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Small Business: Crafting an effective sales compensation plan

Crafting an effective sales compensation plan can be

Crafting an effective sales compensation plan can be an arduous task for any manager. The right plan will motivate sales staff and be aligned with company goals, experts say. Credit: iStock

Crafting an effective sales compensation plan can be an arduous task for any manager.

The right plan will motivate and incentivize sales staff and be aligned with company goals. A poorly written plan can hurt morale, not to mention your bottom line.

"The primary purpose of a sales compensation plan is to focus the sales force in alignment with the business strategy," says James Stoeckmann, senior compensation practice leader at WorldatWork, a Scottsdale, Ariz.-based nonprofit human resources association.

It should be realistic, not overly complicated and offer your sales force a "clear and unambiguous direction as to what's important," he notes.

It should include company objectives and goals, key performance measures, and payout formulas, says Stoeckmann.

"You want to keep the sales force focused on the three or four objectives that drive their success and ultimately their pay," he advises.

Commission only? Make it clear if they'll receive base pay, commission or a combination.

Zev Asch, president of East Northport-based Ledaza Inc., a marketing and sales firm specializing in small business, doesn't favor a commission-only compensation plan.

"Sales has to be a mutual commitment between the company and the salesperson," says Asch, also a board member of the nonprofit group Long Island Advancement of Small Business. With commission-only, "there is no commitment on the part of the company."

The lack of a base salary can be demotivating, he notes.

Determining what the salary and commission should be can be tricky.

How much? "Keep your ears open," says Stoeckmann. Study what your competition is offering. See if there's market data for your area and gather intelligence in both the hiring process and exit interviews.

If you're consistently not reaching your goals, your plan may be too unrealistic or there may be other factors such as inadequate support and training for your staff, says Stoeckmann. It's not all about the money, he notes. You need adequate training and good quality management that focuses on communication.

"Not always does the fault lie with the salesperson," adds Asch, who recommends including your sales team in short- and long-term sales goals and discussions. "If you shove quotas down their throats, they'll choke," he says.

If your plan includes a commission component, state labor law requires that it be in writing and signed by both employee and employer, says Avrohom Gefen, an associate in the litigation and employment law group of Vishnick McGovern Milizio LLP in Lake Success. This affects even those plans that combine base salary and commission, he notes.

The document must detail how and when commissions are earned (i.e., when they bring in the contract or when the customer's check clears). Gefen advises stating that the commission isn't earned until the firm actually receives payment from the customer.

The written plan must be kept for the entire term of employment and three years after they leave, he notes. It may be altered but changes must be in writing.

Review and adapt: The plan should be reviewed at least quarterly, advises Stoeckmann.

Michael Montenes, president of M.S. Hi-Tech Inc., an electronic components distributor in Hauppauge, does this regularly. About four years ago, he altered his plan to better motivate his sales force. He used to give higher base salaries in addition to commission.

"I decreased the base salary and increased the commission structure," says Montenes. The change resulted in a 10 percent increase in sales, he estimates. "It's made people a little bit more hungry."

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