<i>Dear Workforce</i> How to Structure Sales Commission Targets, Goals

April 1, 2001
QDear Workforce:

    We are a growingelectronics contract manufacturer and need to structure a sales commissionprogram for our sales managers. They currently earn a low to mid-$50s basesalary with commissions based on net sales shipped. I am seeking information onprograms such as:

  • Do the commission percentages andtargets typically change each year?

  • Do salespeople who leave thecompany continue to receive commissions on sales attributed to them that arenot shipped until after they leave?

  • Can you recommend any goodsources for such specific details on typical commission programs?

- Ellen Marino, human resourcesmanager, Contraves Inc.

Dear Ellen:

Yes, yes and yes.

Moving targets:
Typically sales commissionpercentages and targets do change from year to year - driven by anever-changing marketplace, corporate goals and employees' career developmentpaths.
The market:
It's inevitable; the market willchange and your clients' tastes will evolve - and they won't necessarilywant or need the same products or services year after year. Case in point: acar dealer that sold a car to a client last year probably will only have theopportunity to sell that same client a roof rack or sun roof this year, notanother new car.
The company:
By aligning sales commissionpercentages and targets directly with corporate goals, the organization as awhole stands a better chance of building a better bottom line.
For example, if an organization ismaintaining a stock of last year's product that yields a 30 percent highermargin than this year's product, it behooves the organization to provideincentives to the sales force to push last year's product line with a highercommission rate.
By doing so, dated products areremoved from stock, thus reducing overhead for storage. This is a good wayto get sales to contribute to achieving business goals, but make sure thatyou account for personnel who inevitably will surpass a 100 percent quota.Build the commission plan to account for the over-100-percent achievers,and, perhaps, even provide them with an awards banquet (held somewhere warmin the cold of winter).
And to give those performers somepublic recognition, consider sending out news releases to key tradepublications and local business editors, or even special notations onbusiness cards.
The employee:
Another practice that should neverbe lost is the sales team's career development. To attract and retain goodemployees, organizations need to motivate them by providing the opportunityto develop. By changing their targets and commission rates, not only willthe organization meet its new goals and objectives, the employee will begiven an opportunity to expand their skills and client base - in addition tomaking money.
Walking commissions:
As with certain benefits which areearned and cannot be taken away from employees (e.g. accrued yet unusedvacation), commissions earned should be paid out either on their last day,at the time the order is placed, when the product ships or when payment isreceived. This payment schedule should be clarified in the salescompensation agreement.
If your company decides to pay uponproduct order or delivery, ensure that the compensation agreement contains aclause covering "returned goods" as they relate to"already-paid" commissions. Note: paying commissions to departing(or already departed) sales people helps to promote a positive corporatereputation - if they leave on good terms, chances are they'll speakpositively about your company.
Information sources:
For resources on designingcommission programs or professional training for specific sales roles,regions and industries visit the Workforce ResearchCenter, World atWork, the Society of HumanResources Management, or an industry association, like the National Electrical Manufacturers Association(NEMA). If further help iswarranted, there are consultants that focus on developing sales compensationplans that could help you structure a program specific to yourorganizational needs.

SOURCE: Mike Parker, BenchmarkHR Solutions, Salem, N.H., Feb. 13, 2001.

The information contained within this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or legal opinion. Also, remember that state law may differ from federal law.