Compensation Structure Change
Q: I have been with a publishing company for 2 years (ad sales). Their commission structure was as follows: after achieving 70% of sales the commission tier (10% on that increment) would kick in. So for example if the rep’s individual quota was $100,000 and I achieved my quota, I would receive $3,000, which can also be seen as 3% of total sales. I also received a base salary.

The company has made changes to its compensation plan by raising the sales quota and level upon which the commission rate kicks in. My quota is now $105,000 and I must achieve 80% of it before I receive my commission rate. These changes were made, without consulting the sales reps.

My question is this: Can a company change their compensation structure so radically? For example, I will lose $1000 next month, even though I am keeping up with my quota, for no other reason than this company wanting to cut out 'expenses.' Keep in mind there are no other incentives as far as bonuses, trips, 'prizes' AND not only did they bump up the tier but they have also increased the quota. So for every $100,000 that I would have brought in and made $3000, I now have to bring in $105,000 and receive $2100. It’s not as if they are taking this money to reinvest in the sales dept.

A: Thank you for contacting the Canadian Professional Sales Association's Sales Advisor. Currently salary surveys and sales compensation plans are focusing on the concept of Total Target Compensation (TTC). This concept involves determining the total payoff for achieving the sales target set for the position. Base salary plus incentive @ target equals TTC.

Few companies have the resources or expertise to develop a customized compensation plan. In many cases, a company will take one of two approaches. One approach is to tinker with an established plan without talking the time to develop an understanding of compensation issues (this seems to be what your company has done), while another is to adopt with minor modifications, a competitor's plan and implementation. However it goes against the grain for a company should to redesign their compensation plan by increasing the sales quotas while reducing the commission tier with providing opportunities for the reps to make up the difference.

According to CPSA's Canadian Sales Management Manual, designing or redesigning a sales compensation plan is a complex process. Your company should have adopted some of the following steps:

Design the incentive component. Figuring out how to design the incentive component is a critical step for companies. Basic issues include the form of the incentive, its threshold for activation, limits and/or restrictions, the salary and incentive mix, the timeframe for the incentive and the performance measures. A company need to look at the following:

Does the incentive portion accrue at a constant rate or can it accelerate or decelerate as performance increases or decreases? At what performance level does the incentive plan cut in? Is there a maximum or cap to the incentive component? Does the time period for the incentive component follow the sales cycle? What is the frequency for incentive payouts—semi-annually, quarterly or monthly? What are other performance factors outside of sales volume that come into play? Should every territory be subject to an identical incentive plan? What about split commissions/credits? Are there special plan treatments covering promotions, transfers and special assignments? How are house accounts treated? What's the definition of a sale? What are the implications of benefit programs?

Test, communicate and implement the incentive plan. The last element in any good compensation plan is to evaluate the plan design. You can test the validity of the plan on a case-by-case basis or by using a 'what may have happened' approach. Communicating the plan to the sales force is a high priority. Sales representatives must understand how the plan works, why it has been designed the way it has and how they can succeed under it. Payments under the plan must be made in a timely fashion and any problems with administration need to be cleared up immediately so as to keep representatives from losing faith in it.

It's obvious that your company is looking to cut costs, either because they have been paying compensation above industry norms or they are experiencing financial difficulties. A cardinal rule in sales compensation is that you never limit or roll back your salespeople's compensation without good reason. Furthermore you never increase the quota without increasing the incentive or offering your salespeople a means to make up the difference.