The Coaching Effect Blog

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    Sales Compensation Plans: Step 7, Commission & Bonus Structure

    by Jaime Davis-Thomas / September 24, 2010

    Editor's Note: This guest post from Bob Malandruccolo has been updated for accuracy and comprehensiveness on June 16, 2020.

    The seventh step is determining whether the plan should be based on commission or bonus or both. These are some common principles for a commission and a bonus plan. A commission plan is paid based on a percentage of sales results such as 2% of sales or a payment per unit such as $.05 per unit sold.

    Some common considerations:

    • If you cannot set goals at the sales rep level, a commission plan is usually appropriate.
    • If territories are relatively balanced, meaning all territories have similar opportunity to earn, commission is usually appropriate.
    • If you have a high number of customers, such as in the thousands, and a short selling cycle, such as less than 90 days, commission is usually appropriate.

    On the other side, a bonus plan is paid as a percentage of a sales quota or a specific objective. Some common considerations of a bonus plan: If you can establish goals at the sales rep level, bonus is usually appropriate. If territories are not balanced, a bonus is more appropriate compared to a commission plan. If there is less number of customers, such as less than a hundred, and the selling cycle is long, such as greater than 90 days, a bonus is usually appropriate.
     
    I have a client that struggled with an existing bonus. The issue about the plan was that it was not fair for sales reps that had large books of business. We developed a bonus up to 100% quota and a commission plan above 100% quota. In this case, overachievement allowed a closer correlation between pay and performance. That is an example of a combination of commission and bonus. 

    If you select a bonus, this describes the three different types of bonus plans.

    You could use a standard bonus. That means that every sales rep in the same role would have the same sales goal or quota. This would be appropriate if all assignments or territories have similar opportunity to earn at similar levels.
     
    You could use individual quotas if assignments or territories are different in terms of earning levels.
     
    You could use Management by Objectives (MBOs). MBOs would be used for long sales cycles and augment other results-based measures. The caution around MBOs is that they could turn into entitlements. One of my clients used MBOs to provide pay for sales reps that were not achieving their goals. If you are using MBOs, follow S.M.A.R.T. guidelines. Make sure that they are Specific, Measurable, Attainable, Realistic and Timely.


    HERE ARE THE 10 SALES COMPENSATION PLAN STEPS:

    Step 1 is defining the Sales Compensation Philosophy or Strategy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process. Read about this step here.  

    Step 2 is determining which Eligible Roles are included for sales compensation treatment. Learn more about this step here.   

    Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance.  Read about this step here

    Step 4 is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance. You read about this step in this blog

    Step 5 is choosing the amount of Upside of incentive pay for high performers. Find more about this topic in this blog.  

    Step 6 is selecting Weights & Measures that are linked to incentives for the plan. More on this topic found here

    Step 7 is determining whether the plan should be based on Commission or Bonus or both. Read more about this step here

    Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve. Learn more about this step here

    Step 9 is choosing the Frequency of Payouts for each measure. Read more about this step here

    And finally, Step 10 is determining the Administrative Details included in the plan. Learn more about this step here


    Bob Malandruccolo is the founder and principal owner of Sales Force Effectiveness Consulting. With over twenty-five years of practical business, management and consulting experience in sales and marketing, Bob has worked with a broad range of clients from Fortune 100 corporations to small, closely-held firms with special emphasis on sales and marketing process implementation. He has worked closely with his clients through hundreds of successful engagements and implementations across multiple industries (manufacturing, engineering, distribution, software, healthcare insurance, medical products, healthcare, automotive, telecommunications, retail, information handling, media). Article Source: http://EzineArticles.com/?expert=Bob_Malandruccolo


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