Designing the Compensation System

A sales manager needs to design a compensation plan for the organization. There is a scientific method of designing the sales force compensation plan, which every sales manager should follow in organizations. The sales manager should take into account the various factors influencing employee motivation and the purpose of compensation. We will now discuss the various steps followed in designing an equitable, justified, and strategic sales force compensation plan.

Determine Sales Force and Compensation Objectives:

The sales manager should identify the corporate objectives and also the objectives of the salespeople while developing a compensation plan.

The sales objectives can be attainment of the annual sales volume target and gross margins, attainment of monthly and specific period-wise sales targets, market penetration and exploitation of the territory potential at a specific rate, management of sales calls and development of potential in key accounts, development of new customers, and gaining support of the salespeople for the new product introduction.

By evaluating the relative importance of these broad objectives, the sales manager will be able to finalize the level and type of compensation plan to offer to the sales force.

Determine Major Compensation Issues:

Once the sales manager is able to finalize the compensation objectives, he needs to compare his available payment structure with that of the industry and major competitors. In the case of a new compensation plan, the industry average and the competitors’ compensation plans serve as the benchmark for designing the compensation plan.

The major components of salary are decided by taking into account the wage level, the wage structure, the salesperson’s wage, and the salary administration procedure.

The wage level of compensation talks about the salary in relation to the competitors’ sales force compensation. If the organization’s salary level is lower than that of the competitors, the salespeople will always wish to join the competitor, and the competitor will in turn allure them to work with them, which may lead to loss of manpower for the firm. Salaries for various sales­people should be established by doing a comparative analysis of the salary level in the industry.

The wage structure is the explanation of the pay differential inside the organization at different levels. The evaluation of the job and description indicates the extent to which the job contributes to the success of the enterprise. Depending on this evaluation, salary structures are planned at various levels in the organization.

The individual wage is the salary paid to the individual salesperson depending on his work experience, nature of the job, and personal background. His abilities related to job descriptions are evaluated while deciding on the compensation structure.

The administrative issues related to compensation management include the sales force evalu­ation and control mechanism, mechanism for modified compensation, and pay revisions and raises which should be meaningful enough for the salespeople to stay longer with the sales organization. The sales manager prepares the budget for compensation of the salespeople, consi­dering the ability and intention of the organization to compensate the sales force in the form of wages, commissions, perks, bonus, and incentives.

Implement Long-Term and Short-Term Compensation Plans:

The sales manager should take both long-term and short-term views of the sales compensation plan. While in the short term, it should address the issues of adequate compensation and low cost drive for the firm, in the long-term, it should reduce the attrition rate and develop employees to take up higher challenges including managerial responsibilities.

Long-term planning includes promotions, retirement plans, disability benefits, and life insurance for the salespeople. The compensation plans should have a long-term vision and lasting value for the organization. Short-term issues related to the compensation plan include bonus, expenses management, and sales contests. This should be coordinated with the total marketing efforts of the organization and in sync with the long-term compensation plan.

The sales manager should communicate the compensation plan to the sales staff inside the organization through inter-office memos, email, newsletters, and all other means, and explain the advantages and mutual benefits of the sales compensation plan. Many salespeople ask the company at the time of joining about the nature and type of compensation they are likely to receive for the job.

The sales compensation plan should be designed and communicated in such a way that it increases the clarity and comprehensiveness of the salespeople in the organization. The sales supervisor is the key link in the chain of communication to the salesperson. Since salespeople normally work in the field, it is important to brief the sales supervisors about the compensation plan so that they can handle the salespeople’s queries.

The compensation message should include the part of the salespeople’s job that will help the organization in attaining its goals. The sales supervisor should also brief them about the role of the salespeople in achieving the sales objectives.

The sales supervisor should make the salespeople realize that their compensation will largely depend on their ability and intention to contribute to the organization’s goals. If the salespeople commit themselves to the organization and their performance improves, so also will be the sales of the organization and hence the level of compensation for the salespeople.

Relate Rewards to Performance:

In a scientifically designed compensation plan and the plan-related communication strategy, the rewards are always related to the sales performance. This is an important stage in the compen­sation process, where each stage of performance and reward system should be linked with the contribution of individual salespersons towards the organization.

It also links the performance of the salesperson to the rewards through an objective and logical method of performance evaluation.

Measurement of Performance:

Like the compensation plan, the method of evaluations should also be objective and transparent. Sales organizations need to measure the performance of the salespeople periodically. The criteria for evaluation should include the new sales volume achieved in the last period, the level of customer satisfaction, and the level of information dissemination about the performance of the company and its product in the market.

Appraise the Compensation Plan:

It is necessary to look at the redundancy effect of the compensation plan. This should be done on a periodic basis so that the sales manager can find out the relevance of the company’s com­pensation plan in the face of competition and evolutions in the sales management function.

The success of the plan can be evaluated by looking into the achievement of compensation objectives, ability of the firm in attracting new salespeople with- the current compensation plan, and finding out the relationship of the compensation plan with the attrition rate in the organization. The compensation plan should be updated continuously to respond to new sales force objectives. There should be a continuous attempt to link the available compensation methods with the desired performance of the salespeople.