Can Your Compensation Plan Pass This Test

One of the most contentious issues sales managers have to contend with is the compensation plan. Sometimes these plans are foisted upon us from on high and sometimes we have to work them out for ourselves. Either way, they have the potential to be a pain in the duffis!

This article isn’t about developing a comp plan; I’ll save that fun for another time. It also isn’t about how much to pay salespeople, another fun topic. It’s about the plan you have in place now and whether or not it has the potential to cause you grief.

Avoiding Lawsuits

A lot of post-employment aggravation, where either a salesperson leaves you or you leave the salesperson, can be avoided if the compensation plan covers off the items in my checklist below.

Some of this grief is the result of simple misunderstandings and are worked out after tense discussions where both tempers and maturity are tested. Some end up in the courts where a judge will decide what was and wasn’t intended by what was written in your compensation plan.

No checklist can ever cover every eventuality, but if you can cover off some of the major causes of potential grief you may well avoid lawyer’s fees and court costs.

Watch for the Obvious

As you go through my checklist, avoid the tendency to pooh-pooh what appears to be obvious.

For example, what is a sale? Is a lease a sale? Is a purchase order that has yet to be accepted by the credit department a sale?

What is the value of a multi-year sale with annual call-offs? Does the salesperson get credited with the full value of the contract or just the annual call-offs? Get the idea? Be clear with your intentions.

Compensation Checklist

Here are some of the key issues that need to be addressed in the compensation plan documentation. The list is by no means complete but it’s a great starting point.

What constitutes a ‘sale’?

How are low-margin sales handled? What is the value of a sale for commission purposes or credit towards quota?

When is the salesperson credited with a sale? Some options are:

  • upon receipt of the purchase order or contract,
  • upon delivery,
  • upon invoicing,
  • upon payment.

When are commissions due (or owed)? Some options are:

  • when credited with the sale,
  • upon delivery,
  • upon invoicing,
  • upon payment.

When are commissions paid: weekly, monthly, quarterly, annually?

Note: These last three points are particularly important if a salesperson leaves or is terminated.

Do you provide a draw against commission? If so, how much and under what conditions and terms? What type of draw: recoverable or non-recoverable. Draws can be a financial minefield.

What happens if a salesperson doesn’t make his or her monthly/quarterly minimum sales targets?

Are or should monthly/quarterly minimum sales targets be seasonally adjusted?

How are bad debts, refunds, or returns handled?

What happens in the event of a cancelled project, sale, or contract?

Are assigned territories and/or accounts properly defined?

Are there any house accounts? What happens on a sale to a house account?

What happens when a salesperson leaves the company? When do commissions stop being owed?

What happens when you fire a salesperson?

Is there a need for split commissions? If so, how will they be split?

In the case where an account is turned over to a new salesperson, how is the former salesperson compensated for residual business that might occur, and for how long.

What dispute resolution solutions are available to each party?

Other Considerations

While often not a formal part of the compensation, expenses and how they are defined and dealt with can cause internal grief. Here are a few thoughts for you.

Some salespeople spend the company’s money as though it was their own and are very responsible while others will spend your money as though they’re a bunch of drunken sailors who have just won the lottery.

Make sure you define what is an acceptable class of air travel, hotel accommodation, daily meal allowances, etc.

Unfortunately, common sense isn’t all that common so make sure your people know what you’ll pay for and what you won’t.

Let people know if they’re expected to travel on weekends or take advantage of staying over a Saturday night in order to save on air fares. This can be a sore point for people with young families.

Do you have a properly defined vehicle remuneration plan? If you pay mileage, what mileage do you pay for and what won’t you pay for. Can they use the vehicle for personal vacations? Do you require mileage logs?

When are expense reports due and when are they paid? What is the penalty for not getting expenses in on time? What types of receipts are required?

Like most things, this is only touching the tip of the expense iceberg but it should be enough to keep you out of major trouble.

Passing Grade

How does your plan stack up? Would you give it a passing grade or are you vulnerable to possible problems?

Take the time to develop or fine-tune your compensation and expense plans. Once you have a good plan in place, you should be able to use it year after year with just minor changes.

The Elevator Ride

If you can’t explain your compensation plan in an eleven-floor elevator ride, going up with no stops, it’s probably too detailed or too convoluted.

I’ve seen plans that run 15-30 or more pages. Incredible! The salespeople spend more time trying to work the plan than work the street. They try to maximize their income instead of maximizing their sales. Salespeople should be able to quickly figure out what they’ll make for what they sell without having to use a computer, Ouiji Board, or telephone help line.

The Bottom Line

Use the KISS principle. Keep it simple. Keep it fair. Keep your salespeople happy.