. Comprehensive sales plans may place emphasis on these steps of the sales cycle by setting quotas in each of these areas.  Or, they may pay a commission at each step with varying payouts based on how important each step is within the overall sales cycle.

In addition, you likely have specific goals for your range of products, customers, markets or geographies.  Newly introduced products may require more attention than established products.   One company may be focused on customer retention while another wants to expand its customer base.  Other companies may be looking to establish a toehold in a promising, new market.  Finally, another may be interested in expanding into a different geographic region.  Each of these goals should be accounted for in the commission plan.  As with the sales cycle steps, you can use quota and commission rates to drive sales behavior and promote achievement of important goals.

Personal and Professional Goals

Most sales representatives are motivated by money and flexibility.  Sure, they are also driven by professional pride, a desire to serve their customers and other personal goals.  But, for the most part, sales reps measure their success by the money they make and having flexibility in their schedules so they can enjoy their earnings.

A well designed commission plan must offer realistic earnings expectations for your sales reps.  You want your sales reps to interpret the plan as enabling them to achieve their money goals.  This will keep them happy and motivated to work hard to sell what the company wants to sell.  However, if your sales rep becomes disillusioned and does not see that his commission plan as providing a path to achieve his or her goals, then the rep will stop trying.  The commission plan will become a de-motivator.  In the end, your company will lose that sales rep, and most likely other good sales reps on your team.

Sales Team Retention and Attraction

Your company has made a considerable investment in its sales team.  At the very least, the company has spent a lot of time and resources recruiting qualified, strong sales representatives.  Once hired, the company spends even more time and capital training its sales representatives.  You train new recruits on the company, its culture, processes and systems.  You train them on the product line, services, markets, customers and competition.  Top-notch sales organizations train their sales representatives on the latest sales techniques, solution selling, relationship selling and tools.  Most importantly, established sales representatives have an investment in their customers.  They have built key relationships, developed institutional knowledge and honed a market awareness that can take months and years to replicate.

An effective sales compensation plan is designed to keep your experienced and trained sales professionals.  It rewards them well for excellence.  It bolsters their self esteem.  It provides them with a pathway to attain their personal and professional goals.  Additionally, an effective sales compensation plan facilitates attracting new sales representatives.  Having a pipeline of new reps makes it easier and more efficient to expand into new territories, open new markets and back fill sales representatives who leave due to promotion, transfer, retirement or other reasons.

Stay tuned for my discussion of these specific components of sales compensation plans – base salary, benefits, variable compensation and draws.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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