Salespeople will always find the money, so your corporate strategy needs to be very clear and very clearly supported by your compensation plan. If you’re not driving the behaviour you want, you’ll get behaviour you don’t want. Poorly designed compensation plans cost companies millions because they are rewarding the wrong behaviour.

So how do you produce a solid plan? It starts with a clear definition of your corporate strategy and a good understanding of the behaviour you want to encourage. There are four key elements that should be defined…

Reward at the point of persuasion – Adjust the compensation plan based on the degree of influence a salesperson has over the close. Each person on incentive pay should have the power to persuade. If salespeople have enormous influence over buying behaviour, such as in the insurance or office equipment industries, plans should lean mostly toward commissions. If, on the other hand, there’s little opportunity for salespeople to exert influence, compensation plans should be based more on salary.

Performance measures and goal. A good plan must be measurable, and the best plans measure three things. The plan should measure things like sales volume, units sold, margins, product mix, and new accounts. They shouldn’t measure activities like phone calls or tasks that belong to management, such as inputs to a CRM system. In deciding which items to measure, keep in mind that the plan should support the company’s strategy. Measure the activity the company wants to inspire. The terms need to be clear. What’s measured? Over what time frame? Who gets compensated? How are exceptions handled? Should be spelled out before you set the plan off, not when pay out time arrives.

Rates and formulas. In developing the compensation plan management should think of commissions as rewarding volume and bonuses as rewarding specific goals. Most important, steer clear of capping commissions. The goal of any incentive / commission is to inspire salespeople to sell. Caps and thresholds put a damper on motivation.

Payout timing. Timing is everything. To reward the behaviour the company wants is should pay as close attention as possible to the event. If the focus is on bookings, pay on getting written orders before commissions are calculated, salespeople will be inclined to stay focused on that. If it is on customer payment of invoices, that’s what salespeople will push. Something to consider if you have a very long sales cycle and a order fulfilment time is to split commissions, for example paying 35.0% when the order is taken and 65 percent when the cash comes in.