Sometimes customers return products, or they just don't pay. As a result, some companies do a charge back on commissions paid to the sales person on the sale. The legality of this practice can vary from state to state. However, it is common practice to recover commissions paid in cases in which the company is not paid.
To be sure you're covered legally, and that everyone knows what to expect, you would do well to document your intention to charge back commissions in case of returns or non-payment in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you'll be all set.
Friday, May 30, 2008
What are some of the "best practices" in terms of incenting sales people in an manufacturing environment?
Often in manufacturing companies, sales people influence both the volume of sales and their relative profitability, rewarding simultaneously for both puts the incentives in line with what's best for the company.
Three nice ways to approach this that are pretty straightforward are to either:
1. Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
2. Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.
3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.
Three nice ways to approach this that are pretty straightforward are to either:
1. Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
2. Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.
3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.
Thursday, May 29, 2008
What is considered "best practice" with regard to payout eligibility and employment status re: incentives and contests/SPIFFs
My answer is different for contests and SPIFFs than for core incentive components. Let’s start with the core incentive component (part of the official compensation package, documented in a signed plan document or employment agreement, representing a portion of the official compensation package, with on-target payout needed to provide market-competitive total compensation). For core components, give some thought to what you’re trying to accomplish with your eligibility requirements. Some companies feel that requiring people to be currently employed at the time the payment is made improves retention and is more fair to the company. Consider the possibility, however, that you will have people who have already decided to leave staying in the role, collecting their base, cementing personal relationships with important customers or prospects, and delaying your hiring of a more committed resource while they are waiting for their incentive payout.
In addition, it is true that payment in this category must be paid regardless of employment status at the time of payment in certain states and industries. The criteria here have to do with the nature of the job (selling, not delivering services or managing sales people), relationship with the company (employee, not a contractor or outside rep), and the mechanics of the comp plan (communicated as a percent of sales, not a bonus). My counsel on the core components is generally to pay them regardless of whether the employee is currently employed at the time of the payment.
There can be some protection here by noting that payments (made following order intake, for example) are an advance against earnings, and that the commission is not earned until the cash is collected. So if the cash is not collected until after the employee has left, the commission has not technically been earned.
Regarding contests and SPIFFs, you are probably safer in not paying unless employed, legally (but check with real lawyers). And you are also probably not risking any unproductive lingering by disengaged employees if you do require people to be present to be paid – mostly because contests and SPIFFs are generally shorter in duration between announcement and payout, and the stakes aren’t as high. It is a very common (and in my view reasonable) practice to only pay for these incentives if the employee is still employed when the payment is made. A good practice in these cases is to make that intention clear in the contest/SPIFF documentation – fine print at the bottom of the flyer/email works fine.
As always, while we can provide some general guidance on this topic, we strongly encourage you to seek additional legal counsel and review of your official sales compensation plan document to ensure it is compliant with federal and state legislation, specific to your company and the location of your sales representatives.
In addition, it is true that payment in this category must be paid regardless of employment status at the time of payment in certain states and industries. The criteria here have to do with the nature of the job (selling, not delivering services or managing sales people), relationship with the company (employee, not a contractor or outside rep), and the mechanics of the comp plan (communicated as a percent of sales, not a bonus). My counsel on the core components is generally to pay them regardless of whether the employee is currently employed at the time of the payment.
There can be some protection here by noting that payments (made following order intake, for example) are an advance against earnings, and that the commission is not earned until the cash is collected. So if the cash is not collected until after the employee has left, the commission has not technically been earned.
Regarding contests and SPIFFs, you are probably safer in not paying unless employed, legally (but check with real lawyers). And you are also probably not risking any unproductive lingering by disengaged employees if you do require people to be present to be paid – mostly because contests and SPIFFs are generally shorter in duration between announcement and payout, and the stakes aren’t as high. It is a very common (and in my view reasonable) practice to only pay for these incentives if the employee is still employed when the payment is made. A good practice in these cases is to make that intention clear in the contest/SPIFF documentation – fine print at the bottom of the flyer/email works fine.
As always, while we can provide some general guidance on this topic, we strongly encourage you to seek additional legal counsel and review of your official sales compensation plan document to ensure it is compliant with federal and state legislation, specific to your company and the location of your sales representatives.
What is an override/overwrite?
An "override" (also sometimes called an overwrite) is a commission paid on the sales someone else makes. For example, you may have a sales person with a 5% commission (earns 5% of the sales value of whatever they sell). This person may have a sale manager with 6 direct reports, and may receive as his/her compensation 1% of the sales of all the people reporting to him/her. The 1% to the manager is an override. It is a common sales compensation mechanic in small or early stage businesses.
Over time, most businesses benefit from moving their sales leaders to a goal-based plan with payout thresholds (e.g., no variable pay earned under 75% of the year-to-date goal), and acceleration for over-goal performance.
Over time, most businesses benefit from moving their sales leaders to a goal-based plan with payout thresholds (e.g., no variable pay earned under 75% of the year-to-date goal), and acceleration for over-goal performance.
Wednesday, May 28, 2008
How do we design a 100% commission plan, and how does that interact with a draw?
There are many different ways a 100% variable commission plan can be structured, depending on the needs of the business and the nature of the product sold. The most simple approach for pure new business developers is to use a flat commission rate based on expected revenue and the amount you need to pay the person, and then pay that rate on all new revenue for a specified period of time (e.g., 12 months). Often, but not always, the rate continues for an additional period of time at a reduced level. If the person is expected to retain control of the customer, or has a mix of new business and account management responsibilities, then plan design is considerably more complex. If there is a defined "hand off" point when the customer goes to an account manager, then you may need to consider doing a "hand off bonus" to compensate for the perceived loss of income from the new business developer. The problem if you don't do this, is quickly your new business developers become account managers (it's easier to farm than to hunt!). First rule in sales comp design is define the roles and accountabilities. From there, plan design is relatively easy.
The other thing to consider is the economics of the draw. Is there a valid business reason for delivering pay this way vs using a modest salary? Typically there is "recurring revenue" that is generating a relatively fixed amount of compensation that is actually acting as a base salary. I've found over 10 years of designing sales comp plans that 9/10 times using a 100% variable approach with a draw actually REDUCES the effectiveness of a sales incentive plan and makes it hard to attract talent vs using a modest salary + truly variable incentive. However, in some industries, this approach is the norm.
The other thing to consider is the economics of the draw. Is there a valid business reason for delivering pay this way vs using a modest salary? Typically there is "recurring revenue" that is generating a relatively fixed amount of compensation that is actually acting as a base salary. I've found over 10 years of designing sales comp plans that 9/10 times using a 100% variable approach with a draw actually REDUCES the effectiveness of a sales incentive plan and makes it hard to attract talent vs using a modest salary + truly variable incentive. However, in some industries, this approach is the norm.
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