Building a short-term sales incentive requires careful planning to ensure that you provide the right incentives that help your company achieve growth and success. You need to think strategically about the design process of your sales incentive compensation plans.
Plan Components
The short-term sales incentive framework aligns with a pay-for-sales performance approach in which sales employees are only rewarded for achieving a certain level of predetermined sales targets.
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Pay Mix
Pay Mix expresses a ratio of base salary and sales target incentive. For example, a 70/30 pay mix means that 70% is base salary, and 30% of commission based.
There are a number of factors that can contribute to how aggressive your pay mix should be, including the type of product selling, the length of the sales cycle, etc.
There are a number of factors that can contribute to how aggressive your pay mix should be, including the type of product selling, the length of the sales cycle, etc.
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Funding
A percentage of net profits is allocated to the short-term sales incentives. Some companies vary the % of profit allocated to the sales commission from year to year, at the discretion of the Board and differ based on the industry.
The commission paid on high end priced products may be less than a percentage than a low-end priced product. For example, a high-priced product of a luxury car commission rate can be 5% on sales target and for a low-priced product as selling electronic gadgets can be 15%.
The commission paid on high end priced products may be less than a percentage than a low-end priced product. For example, a high-priced product of a luxury car commission rate can be 5% on sales target and for a low-priced product as selling electronic gadgets can be 15%.
Pay-Out-Scheme
A Balance between upside & downside defines how much pay will occur when sales workforce overachieves or underachieves against their sales targets. The proper amount of upside helps motivate the sales workforce and rewards them for over achievement.
Sample Pay-Out-Scheme
Each sales target is assigned four different levels of performance and pay-out.
- Exceeded Sales Target: represents the above target performance at which the company is willing to pay additional incentive
- Achieved Sales Target: represents the target performance level that the sales line manager has set
- Partially Achieved Sales Target: represents the minimum performance level at which some incentive may be paid out
- Unsatisfactory: represents the below threshold performance level at which no incentive will be paid out
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Performance Period
This is the time period in which you measure performance against sales targets. This should reflect the length of the sales cycle and typically, you will see annual, semi-annual, or quarterly performance periods.
Pay-Out-Period
This is how often you will pay out based on a sales workforce's performance. We recommend you make your payments immediately, as incentives not for more than a few weeks lose their effectiveness. Paying as close to the sale as possible will ensure proper cash flow to the sales workforce, mainly for those who have a more aggressive pay mix.
Performance Measure
There should be no more than 3 performance measures to keep your sales workforce focused. Sales teams with too many sales targets can’t focus on the targets which will affect the company and their bottom line. Target weighting should provide clear direction to the sales workforce about what is the relative priority & importance of each sales target.
Communication - Keep It Simple
Incentives can be confusing and keep communications as easy to understand as possible and be sure to provide clear examples to help break down complex financial information into simple pieces.
