"Cutting-Edge Consulting and Outsourcing Services in Human Resources"
Sales Compensation Plans: Advantages & Disadvantages
SALARY ONLY PLANS
- Easy to understand and administer.
- Encourages customer service.
- Protects income in situations where sales results vary dramatically due to conditions beyond the incumbent's control.
- Facilitates team selling situations by eliminating the need to split commissions.
- Reduces the potential for problems in situations requiring substantial input to the selling process by nonsales personnel.
- Provides management flexibility in altering priorities.
- Limits management's ability to use compensation as a tool for shaping behavior.
- Increases fixed selling costs.
- Lowers the incumbent's incentive to dramatically increase business results.
- May attract security-oriented employees who tend not share any of the risks of the business.
- Provides no attraction for proven, aggressive "stars."
- Results in "stars" subsidizing "underachievers."
COMMISSION ONLY PLANS
- Allows management to attract high-performers willing to share the risks of the business.
- Forces nonperformers to leave.
- Makes compensation costs variable.
- Easy to understand and administer.
- Encourages maximum sales effort, making it very useful in penetrating new and familiar markets.
- Minimizes the need for supervision.
- Severely limits management's flexibility to direct incumbents' efforts, to require nonselling activities, modify territories, influence levels of performance, relocate or promote salespeople into nonselling positions.
- Encourages a short-term orientation, possibly at the expense of strategic objectives.
- Enables incumbents to obtain a high level of income from mature territories without pursuing improvement opportunities.
- Fosters an incumbent's pursuit of the greatest payoff for the least effort to maximize income.
- Can create conflict between the incumbent's dependence on volume and the company's ability or willingness to fill every order.
- Generates little loyalty.
- Attracts people who have skills beyond that of pure selling.
- Enables a company to compete with employers offering alternative careers.
- Helps retain employees during tough times while maintaining a variable element in the cost of sales.
- Permits management to legitimately include non-sales activities in the sales job.
- Emphasizes pay for performance.
- Can become so complex that it is difficult to understand and administer.
- Can dilute emphasis on key results because of a tendency to try to control too many specific activities through either the commission or the merit increase process.
- Provides flexibility in balancing short-and long-term objectives and selling and nonselling objectives.
- Enables management to change territory structure and sales goals easily from year to year because the incentive feature allows for easy calibration of earnings potential, sales objectives, and earnings results.
- Provides flexibility in determining the amount of incentive to award to the participant.
- If the program is not communicated effectively, allows suspicion over goal setting, to the extent that the sales force distrusts management.
- Can create administrative difficulties because incentive plans are usually more complex to administer than commission plans. Greater effort is required in performance planning.
- If poorly designed, can result in a complex array of goals and payment opportunities that dilute the importance of key objectives.
- If the plan is not properly designed, can enable some participants to succeed on incentive-compensated, non-sales objectives alone while generating no sales revenue.
- Create enthusiasm, hopefully resulting in extra effort.
- Give winners a psychological boost.
- Inexpensive relative to the return.
- Addictive if there are too many; loss of excitement.
- Competition with the sales compensation plan which can weaken points of emphasis or focus.
- Create more losers than winners that can result in loss of credibility.
- Can encourage sales behavior in conflict with strategic priorities.
For more information contact John G. Brau, SPHR at: JohnB
The Quorum Group
John G. Brau, SPHR
P.O. Box 2121
Alvin, Texas 77512-2121
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Last Update: September 02, 2008