How to Create a Good Compensation Package

Compensating your sales force presents a particular challenge because packages must be extremely competitive and should provide adequate incentives to motivate employees to do their best.

The key to creating a good compensation package is balance. Most salespeople don't want to be solely

dependent upon either commissions or salary. Plus, providing adequate and competitive compensation that's based exclusively on either salary or commission most likely won't attract or retain talent, motivate your sales staff, or allow your company to achieve its maximum profitability.

Striking a balance between salary and commission is probably as much art as science, as it depends on your goals. A compensation package that emphasizes salary over commission will allow you to make greater demands on your salespeople and how they spend their time. A pay package that emphasizes commissions will motivate your salespeople to spend more time selling and booking new orders rather than other work that won't result in new sales.

Although businesses compensate salespeople in a wide variety of ways, most use a combination of salary and incentive components, along with common benefits such as health insurance, a retirement savings plan, and paid time off.

Base Salaries
Providing a base salary that assures salespeople a steady income is a good idea. A guaranteed salary provides salespeople the comfort of knowing that despite good and bad economies, streaks and slumps, they can maintain their current lifestyle.

Salaries alone, though, are not the brass ring. And salespeople won't necessarily push themselves without additional incentives. At the same time, salespeople want to know that if they make the extra effort they will be adequately rewarded for their hard work.

Incentive Compensation
The most common way to motivate and reward salespeople for closing big deals or meeting goals is through bonuses and commission. Consider offering your salespeople a set salary and guarantee a minimum level of pay with rewards for higher levels of performance.

Or offer them a salary with a bonus tied to their quarterly or annual objectives. Bonuses can be set at increments to give bigger rewards for greater performance. Profit-sharing plans can be used too, but these reward team effort, not individual performance.

Your compensation program should be easy to understand and implement. Performance measures should be as objective as possible, and formulas to calculate commission or bonuses should be based on concrete, determinable numbers.

For example, use gross profit as opposed to net profit to compensate a salesperson, as net profit can have hidden costs, such as overhead. Incentive compensation is important to motivate sales staff and to retain the best performers, those employees who may otherwise feel that they are not making as much as they could elsewhere.