Sales Comp: All About How You Split the W-2 Pie

Schum, a Senior Consultant at Compensation Resources, Inc. in Upper Saddle River, NJ offered his tips for sales compensation design at a recent webinar sponsored by BLR/HRhero.

For example, Schum says, here’s how one organization might split the sales compensation W-2 pie:

Sample Sales Compensation Mix

Tier	Scope of Accountability	Base Salary (Fixed)	Bonus (Variable)
I  Jr. Sales Rep Sales Associate	Limited experience  Low influence on sale Minimal product/technical knowledge	90%	10%
II  Sales Rep Account Manager	Experienced Moderate influence on sale Competent product/technical knowledge	75%	25%
III  Sales Specialist Account Executive	Experienced High influence on sale Substantial fiscal responsibilities  Expert product/technical knowledge	50%	50%

Critical Payers in Plan Success

Too many comp people try to do sales comp planning on their own, Schum says. Be sure to include finance and HR, Schum says.

• Finance. The financial people are most closely aligned to the strategic plan, and to the individual finances of the item being sold. For example, they know what the difference to the organization is of selling 1 million or 10 million units, how the margins change, etc.
• Human Resources. The HR people sit between sales and non-sales. They can provide critical market information and administrative expertise on plan mechanics.

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Forms of Sales Compensation

Schum outlines the various forms of sales compensation as follows:

Salary Only

Salary only plans offer a set amount each pay period.

• All fixed costs
• Rote process
• Incentive-less program
• More for order takers, web-based. or call-in centers

Salary-Plus-Commission

Commissions are typically a percentage of sales or margin

• Spreads risks
• Designed to attract quality salespeople

Salary-Plus-Bonus

• Focus on MBO’s or other objectives
• More business development than sales, longer sales cycle
• Managerial and administrative

Commission Only (With/Without Draw)

This is for the pure hunters, says Schum, those who are really confident in their ability to sell.

• Advance pay for living expenses charged against future commissions
• Recoverable or non-recoverable (Non-recoverable draw is another word for base salary, Schum says.)
• Provides strong incentive to excel

Graduated or Tier Commission rates

As the salesperson reaches sales milestones, the commission percentage increases. A multi-tiered program might offer differing rates by product line, for example.

Other Extra Bonus Types

There are several additional types of bonuses to consider, Schum says.

• SPIFFs (Special Plan Incentive for Fast Sales) and similar sales challenge programs are useful for product introduction or emphasis. Features:
• Generate instant attention and excitement
• Ad hoc, short–term program
• Specifically focused on special item(s) like a new product roll-out
• Outside parameters of established program
• Kicker rates. This program adds a kicker for a new client or selling a new product to an existing client.
• Supplemental Rewards
• President’s Awards/Salesperson of the Year
• Cash or prizes (trips or dinner or theater)

Of course, says Schum, it’s possible to combine the above in many different ways to suit your particular circumstances.

Plan Design Considerations

Schum recommends considering the following in planning sales compensation:

Establish an objective process for:

• Assigning goals or quotas
• Setting territories/accounts/National Accounts
• Referrals/Cross-selling/Upselling

Figure out what sales activities you want to emphasize

• New clients vs. existing clients
• New products vs. existing products

Determine the basis for awards. For example, Schum says, if a salesperson has a lot of leeway in setting price, you may want to base commission pay on margin.

• Revenue
• Margins
• Units

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Consider other factors:

• New launch? Timing?
• Replacing an existing product?
• Aging technology (product that isn’t state of the art)?
• Product sells itself (order taker vs. salesperson)?
• What is the Sales Cycle? Point of sale or long decision process?
• What is the type of customer? (Government? B to B? End user or not?)

Define a sale:

• What is a sale?
• When is a sale recognized? At the time of the order? When invoiced? When paid? (If there are many cancellations or returns, it’s probably best to recognize on payment)

Finally, says Schum, be wary of sales compensation data in surveys. The survey says what was paid, but it doesn’t tell you whether the participants were stars or never met expectations.

In tomorrow’s Advisor, Schum shows how to set commission parameters based on sales and the true cost of a salesperson, plus an introduction to the all-in-one compensation website, Compensation.BLR.com.