Forward thinking organizations ask themselves a few critical
questions that are intrinsically connected:
- How does our organization compete?
- What will our growth strategy be?
- How are we driving sales performance to generate that growth?
- How should we design our incentive plan to effectively impact
performance while supporting growth plans and ensuring proper
Organizations want to reward employees involved in the sales cycle, from sales
representatives to product specialists. Yet we frequently hear that many are challenged
by the collection of incentive plans in the marketplace and disappointed in their results.
Short term incentives (STI) don’t always drive the desired behavior; they often create a
disconnect of interests between the company and its sales force.
This paper is meant to support organizations looking at designing a short term
incentive plan for their sales organization that will set the stage for a high
performance, competitive sales force – an integral part of the living organization.
Jean-François Vézina, MBA
National Vice-President, Sales & Marketing and Human Resources
With over 15 years of experience within the Sales & Marketing field, Mr. Vezina
leads sales organizations and develops their teams to generate profitable growth.
Throughout his career, he has consulted with a variety of organizations within multiple
industries regarding their sales structure, as well as how their teams are compensated
and managed. In this way, Mr. Vezina helps organizations create and develop a
competitive advantage, particularly in revenue generation.
design a sales
Sales compensation plans, whether commission or bonus based,
should incentivize and steer desired results and behaviors critical to
business success. To maximize impact, design choices should align
with the organizational culture, values and objectives.
corporate principles of short term
The short term incentive (STI) is defined as the variable part of the remuneration
(in the form of bonus or commission) provided to employees on an annual basis,
according to specific targets and timelines. The purpose of the STI is to support
a corporation’s ambition by steering high performance in alignment with the
company’s strategy and values. Where variable pay is applicable, it’s usually
designed locally and according to the specific business objectives of each operating
company, local policies and market practices. Its implementation is also typically
steered by each operating company.
The STI plan must be based on corporate principles in order to guarantee
alignment with the organization’s group strategy.
These STI corporate principles might include the following:
Part of the employees’ compensation should be fixed; ideally no employee
contracts with 100% variable pay should be allowed, at any level.
With regard to senior managers, in order to support continuity and long term
orientation, at least one of their annual KPI’s (key performance indicators)
should be “long-term oriented”/ “qualitative” (a performance indicator
related to long term sustainability e.g. market performance, client loyalty,
talent management, employees engagement) – quite often based on a
balanced score card.
The STI should be aligned with company goals.
The STI should encourage team working and cross selling when the local
business model and objectives require it.
The STI should be transparent and simple to understand, communicate
The STI plan should be made easy to change (e.g. introduction of new
practices) and should not be part of any employment contract.
The STI plan should be fair and not discriminatory.
five steps to
What follows is a five-step process to assist you in designing a sales
compensation plan for your business. These five key phases – analyze,
set objectives, design, implement and evaluate – are intended for
sales and field roles, not for head office positions.
step 1 – analysis
Always start with understanding the organizational context, business objectives and the market. Some
questions to consider in your analysis that will guide your design choices in the next phase include:
step 2 – set objectives
A sales compensation plan needs to align with business objectives as well as be transparent and
easily understood by employees. Once the organization context is understood, plan objectives need to
key consideration examples
business strategy - What are the key objectives and
priorities of the business?
- Where is the organization in its
- Build existing client base?
- Develop new markets?
culture - What is the culture of the
- What sort of people and behaviors
are required for business success?
- individual vs collective achievements
- processes vs outcomes
- tradition vs innovation
- shared power vs retained power
- risk taking vs risk avoidance
external market - What is the competitive
- From where do we attract talent?
- What is market pay practice?
- Market leader or new entrant?
- What commission schemes are
common market practices?
key consideration examples
plan objectives - Define results: the plan should
- Define behaviors: the plan should
- Define level of plan
- Sales, gross profit, profitability, etc.
- Individual, team or cross-sell results?
- If in growth stage or weak market
position, you may need to pay
above market to attract experienced
step 3 – design
The following table takes you through the key elements in the design of a sales compensation plan.
Frequent changes in compensation plans have a negative impact on organizations’ employee
retention. That’s why it’s essential, when designing the plan, to calculate all compensation
possibilities in order to create a viable long-term plan, especially if employees become high
performers. A viable, long-term plan is even more crucial when you consider that frequent plan
changes create instability and undermine confidence in leadership.
key consideration examples
eligibility - Identify which employee groups will be in scope
based on which roles have responsibility for
- Typically covers employees with an impact
on sales results, from junior to senior, team
leaders to managerial.
plan type - Define the type of plan i.e. bonus or
- Typically dependent on market practice, what
is accepted in the organization culture and
desired aggressiveness of the plan.
KPIs - Agree whether KPIs will be financial or a
combination of financial and non-financial
- Define set of KPIs per role.
- Link targets to job description.
- Ensure that KPIs are measurable.
- Determine what degree of influence a role
has on the sales results.
See table 1
pay-out - Define thresholds for pay-out
- In case of bonus, define % of salary to be
paid for on-target performance and for over-
- In case of commission, determine level of
potential earnings and the earnings brackets;
also whether earnings will be capped or not.
- In case of bonus or commission, determine
when it will be paid, as it acts as an exit barrier.
- Consider client payment terms, that is, pay-out
made only when client remits payment.
- Consider the portion of Gross Margin that
should be allocated as Personnel Costs.
- As company policy, for executives pay-out
starts at 100% of target, 10% for on-target
and 20% for over-achievement.
- For sales representatives, pay-out of 10%
of Gross Margin if 100-149% of the target
is achieved and 20% if 150%+ of target
- As company policy, annual bonus is paid once
a year in January, acting as a retention factor
and incenting employees to stay in position
to receive the bonus.
funding - Test plan under different financial scenarios to
model cost of the plan and to ensure business is
covering its operating costs.
- Is the plan allowing the company to
meet financial goals when sales are
underperforming, performing at standards?
- Does it allow growth when in an over-
- What are the benefits and threats the
plan brings to the corporation? Are these
frequency - Define frequency of plan pay-out, commission,
- Sales compensation plans tend to pay on
a monthly to quarterly basis; regardless,
ensure alignment with business cycle and
administration - Document plan in detail.
- Map out process for tracking performance and
- Refer to properly documenting a sales
how it works*
An account executive with 5 years of experience (last column) has a base annual salary of $80,000,
which represents 50% of her total financial compensation. Her incentive will be $80,000, for a total
compensation of $160,000 annually.
As another example, a territory manager with 3 years of experience (third column) has a base annual
salary of $60,000, which represents typically 60% of his target compensation when he sits at 100% of
his target. His total remuneration will be $100,000, which includes a $40,000 commission.
Finally, for a key account manager (second column) we estimate a base annual salary of $80,000, which
amounts to 70% of her target compensation. In this case, it’s common to see a mixed sales incentive
composed of bonus and commission. At 100% of her target, her incentive will be $35,000, for a total
remuneration of $115,000.
*These examples are based on mean salaries from the Economic Research Institute for the city of Toronto. Please refer to our
Professional salary guide for more details.
incentive as %
of target total
base salary as %
of target total
sales/service overlay sales direct sales
degree of influencelow
current account management
new account acquisition
table 1 – pay mix structure
pay mix based on role’s degree of persuasion/influence
and aligned to market benchmarks
about table 2
Here we see how under-performance or over-performance of objectives can impact variable
compensation. In compensation structures aligned with sales objectives, the greater the degree of
influence a role has on results, the higher the variable compensation will be. Therefore, the percentage
of commissions for a role in business development will be typically much higher than for a role in
As we see in table 2, no commission will be paid under 75% of quota, but over 100%, there will
always be commission proportional to the degree of influence of the role. For example, a business
development manager (third column) at 125% of target doubles or even triples his commissions if
he reaches 150% of target. That’s how accelerators work. In this example, a business development
manager with a $50,000 base salary could have an income of $100,000 at 100% of quota, $150,000 at
125% of quota and $200,000 by reaching 150% of her objectives. In roles that highly influence sales
results, it’s not uncommon to see top performers paid more than their managers.
Conversely, when the degree of influence is low, the percentage of variable compensation is lower and
variations in total compensation are much lower. In a case of underperformance, total compensation
will be slightly lower, and where performance is high, commissions will be far more modest. That means
a client program representative (first column) who performs at 75% of quota would still receive 90% of
his compensation (base salary). By contrast, at 125% of target he would only receive an additional 10%,
putting him at 110% of his target compensation.
Remember that short-term incentive plans must be designed to motivate and align with sales teams,
while being representative of the degree of influence they have on results.
See Appendix for a more comprehensive table with examples.
table 2 – sales compensation structure
degree of influence
step 4 – implement
The key steps involved in implementing the new plan are:
step 5 – evaluate
plan Decide whether the new plan will be piloted in a given region/area to evaluate
its effectiveness or whether a future implementation is preferred.
communicate Develop a communication strategy to ensure the plan is well understood
by both managers and representatives as well as key parties involved in
administration of the plan, including;
- communication materials
- information sessions
evaluate - Evaluate and annually update target levels per KPIs per role.
- Evaluate effectiveness of the plan annually together with key stakeholders.
- Adjust the plan following steps 1 to 4, described above.
Of course, compensation
plan success also depends
on how well the base
salary aligns with market
and position requirements.
To ensure you’re
competitive in your global
compensation, consult our
professional salary guide.
five key sections
This is an executive summary of the plan that covers such topics as the
plan’s objectives, plan eligibly, and highlights of plan elements, such as
the target compensation structure and performance measures (KPIs).
Plan documentation should be a detailed, technical write-up that covers all
aspects of how the plan works. It’s intended for plan participants as well as
anyone in the organization involved in ongoing administration of the sales
compensation plan, such as individual sales people and sales management
staff, as well as key stakeholders from Sales Operations, Human Resources,
Finance, and Legal. Because of its technical nature, this documentation is not
intended to be the sole, or even primary, communications vehicle describing
the new plan. It is, however, intended to be a lasting reference document that
helps answer questions about all aspects of the sales compensation plan.
This is the detailed write-up of each of the compensation plan
components. For each component, it should define performance
measure(s), sales crediting policies, how performance is measured, and
payout frequency. It should also present the compensation (bonus or
commission) schedule and describe how earnings are calculated.
compensation calculation example
Using illustrative performance assumptions, this section walks the
reader through the process of calculating compensation for each
While there are many different elements that should be part of the
strategy to implement a new sales compensation plan, one necessary
element is thorough documentation of the plan.
an ounce of prevention
Documentation of a compensation plan as outlined here can be a time-consuming endeavor.
Remember that the purpose of this document is to serve as a helpful reference guide by clearly defining
all of the provisions of the sales compensation plan. Just as important, this documentation will serve
to protect the interest of the company by providing clear guidance for any potential dispute that
may arise regarding compensation plan administration. Don’t leave yourself exposed to unnecessary
conflicts or – even worse – lawsuits because of a poorly documented sales compensation plan. An ounce
of prevention is worth a pound of cure.
administrative policies and procedures
This is the section that covers all terms and conditions that govern ongoing administration of the sales
compensation plan. This section, in particular, should be reviewed by Legal before finalizing and distribution to
the field. A sample of topics often covered in this section include, but are not limited to, the following:
This section confirms an individual’s target compensation level and performance goals or quotas for each
compensation component. This section also requires that the compensation plan participant provide their
signature indicating their acceptance of stated performance expectations as well as their agreement to abide by
all the terms and conditions of the plan.
• management’s ultimate authority – a statement of
management’s final authority regarding any and all
compensation plan administration issues
• plan effective dates – the starting effective date
and termination date, if applicable, for the sales
• employee termination / separation – what a
separating employee is eligible for in terms of
compensation upon termination
• eligibility timing – employee service requirements to
be eligible for the sales compensation plan
• sales crediting – when a sale is credited for
compensation purposes (e.g., at booking, invoice or
• leaves of absence – how quota attainment and
compensation is treated during a leave of absence
• job/territory transfers – how quota attainment and
compensation is treated under a job or territory
• quota or goal adjustments – a statement of
management’s right to adjust quotas as well as the
defined process for requesting a quota adjustment
• payment adjustment requests – the defined process
and timing for initiating, as well as managements’
process for reviewing a payment adjustment request
• bad debt charge backs – how bad debt charge backs
impact paid commissions or bonuses
• statement of confidentiality – a statement that
all aspects of the compensation plan are company
confidential and proprietary
Alexander group: alexandergroup.com/blog/sales-compensation/sales-compensation-setting-pay-mix-with-a-structured-approach-2/
Compensation Force: compensationforce.com2
Profit Guide: profitguide.com/manage-grow/sales-marketing/how-much-should-you-pay-your-salespeople-52411
Randstad Canada: Compensation plans guideline
Sales globe forum: salesglobeforum.wordpress.com/category/sales-compensation-2/
a global offer
In addition to significantly contributing to the productivity and
efficiency of any organization regardless of size, short-term incentives
are major attraction and retention drivers.
Many organizations, particularly small and medium businesses,
underestimate the importance of clearly communicating their
global offer to their workers. This is essential for a compensation
plan to be effective. By presenting the value of each facet of the
program i.e.: salary, incentives, benefits, career progression, coaching
and training, etc., employers will increase employee appreciation,
motivation and retention.
Quantify your global offer, communicate it clearly and advertise it to
all employees – the winning strategy for high-performing companies.
types of sales
typical role for this sales level role and management of
the sales person
typical client type
$35 to 45K
- junior B2B sales
person with less
than 3 years of
- junior outside sales/
business development roles
with all industry types from
technology to industrial to
business services companies
- junior account managers
with consumer product
- high level of cold calling
(daily and weekly)
- sales cycle: immediate to
- all sales activity and
metrics are highly
- simple client decision
- SME or larger
- low to mid-
with 3-7 years
of B2B sales
- mid-level outside sales
role for media companies,
products and business
- territory/account manager
with consumer packaged
(sometimes the base salary
is higher, but the total
income is the same)
- very micro-managed (lots
of activity reporting)
- sales cycles: up to 6
- clients likely have a fairly
simple decision making
process (not too many
- SME or larger
comparison guide to roles in a sales department
types of sales person typical role for this sales
role and management of
the sales person
typical client type
- 5+ years of strong
B2B consultative sales
very well in-person;
has consistent history
of success and good
career decision making
- B2B sales companies
industrial) focused on
selling into companies
with more than 200
- representative with a
little more autonomy
(more 1-on-1 coaching
but less granular
- measured more by
sales results and
pipeline than by
- sales cycles: up to 1
- mid and large
- mid to high
- 10 years+ of
more complex sales
or very transferable
experience (so they
can hit the ground
- companies selling
- very common in IT,
industry, large project
or senior telecom
- highest performing
likely one of the best
paid people in the
- likely a complex and
- sales cycles: from 9 to
- high level and
comparison guide to roles in a sales department
At Randstad, we’re dedicated to helping professionals reach their career goals as
well as helping companies build effective staffing strategies. For middle and senior
management positions, Randstad Professionals recruits supervisors, managers,
professionals, interim specialists and consultants with professional qualifications.
Our knowledgeable and tenured account managers fill permanent and, in some
sectors, contract or temporary positions with experienced professionals and
sales & marketing
Randstad Sales & Marketing understands the importance of excellence within the sales
and marketing division of any organization. We specialize in all levels of sales and
marketing recruitment across a large cross-section of industries, providing the talent
that builds, develops and manages market-leading brands that drive sales growth.
Randstad Sales & Marketing is driven by a team of tenured and knowledgeable
recruitment specialists dedicated to meeting the needs of your changing workplace.
At Randstad Human Resources, we understand that people are your most valuable
asset. That’s why we offer a wide variety of scalable solutions that cater to our clients’
specific HR recruitment needs. Our full range of service offerings allow us to not only
source and deliver top HR professionals, but to provide valuable industry intelligence,
insight into topical issues and other value-added services. We also complement our HR-
related expertise with extensive knowledge of current workplace trends, compensation
intelligence and competitive staffing strategies to help streamline your hiring process.