To be clear, this law would apply only to true commission plans, so sales incentives paid as a goal-based incentive would not be subject to it. For more on the difference between these two, see What is the difference between a commission and a bonus? (Note that a goal-based incentive is officially called a “bonus” by WorldatWork, the accepted keepers of the “Sales Compensation Body of Knowledge.”)

It is always a best practice to provide great plan documentation, and we generally recommend it take at least two forms, possibly three:

1. The rollout presentation. This is often a PowerPoint document which provides an overview of the plan design, explains what is new for the updated plans, and makes it clear what focus, behaviors and results are needed to earn well under the new plans.
2. The plan document. This explains the plan in further detail, ideally with good examples included. It is not general across all sales people, but specific to the person who receives it, and includes documentation of their own target compensation and sales goals. It also includes a section covering a range of contingencies (shared sales credit, crediting rules in case of transfers, provisions for leaves of absence and termination, management discretion clause, etc.). It needs to be technically correct in terms of the mechanics of the compensation plan, but also needs to be reviewed by legal counsel in all jurisdictions in which eligible employees live and work.
3. The earnings estimation calculator. This is either built in to  the compensation administration system as a feature, or provided as a stand-alone spreadsheet, often in Excel. It allows the incentive-eligible employee to enter sales goals and target compensation, and also possible sales results, and see the resulting compensation. (We love it when a comp plan is so simple that a calculator would be overkill, so occasionally we can recommend NOT providing a calculator. But for most businesses, a calculator can be a great tool to speed understanding of a new plan.)

These three communication tools are so vital to plan success that they are standard deliverables in all Cygnal Group Full Service plan design engagements.

We’ll leave a lot of that to your other advisors and focus here on the compensation piece with the basic steps you need to complete to arrive at the right comp plan for your new hire:

1. Your first step is to determine a reasonable level of total compensation for a sales person in your business — in the U. S., that’s what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person will sell in that first year — the cost needs to be associated with a reasonable return. You’ll get better at that as time goes by, but you’ll have to start with some kind of working assumption based on others in your industry, leadership’s experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
2. Next you need to decide how the risk will be shared — how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even non-existent. 30% to 50% of the target total compensation is a good starting place. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
3. Since you know the target total cash and the base, you can subtract to determine the incentive at target. Your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There’s more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date). But many early stage companies do fine with a straight commission paid monthly – a single rate based on the incentive at target divided by the productivity expectation (e.g., x% of revenue, y% of margin, $z/unit).
4. Your last design step is to check the plan’s appropriateness across a broad range of possible levels of productivity, and be sure you’re comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company’s owner.
5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person’s manager and the sales person. Here, you should probably ask for a review by your legal counsel.
6. And finally, determine how you will administer the plan – where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.

Then after you’ve been living with the plan for a few months or quarters, have a look again to see if it’s meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don’t adjust during the plan year unless you’ve got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

By Beth Carroll, The Cygnal Group

(Read Spotlight on a Sales Representative: A Sales Rep’s Perspective on How Sales Compensation Plans are Implemented and Communicated)

Communicating changing sales compensation plans is never easy. The salesforce will always start with the assumption that the new plan is going to take something away from them, and will be skeptical of anything the company tries to push as a “positive change.” It usually takes two payout cycles under a new plan for the reps to figure out what behaviors they need to change to maximize their pay under the plan, and this is the point at which your top performers will finally stop holding their breath about the new plan design (provided, of course, it is designed well and truly rewards top performance in a fair and equitable manner).

There are several strategies that can be used to help ease the change process for the salesforce.

• Include the reps in the assessment process by interviewing or surveying them before you begin the redesign effort. If you don’t have time to talk to every rep (and there are diminishing returns the more reps you talk to), be sure you select a few from each role who are new reps and a few who are tenured. You can typically avoid under performers UNLESS they were star performers under previous year plan designs. In this case, find out what has changed.

• Be sure you include sales management on the design team. However, do not under any circumstances include anyone as part of the design team who will be paid under or as a direct roll-up of plans being designed. It is impossible for anyone to be objective when it comes to his/her own pay.

• Once the plans are designed, hold a challenge team meeting with a few of the most vocal sales reps, team leaders and front-line managers who were not part of the design process. They should be told they are helping to craft the plan communications, which they are. However, they will also poke holes in the design (even if you tell them the design is set), and this may provide you with a chance to correct any problems you have missed. Also, your communication effort will be smoother because of this step.

• After the plans have been rolled out, you want to check in with your sales reps frequently to be sure they have understood the plans. Using an earnings calculator is a common way to help reps internalize the designs and plan their year to maximize their pay. This can be a simple Excel-based tool, or it can be an add-on module available from several of the EIM vendors.

When selecting the reps to participate in the process, you want top performers who are vocal and considered leaders by others. Often, you may find you have your most “difficult” sales professional included in this group, and there is usually a reason. A good sales rep never stops negotiating, and will therefore push at every opportunity to get the best deal he/she possibly can — especially from their compensation plan. The only time I truly worry about a plan design is when there are no complaints from the reps.

By Beth Carroll, The Cygnal Group

It’s fall again, the economy appears to have shifted toward the positive in many sectors, and companies are thinking about redesigning their sales compensation plans for 2011. In order to ensure the redesign process and resulting plans will provide a good return, businesses should address six key areas:

1. Planning
2. Involvement
3. Knowledge
4. Modeling
5. Communication
6. Administration.

Planning
Incentive design is a process, not an event. Whether this is your first design effort or you’ve done this more times than you can remember, you should not underestimate the time and effort the project will take, particularly given the recent economic upheavals. You also must allow time to carefully communicate any plan changes. Employees are nervous about adjustments to their compensation in the best of times, but they are especially skittish now. In a tumultuous year, even more time in the design process should be allotted to communication. Keep in mind if you are reading this in September, you may already be running a bit tight on time for a January effective date, although you can still accomplish what you need to if you move quickly but carefully.

Involvement
Too many people involved in a sales compensation design project can be unwieldy; too few can lead to a complete failure of the design if a critical viewpoint was not adequately represented.

Senior leaders must be visibly and vocally supportive, whether or not they are directly involved in the project. Sales leadership, finance, human resources, sales operations and IT must be represented on the design team at fairly high levels, as they are key constituents who have the best knowledge about the organization, the history, the systems, and what is and is not possible with incentives.

The design team should not include anyone whose compensation will be directly affected by the outcome of the process, but a representative sample of sales employees and managers should be interviewed to gain feedback and insights into sales jobs and processes, as well as what has and has not worked in prior compensation plans. Such inclusion will give them a sense of being heard, which can be critical in gaining acceptance once the plan is rolled out.

Knowledge
If there is controversy about the effectiveness of the current plan design, a survey of your salespeople may provide some needed insights to break a logjam. If there is concern regarding the amount being paid relative to market, a market pricing review can provide guidance about the need to raise or lower target pay levels. If management believes the goals that have been set should be attainable, a bell curve graph showing that 80 percent of employees were at 50 percent or less of goal might be what’s needed to show the disconnect between management’s belief and what is realistic. Spend time at the start of the project to build this fact base.

Modeling
Once you have developed your initial recommended plan design, you must model it under different performance scenarios. If you do not take the time to do this important step, you will find an unpleasant unintended consequence the following year; it’s only a matter of when.

What if you are at 80 percent of goal? What about 120 percent? Are the payouts still acceptable as a percentage of revenue or profit? What are the best measures of sales’ contribution to the company? What would you consider a successful outcome for an individual and the company, and based on the modeling, will this plan get you there? Are transition arrangements needed to move people in an orderly fashion into the new plans? All of these questions must be addressed for a successful outcome.

Communication
A simple incentive plan that is well-communicated and understood by the field can be far more effective than the most mathematically perfect design that no one understands. Senior leadership must take the lead in communicating the new plans. Managers should be told about their plans first, as their support is critical to the rest of the communication effort. Examples must be provided showing how different performance results will pay under the new plans.

Plan documents and quota-acknowledgement sheets should be provided in one-on-one meetings between the employee and his/her manager. This meeting should focus on employees’ goals and earnings expectations, their specific strengths and opportunities, and the best ways for them to win under the new plans. Excel-based earnings calculators can be powerful learning and motivational aids, but be careful employees are not so busy estimating their pay that they forget to actually do the work.

Administration
The last key area to address is administration of the plans. Payouts must be on time and accurate in order for salesforce members to trust the plan design and learn to modify their focus to improve their results. As part of the administration process, be sure that regular reports are provided to design team members, so they can assess the plan’s effectiveness as the year progresses, and to employees, so they understand the direct connection between their performance and their pay. It is also a good idea to include a “motivation” section that shows how much additional could have been earned if a hurdle or threshold had been cleared. Often, necessary design changes are only surfaced when it comes time to administer the plans, so test your administrative processes before you actually communicate the new plans to the field.

Conclusion
While there are many right answers for any sales compensation plan, there are perhaps even more wrong answers. A process that addresses each of these six areas will yield a right plan design that will create great value for the company, the salespeople and even your customers.

By Beth Carroll and Donya Rose

The economy appears to have taken a positive turn and many companies are starting to think about growth:  hiring more sales reps, launching a new product, or breaking into a new market segment.  One of the first questions that is raised when a company returns to growth mode, especially if there has been significant retrenching, is, “What should we do with our sales compensation plans?” Odds are high that the right focus for the recession is not going to be the best focus for the company’s growth phase. It may be time to take a hard look at your sales incentive plans.  There are some key indicators you can check to determine if it’s time to make a change, and if it is, if you can afford to wait until January 1 (or the start of your next fiscal year) to implement the new plans.

1. You scaled back (or perhaps eliminated) incentive compensation during the recession, and now you see that your people are not engaged fully to capitalize on sales opportunities.You need to act as quickly as possible to regain momentum and re-energize your sales staff. While this is not a situation that should be left in place until the start of the next fiscal year, a full redesign of the plans may not be the only alternative. First, consider SPIFFs, contests and recognition programs. Are there things that can be done that will quickly drive new sales and create increased enthusiasm in a cost-effective manner? Second, consider adding a small “bounty” type incentive that provides additional income tied directly to the performance you need most right now (e.g., new customer acquisition), but that limits your exposure if sales opportunity radically exceeds or falls short of your expectations. Third, if you can, consider a stub-year plan that will shift people in the direction you will want to go at the start of the next fiscal year. If you filled in an incentive gap by increasing base salaries, you can start to move them back down again. If your employees have been earning 60% of what they earned in better years, you can start to bring that number back up again by developing a more modest incentive program with less leverage than was appropriate in more stable market conditions. In addition, you should consider the culture that has been enforced (or created) by your sales compensation program. Should you add a team-based element to keep the focus on working togethe
2. You scaled back your expectations in terms of goals or volume production, and now you are starting to see payouts that are far higher than you expected. This is also a situation that has the potential for serious negative consequences on two fronts. First, your company’s financial performance could be adversely affected by overpayment in the incentive program. Second, your employees’ sense of their own value in the market place could be inflated beyond reasonable expectations. It is remarkable how quickly salespeople come to expect a higher level of earnings on an on-going basis once they have experienced it for a few months or quarters. It can be very hard for them to accept the adjustment that will inevitably be required. Quick action is needed to recalibrate expectations, supported by thorough modeling to make sure that pay levels return to appropriate levels without damage to morale, and while still providing significant upside earnings potential for true top performance.
3. You are finding it difficult to hire top talent, and the reason cited is the lack of a competitive compensation package. You can take a two-pronged approach on this and develop a plan for new hires that would be a lead-in to next year’s plan for the existing staff. Because many companies provide a guarantee for new hires, such an arrangement is possible for a few months before any significant discrepancies in the two versions of the incentive plan are felt. However, you will want to make the transition strategy clear for the incumbents so they know that at a specific future date they will be moved onto the new incentive plan as well. Many salespeople have become leery of 100% variable plans, as they’ve seen what can happen when they fail to cover their draw month after month. Even top salespeople in industries that are highly risk-tolerant may be more interested in finding programs with at least a modest base salary. A 40/60 to 60/40 pay mix is reasonably aggressive, and yet either option allows some degree of control from an employer/employee perspective while providing salespeople with a greater sense of security. Of course, the less variability in the plan, the less leverage on the upside, as this is a necessary trade-off. But it is one that can be designed to provide very attractive earnings opportunities to true top performers.

by Beth Carroll, The Cygnal Group

The joke goes that the majority of incentive plans are drawn up by the company president and sales director hastily over cocktails and written on a napkin.  While most incentive compensation plans have a bit more thought put into them than this, there is a kernel of true beneath the folk-lore, and the place this is most often evident is in the plan document — the piece of paper which is given to the employees to explain how they are going to be paid.

The risks of having poorly documented incentive compensation plans range from your employees not understanding the plan and, therefore, not being motivated by it (leaving your sales director scratching his head as to the lack of results, and possibly his lack of job!), to legal battles with former employees who are claiming they are owed back incentive pay due to vague, inaccurate, or misleading wording in the plan document.

At a minimum, a well-written plan document must have the following components:

1. Plan Overview: This part describes the plan objectives, tells who is eligible, gives the time frame the plan will be effective, tells what the target incentive amount is at 100 percent performance, and lays out the various elements of the plan, their weights, their pay frequency and calculation timing, and their performance period.
2. Element Details: This section thoroughly explains each plan element or component, and details the method used to calculate results (e.g., “Gross Margin is calculated by subtracting the cost of purchased transportation services from the customer payment excluding adjustments for discounts and fuel surcharges”).  Wording must be precise to prevent misunderstanding.  Include commission rates, commission tables, bonus payout tables, or any other information that will enable employees to quickly and easily calculate their incentive payments.  Be sure to also document any qualifiers that must be met before pay will be earned (e.g., “minimum gross margin percent must be 10 percent to earn incentives under this measure”). If modifiers are part of the plan, include them in the plan document at this point as well (e.g., “if your on-time  percent falls below acceptable levels, your incentive for the performance period will be reduced by 50 percent”).  Include information about any quotas that will be used to determine pay, and provide a calculation example so the employees can follow it step-by-step.
3. Plan Policies and Practices: This is the very important legal disclaimer section that is often completely omitted.  Things to include in this section are policies about payment when an employee transfers, is on leave, or is terminated.  Preparing this plan document section will force you to think about how you would handle incentive payouts in each of these cases before they happen which could save you a lot of money after they happen.  Also be clear about when incentives are earned. Are they earned when a load ships, is delivered, is invoiced, or is when it is paid?  If an employee terminates and a load that shipped while the employee was active is paid after termination, will that employee still be entitled to a commission on that load?  Check with your lawyer on this, as local laws governing commissions vary.

Also include disclaimers that the incentive plan is not a guarantee of employment, that management has the right to modify the plan at any time and for any reason, with or without notice, and that management may adjust sales credit and/or payout in its sole discretion to preserve fairness to the company and the employee.

Credit splitting and adjustments must be clearly outlined either here or under the pertinent Element Details section.  If you have not documented your policies in these two areas, now is an excellent time.  Consider the situation if two parties work the same load, handle the same customer, cover for each other when one is on vacation or out to lunch, etc.  Also, what happens if there is a major adjustment after you’ve already paid the incentive? What about bad-debt write-offs?  Is there a cut-off point beyond which a load will no-longer be eligible for incentives (e.g., must be paid within 60, 90, 120 days)?  The list goes on.

If there is any possibility of collusion or kick-backs, either between your staff and customers or carriers, or among your staff, be sure to include a clause that such behavior will result in immediate termination.  Include a confidentiality clause, and a funding clause that allows management the right to suspend payment on the plan if overall business conditions are unfavorable (although we recommend using this clause as a last resort only; if it is invoked for reasons other than impending insolvency, then you have a disincentive plan rather than an incentive plan).

Finally, review the whole Plan Policies and Practices section to be sure your intentions are accurately and unambiguously stated; if you do not state your intentions clearly, your ex-employee will likely make an interpretation in his/her favor, and this could land you in court.

Once your plan document accurately reflects your intentions to the best of your ability, have it reviewed by your legal counsel. It will be seen in many jurisdictions as a contract, and is worthy of a legal review. While your lawyer’s contribution is important, you may want to consider reminding him or her that this is supposed to be a motivating and exciting document, understandable by the eligible employee, and confining the “legalese” to the final section to the extent possible.

The thought required to develop each of these sections will result in better plan designs, will prevent costly challenges, and will help ensure your employees understand how they will be paid under the plan. A well-written plan document will help ensure your well-designed plans focus sales effort on the results your business needs.

For a free plan document template to get you started, go to www.cygnalgroup.com/logistics and provide your name and email address in the contact box and we will email you a template within 1 business day.

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

Question

Our small sales team is paid 100% commission on gross margin. Sometimes, we claw back commissions that were paid after the customer is past due and in collections, is this legal?

Answer

I won’t venture a legal opinion here — and believe it is likely to vary from state to state. However, I will assure you that 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 do that 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.

There are companies that successfully manage their sales forces without written plan documents. Typically their plans are very straightforward, and they don’t have very large sales forces. But the norm (and the best practice in most instances) is to have a good plan document that makes the “rules of the game” clear and serves as a helpful reference for all involved.

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.

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 local laws, specific to your company and the location of your sales representatives.