How do I Create a Sales Compensation Plan? (Explained)

A good sales compensation plan should be sufficiently flexible to meet the needs of individual territories, products, and salespeople. The plan should help in attaining the objectives of sales organizations.

How Do I Create a Sales Compensation Plan?

These steps in building a powerful sales compensation plan are discussed below:

1. Review Job Descriptions

The first step in the design of a new compensation plan is to carefully review the detailed job descriptions.

This should disclose the exact nature, scope, and probable difficulty of each job.

A separate description should be included for its selling position, such as sales engineer, missionary salespersons or sales trainee.

The job descriptions indicate the services and abilities for which the business is paying.

2. Identify Specific Objectives

The next step of the job of designing a compensation plan is deciding specifically what it is intended to accomplish.

The following are examples of specific objectives:

Increase profits by 15%.
Increase sales volume of a certain class of products by 15%.
Increase volume at existing accounts.

Improve customer satisfaction.
Stimulate missionary work.
Develop a new territory.

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3. Establishing the Level of Compensation

One of the two key tasks in designing a payment plan is to determine the level of compensation.

The level of pay means the average earnings of the salespeople over a given period.

In many respects, the level is more important than the method.

People usually are more interested in how much they have earned than in how they earned it.

To the company, the level of income is the direct sales cost. Management is interested in the compensation Level because that is what attracts most salespeople.

The method of sales compensation has a bearing on the level of compensation.

Salespeople who work under a straight salary plan typically earn less than a salesman who are paid a straight commission or some combination of salary and commission.

The level of sales compensation is also closely related to the experience of the salesperson.

This is understandable because the more experienced representatives have usually developed more skills.

4. Developing the Method of Compensation

The Other key task in designing a sales compensation plan is to develop the method by which the salesman will be paid.

The building blocks available to management when constructing a sales compensation plan include the following elements:

Salaries
Commissions

Bonuses
Indirect monetary benefits (vacations and insurance)
Expenses

Some of these components are incentives for the Salesforce; others offer stability and security in earnings; still, others may help the firm control sales costs.

The more elements used in building a plan, the more complex it is, as shown in the chart:

5. Deciding on Indirect Monetary Compensation

Today, most salesmen enjoy the same employee benefits as production and office workers in a company. Management is more sensitive to its social responsibility.

The indirect monetary benefit includes an item that has the same effect as money, though payment is less direct than a salary or Commission.

Indirect monetary benefits, which are also referred to as fringe benefits or just benefits, include such things as retirement plans, paid vacation days, and insurance.

Indeed, what was once considered “fringe” benefits are now better considered to be an integral part of the compensation package.

The company paid fringe benefits for salespeople May include the following:

Medical insurance.

Group life insurance.
Dental insurance.
Long term disability.

Pension plan.
Short term disability.
Profit-sharing.

Thrift saving plan.
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6. Pretesting and Installing Plan

Once management has tentatively scored the method of compensation, the next step is to protest the entire compensation plan.

This involves determining how the proposed plan would have operated if it had been in effect during the previous few years.

Management can estimate what the company’s cost would have been and what income would have been earned by the salespeople.

Protesting, a compensation plan is a simulation exercise that can easily be done on a computer.

A change in a compensation plan especially a major one – can create a sock for the Salesforce believe that management is simply trying to reduce selling cost on any changes in the payment plan is the salesman

Consequently, management should ask the salesman for suggestions and criticisms.

Managers should announce that plan well in advance of when it is to take effect.

A compensation plan may be installed throughout the entire sales force. or it may be tested in only one or two territories. If a company cannot conduct a realistic protest, then it my field test the plan in a few Districts under actual selling conditions.

The final step to make certain the entire plan will be evaluated frequently to prevent it from becoming outmoded.

The management should ensure that a compensation plan aligns with changes in the strategic direction of the firm.

Thus, now you know the complete process of How do I create a sales compensation plan?

How do I Create a Sales Compensation Plan? (Explained) Step by Step