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How to Create an Effective Compensation Plan

There is a lot of controversy regarding what type of compensation plan is most effective. Some argue that best way to pay a sales representative is to have their pay come entirely from commissions. They argue that straight commissions directly correlates the sales reps efforts with their compensation. The more they sell, the more they make.

There is some logic to a full commissions compensation formula. However, there are a number of negatives that can come up. For example, it may be difficult to hire new sales representative since it will take awhile for them to build up a sufficient customer base to generate enough commissions to meet their income requirements. Many companies get around this by offering a base salary of between fifteen and forty percent of total compensation. If you decide to do this, it is important to keep base salaries low enough so that your sales agents are very motivated to get out there and sell. Another option you can consider is to provide a salary while your new sales rep is training and reduce it over time. This then will allow them to pay their monthly expenses while getting their customer base established and sales volume up. 

Whatever compensation plan you choose, it is usually best that commissions make up the biggest part of total compensation. A good rule of thumb is to have commissions make up between 65 to 85 percent of total compensation. So how much do you pay your sales representative? Sales commission usually average about five percent of the total sale. This can vary, however, depending on the industry. 

Commissions can be based on sales or gross profit. If you decide to pay commissions based on sales it is important that you don’t give your sales reps control over pricing. Giving your reps the ability to set pricing will incentive them to make price reductions in order to make a sale. If this happens, they’ll still get their commissions, but you might end up with little or no profit from the transaction. 

In developing your compensation plan it is important to structure it so that it motivates your sales representative to make more sales. Many companies offer a tiered commission plan. For example, they may pay 5% commission for the first $100,000 in monthly sales and then jump it up to 8% for the next $100,000 in monthly sales. A third tier of a 10% commission could be for sales that exceed $200.000. This type of commission structure rewards and motivates your top performers. 

Another way to encourage more sales is to offer a bonus plan. In most cases, bonuses are paid at the end of the year. They are paid to sales agents for meeting or exceeding their yearly sales goals. Most bonus plans are tiered. For example, a sales rep may be paid $10,000 for reaching a certain sales goal and $15,000 if he or she reaches a specified higher sales level. It’s usually best to keep the bonus plan simple. Another variation you may want to consider for you bonus plan is to make your bonuses cumulative. 

Sales incentives and sales contests are another way to motivate a sales represenative.  Incentives are usually used to achieve a short term sales goal. In most cases they are a trip or a gift of some kind. It is important that they are significant enough to get your sales agents’ attention.

It is important to constantly monitor the effectiveness of your compensation plan. What works for one company may not work for yours. The most important thing is that it needs to be well defined and offer sufficient motivation to get your sales force working hard to make the next sale. 

If you are searching for a sales representative, NewBusinessMarket.com is an excellent way to find one. You can search by industry category, and the regions you wish to focus your marketing in. In this listing site you can give a preliminary pitch to potential sales agents and sales agencies. This pitch can contain pictures, videos and narratives to persuade agents to carry your product. 

Please keep in mind that using a sales representative is just one way to market your product. I urge you to check out NewBusinessMarket.com to explore your other options. This website will provide you with a wealth of information and tools.

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