Short Term Sales Incentive Framework and Structure

Short Term Sales Incentive Framework

Plan Components

Posted 15 May 2018

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 certain level of predetermined sales targets.

Exhibit 1: Sample Short Sales Incentive Plan

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.

Exhibit 2: Pay Mix - Base Salary Plus Commission

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 as a percentage than a low end priced product. For example, 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 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

Exhibit 3: Sample Pay-Out-Scheme

Sample pay-out range for this plan is between 0 - 50% of sales target commission.

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 performance. We recommend you make your payments immediately, as incentives not paid by more than a few weeks lose their effectiveness. Paying as close to the sale as possible will ensures proper cash flow to 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.

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