Building a Compensation Plan Report

Introduction

The aim of the paper is to design a compensation plan for the sales force of an engineering company that mostly entails in B2B sales. The company had posted high sales in 2006-07 but with the recession, sales had gone down.

Apart from declining sales another problem that the firm faces was attracting, retaining, and motivating the frontline sales team of the company. Therefore, a need arose in order to restructure the sales force compensation plan, which comprises the largest employee structure of the company in order to motivate and retain salespeople maintaining the budget of the company.

Further, with economy showing a continuous slowdown, most companies are looking at revamping their compensation structure. The design of the compensation plan is for a B2B sales force.

The sales people are the ones who are more aware and close to the customers than the company. In designing the sales compensation plan for a B2B sales force, the first step would be to identify the key responsibility areas (KRA) of the salespersons.

Key Responsibility Areas

One of the primary factors affecting the performance of a salesperson is his ability to be a good team player: “…good teamwork is a determinant factor in winning sales and building long-term partnering relationships” .

Distribution of financial incentives to a sales team is a crucial concern among managers; therefore, one important decision for compensation planners is to decide (a) how much remuneration is to depend on performance, and (b) how the financial benefits should be distributed among the team members.

For instance, distribution of awards can be based on either individual performance or the performance of the sales team. In order to decide on the type of the sales force, first the key responsibilities of the sales people must be ascertained.

The key responsibilities of sales people in the organization and their reporting pattern is delineated as follows:

1. Primary responsibility will be to effectively utilize the company’s sales strategy and make sure that the revenue and profit objectives by creation of small, mid-size and large accounts.
2. Generation of new customer accounts for the company is another primary task of the sales person.
3. The salesperson will follows target oriented sales quota and he will be responsible to fulfill the quota through relationship building with customers’ and multi-level decision-makers through various sales strategies such as direct mailing, person-to-person interaction, direct phone calling, etc.
4. Maintain database and MIS of customers and on field maintain a direct relationship and contact with the new and old customers.
5. Understanding the requirement of the customers and generating a product proposal accordingly.
6. Do market research on related products in the market and analyze what less the company is doing in its offering to the customers for which it may be losing customers.
7. Reviewing of self-sales performance and assessing the difference between targets.

Given these responsibilities of a sales executive in the company, the next step would be to design an effective compensation strategy for the sales executives, it is important to understand the KRAs of the position. Given the brief of the responsibilities of the sales force, the KRA that are to be looked at for developing a compensation plan are as follows:

• Building relationships in terms of new accounts.
• Maintaining older accounts.
• Meeting sales target.

Based on these understanding of the sales executive job responsibilities, the compensation plan is devised.

Compensation Plan

Base Pay

Based on the sales executive job responsibilities it can be deduced that the primary functions of the sales executive is to

1. generate new accounts,
2. maintain existing accounts,
3. target the right organization,
4. maintain close relationship with senior decision makers in the target organizations.

Like of most sales force compensation plans, this plan to will be a performance based plan.

The reasons for adopting a performance based compensation plan are to ensure that performance or the actual job done by the salesperson. The idea is to provide adequate compensation for the job they do and not just for the sake of employability.

Most of sales compensation plans are based on a 30% base and 70% commission mix but this plan seems to be more tilted on a larger variable pay. Further, this variable pay is usually directly related to the generation of new accounts, overlooking the effort that is put in by the sales people to retain the older accounts.

Further, the company must also account for the experience the sales person has, as a more experienced sales person may want a larger base pay than a fresher may. Further, the external environment must also be considered while setting the base pay.

In case of engineering company, it is a well-known brand for all kinds of engineering suppliers. Further, the market for engineering is highly competitive as there are other smaller and a few local brands that compete, and there is a high level of price competition.

In such a case, the base salary for the salespeople cannot be pegged at a low rate considering the external environment. Therefore, the present compensation plan will fix the compensation based on experience of the sales person:

• Fresher (0 to 1 year): For someone fresh out of college, the compensation will be pegged at 30% – 70% basis.
• Experienced Salespeople (1 year to 5 years): the base to variable ratio will be 50%- 50%.
• Highly experienced Salespeople (above 5 years): the ratio will become 60% – 40%.

The structure of the base salary will determine the overall expense and cost structure. The base salary should consider living expenses such as a food, housing rent, travel expenses, phone expense, etc. the minimum base can be set at $1000 to $3000 a month based on the experience of the salesperson.

For instance, a fresher may have a base pay of $1000 while a person with 1 years of experience will have a base of $1500. The base will increase based on experience the salesperson puts in.

Variable Pay

The variable structure of the company will depend on the revenue objective of the overall company. Assuming that the company has a sales force of 20 people and a revenue target of $10,000,000, the quota for each salesperson to attain the target revenue is $550,000.

Given this target, the sales people are differentiated into three groups based on years of experience. Table 1 shows the compensation structure that is followed is proposed for the sales force.

The first component as discussed earlier would be the base fixed pay, which would be directly proportional to the years of experience of the salesperson. Therefore, higher the years of experience of the salesperson, greater would be the base pay or the fixed component of the salary.

Table 1: Compensation structure of the Sales force.

The ratio of the variable component will again differ based on the number of years of experience. Based on the amount of total variable component for a salesperson, the commission rate is determined. The commission rate is determined by dividing the variable pay of the sales person by the target quota of the salesperson multiplied by 100.

This commission rate determines the amount of the variable sales of the individual. This will help determine the fixed and variable component of the salesperson. Therefore, the compensation plan shows higher fixed income as the salesperson puts in more years of experience. Further, the sales quota incentive also increases with number of years of experience.

Apart from this, a separate incentive is provided for generation of new accounts to the salespeople. Table 2 shows that there will be different levels of incentive schemes for the stipulated number of new accounts generated.

Table 2: Sales Commission for New Account Development.

Conclusion

Therefore, the total salary of the sales person will be determined by the following: Salary = Base Pay + Variable Pay + Incentive for new account generation

The compensation plan suggested for the sales force considers both the internal and external factors for the generation of the compensation plan as well as looks into the main KRAs that determine the job responsibilities of a sales person. The salespeople compensation plan is robust in its approach and provides adequate incentive based on KRAs.

References

Segalla, M., Rouzies, D., Besson, M., & Weitz, B. A. (2006). A cross-national investigation of incentive sales compensation. International Journal of Research in Marketing, 23 , 419-433.

Wasserman, E. (2009). How to Set Up a Sales Compensation Plan. Web.