Companies with a sales force also tend to have a sales compensation plan. Typically, the plan consists of either a base salary plus commissions earned for generating additional sales or a straight commission-based program. Even though many companies offer these plans, they tend to fall short of expectations—leading to lower than average sales and earnings.
Why do sales compensation plans often fail to produce the best results? Well, because companies make mistakes when creating and implementing them in the first place!
Here are the top three reasons sales compensation plans fail and what employers can do to improve things.
#1. The connection to employee efforts gets broken
One of the main reasons sales compensation plans fall short of expectations is the connection between employee efforts and compensation somehow gets broken. Nearly every sales compensation plan gives cash to employees for their efforts, but in most cases the employee won’t receive payment for his or her efforts until weeks or months after the sale is completed.
Now think about the psychology behind this—sales people are almost always driven by rewards, and they typically crave instant gratification for their efforts. Payments that come too late can demoralize employees who are used to being rewarded almost immediately after closing a sale. Bringing the compensation closer to the actual event, therefore, can help to bridge the gap between pay and performance.
#2. The sales compensation plan is too complicated
The second reason sales compensation plans fall short of expectations is they’re too complicated. Many sales compensation plans have multiple reward levels. For example, an employee may receive one reward for retaining business (i.e., renewing a contract), but another for bringing in new business. Or, he or she may get XYZ award for contracts worth between X and Y dollars, but another award for contracts worth between XX and YY dollars. Ideally, multiple levels incent employees to strive for higher and more ambitious goals. In practice, however, multiple reward levels may confuse and discourage employees.
A well-built compensation plan will link the highest incentive to activities the employer values the most. However, even if the plan is built correctly, employees may still find it confusing. And if the plan is confusing, the employees will likely devote their time to activities that show them the best return in bonus money, which might not be what the company really wants.
#3. The compensation plan is changed too frequently
It’s not uncommon for companies to change their sales compensation plan at least annually, if not more often. Employers do this to motivate employees and even to reduce the cost of sales. For the most part, employees won’t understand why the changes have been made and may become frustrated that they have to learn a new plan. Changes to compensation plans should be made in the best interests of both the employer and the employee, which can be difficult, but it can be done.
If your company’s sales compensation plan is bogged down by any of the three issues mentioned above, it’s a good idea to fix the problems as soon as possible. By doing so, you’ll get the most from your employees and keep them happy with the compensation being offered.
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