The most important design features in a sales compensation program are the pay level (how much) and pay mix (proportion of incentive pay to base pay). Pay levels will generally reflect industry practices, but the pay mix should be designed to meet the marketing strategy of the company.
The degree of risk in the incentive program has to be balanced with the possibility to earn; the higher the risk, the more the sales representative should be able to earn by accomplishing the company’s strategic objectives as they relate to sales.
Straight Salary
The company that has a sales representative on straight salary is engendering loyalty to that company, and the sales force’s actions are easier to control. For example, salespeople are more willing to engage in nonselling activities such as customer service or training. This type of approach is most appropriate when the sales force’s main job is to service existing accounts or generate goodwill for the company.
However, straight salary makes it more difficult to motivate employees to sell new accounts and it may lose the company its top performers, who move to other organizations where both the risk and income potential are greater.
Straight Commission
On the other hand, a straight commission pay program will generate high-volume sales, but volume may not be the company’s only concern.
If the sales force is paid on straight commission, it will be more difficult to get them to perform other functions that may be necessary for the company’s marketing strategy, such as maintaining accounts through good customer service, working with other sales representatives to generate cross-functional selling opportunities, training new reps, and generating goodwill with customers.
Combination Pay
A combination pay program that recognizes sales representatives both for selling and for maintaining accounts is often the best program. This program can be created by mixing incentives while at the same time offering some economic security for the sales force with a base pay program.
The base pay program makes it easier for the company to maintain loyal and knowledgeable sales representatives. Incentive pay for things other than pure volume of sales allows the company to exert some control to accomplish the functions other than generating new accounts that are necessary, and can support targeted marketing goals.
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Incentive Packages to Support Objectives
By setting target rates for sales compensation that are competitive with the external market and then structuring the pay program so that high performers can do much better than this and low performers are not motivated to stay, the company can keep high performers.
By stressing total corporate performance in the incentive pay piece, as well as individual performance and activities that may or may not generate new accounts, such as writing proposals, the company can motivate the type of behavior it needs in the market.
By building in incentives for referral to other parts of the sales organization, the company promotes teamwork and forces the sales force to look at the company’s total goals rather than just volume selling or maintaining accounts.
Sales incentives—just one more challenge for comp managers. “Maintain internal equity and external competitiveness and control turnover, but still meet management’s demands for lowered costs.” Heard that one before?
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