Sales compensation strategies

There are many sales compensation strategies, but I prefer to use the following:

    Bonus Calculator

    Bonus Calculator

  • Salary plus a draw on assigned objectives
  • 100% commissions
  • Salary plus a bonus amount

Let’s explore the salary plus bonus strategy. When you set a goal for a salesperson you as well as the salesperson want this goal to be achieved and surpassed. Any additional sales above goals is increased efficiency you get to add back into your plans. To develop a plan that is agreeable most companies institute a straight bonus.

Straight Bonus Example

A straight bonus consists of a goal (either product mix, sales volume in dollars, sales volume in quantity, or a mix of all three) that is payable as a percentage of some figure, usually a percentage of salary. An example would be a salary of $50,000 plus a 20% bonus of salary if a sales goal of $1,000,000 is met. If the goal is met then the salesperson would receive a bonus of $10,000.

Limitations of this strategy

If the time period for the goal to be met is fast approaching and the salesperson is not near their goal then they tend to give up and relax and no added benefit is achieved by either party. Likewise, if the goal is met what is the added benefit the salesperson achieves for producing more than their objective; again there would be no added benefit for either party when this occurs.

A more beneficial model is one which keeps the salesperson happy and functioning at peak performance even if the goal is not met and additionally adds a larger potential if the goal is surpassed. To achieve this scenario you can utilize a plan that lowers the bonus amount if some part of the plan is not met and raises the bonus amount if the sales goals are surpassed; this model is sometimes referred to as a split with a cliff.

Split with Cliff ExampleFree Bonus Calculator Click Here

The mathematics behind a split with a cliff example are a little bit more complex but, once understood is easily implemented. Salesmen salary is $50,000 and the goal is $1,000,000 with 20% bonus (against salary) and a 2 for 1 split with a 75% cliff. Let’s examine each of these concepts in detail. (Free Bonus Calculator Click Here (this calculator has a maximum of 5 bonus elements).

Split Calc>>>The bonus is straight forward, but first off what does the 2 for 1 split refer to? The 2 for 1 split refers to a multiplier added or subtracted to the actual amount the salesperson achieves. If we use the example from above and the salesperson achieves sales of 900,000 then the calculation would be as follows: Bonus pool is 20% times $50,000 = $10,000 pool. The actual bonus received would be 2 times lower than the percentage difference between goal and actual (90% of bonus achieved, is a 10% reduction so the multiplier would be 2 X 10% or a reduction of the total bonus pool by $2,000). The salesperson would achieve a bonus of $8,000.

Split Calc Example 2>>>All assumptions are the same as above except the salesperson achieves a sales goal of $1,300,000. The total bonus would be calculated as follows: (130% of bonus was achieved, therefore the multiplier would be 2 X 30%=60%, or a total achieved bonus of $10,000 X 60% = $16,000. You can set a ceiling to the bonus if you want, but this is a strategic financial objective you need to consider.

Cliff Calc>>The cliff calculation is a bottom goal that the salesperson is allowed to achieve and still receive a bonus. If the cliff is 75% this means that anything less and attainment of 75% would result in a $0 payout. This insulates the company in such a way to allow for the covering of the incremental cost coverage the salesperson costs the company. Using the same example as above with a $1,000,000 sales goal; the salesperson’s total sales are $700,000. This is 30% lower than the goal set (the cliff would stop payment at $750,000 or 25% lower), there would be no bonus paid out.

Let’s put all of these peaces together for a real life example along with the detailed calculations, (Free Calculator Click Here this calculator has a maximum of 5 bonus elements ). Joe has a salary of $30,000 with a sales goal of $700,000 at a 25% bonus (against salary) and is give a plan that consists of an 80% cliff with a 2 for 1 split. Joe achieves total sales for the period of $720,000. The bonus payout would be calculated as follows:

  • 2 for 1 multiplier ( $720,000 is 2.85% more than the plan of $700,000) the multiplier is 2 X 2.85%=5.7%
  • Bonus pool is $30,000 X 25%=$7,500
  • Cliff calculations are not considered since Joe achieved more than $560,000 in sales. If he achieved less than $560,000 in sales he would have had no bonus payout.
  • Total bonus is 5.7% X $7,500=$7,927 Bonus

Free Tools

Explore these free tools which hopefully will make your life a little easier.