Determining the Total Cash Payout in a Sales Compensation Scheme

Total cash payout (TCP) alternatively called TCC (Target Cash Compensation) is the cash amount sales persons receive for achieving their sales targets. It consists of fixed pay (base salary) and variable compensation, which is the incentives payment for 100% target realization and any other bonuses rewarded. It excludes benefits but includes any direct allowances (business vehicle allowance) paid to the salesperson. 

The following factors should be taken into account by the company while determining the TCP level

  • Industry: When designing the compensation plan, it always should match the standard industry practice. The companies should get periodical survey reports to understand how the industry and the competitors are paying both the basic salary and the variable part. For instance, the retail industry has more of a commissions based plan as the salesperson has an immediate impact on the shopper’s purchase behaviors. Then the company needs to decide if they want to be aligned with the average the industry offers, the 75% or any other percentile
  • Company’s business philosophy: It is very important to align the compensation scheme with the company’s business strategy, work culture, mission and values, sales roles and performance models. A company that focuses on building a strong team is different to the one that prefers to work with sales people that act as lone wolves. If traditionally the company pays, for example, very basic on fixed salary but very competitive commissions, it should stick with that

The TCP level also depends on the sales target levels of the company. How aggressive they motivate their sales persons to be while achieving their sales targets. 

  • The company shall decide how many people they want to reach their targets. Do they want to have 97% of sales people reaching 100% of target accomplishment or 80%?  If the targets are achievable by 100% of their sales people, then then TCP level need not be high
  • The TCP level is affected by how reasonable and easy it is to reach targets. For example, if a sales person is responsible for a fruitful territory that proves easy to sell, the company might have a lower TCP
  • The higher the variable amount, the more difficult that particular job is. The more difficult the job becomes, the less motivated the employee becomes as he doesn’t get enough commissions to help him stay motivated. There is a risk of losing this employee under those circumstances. Does the company want to create money driven salesforce? If not, the company needs to apply a more conservative approach

You should always evaluate your sales force to determine what it is that they should do for you

  • Apart from the incentives, the sales persons are given some direct allowances like, mobile usage charges, meals charges with clients, mileage reimbursement etc. When you design the variable plan, these allowances and other expenses should be kept in mind. 
  • If the company wants to hire competitive and achievement-oriented sales people, then they should match their incentive plans to suit such profiles as it gives intrinsic motivation and rewards. Else, the employees look for such rewards and motivation elsewhere. 
  • The incentive plan design should adequately discriminate the compensation for top performers, middles ones and bottom performers. The top ones generate revenue, business or profits in alignment to the business goals and should be paid the highest. The middle ones represent most of the sales force who are delivering solid results. The bottom ones should be encouraged to pursue their areas of interest and strengths. 
  • It is also important to hire salespeople who can share the company values and culture. For instance, if a retail organization lays more emphasis on the entire customer experience while purchasing more than the purchase itself, then a money-driven, aggressive sales person is not the right hire. 
  • While a company could have a high turnover rate due to various factors, the most direct one is the pay. If most of the sales people’s pay comes from variable amount, then the company needs to relook at the plan and try to increase the amount. 
  • If the company is at a nascent stage, they need to hire individuals who can get them business. In this scenario, the TCP offered should be really high. On the other hand, if the company is in a mature stage and has a team who work together to share leads and get references to existing accounts for upsell, the TCP can be moderately priced

How sales as a role affects the decision of setting the right level of TCP

The TCP level depends on 

  • The sales roles in the organization. There are different sales roles from account managers to purely hunters for new sales, people with combined responsibilities, strategic product sales people, etc. The level and the responsibility of the role determine the amount of the TCP. 
  • The TCP level is a variable amount depending on the amount of sales generated. The salesperson generating low volume of sales and the person who fetches a multi-million dollars contract get very different variable pay. 
  • The target audience. There’s always a luxury and non-luxury type of sales. The luxury sale brings in more commission to the sales person than the non-luxury one. It is different to sell to sophisticated clients, something that requires powerful skillset and effort.
  • The sales person’s efforts.  The sales person who shows unrelenting efforts to persuade a client to make that sale happen also affects the level of his TCP. How much effort he puts to change the status quo in the market when competing with another very recognized product determines how much he can earn his TCP
  • Is the sales person targeting new and undiscovered and non-penetrated markets or does he try to sell to clients that already use a product by a competitor? The effort in breaking into markets with a new product where an established product already exists is huge as it requires the sales person to establish his product against the competition. In this case, the sales person should be accordingly rewarded.
  • How much the product and the company are recognized in the market. For a new product or company, the sales person should double his efforts to establish the product. The lesser the product is known, the more the efforts, the more the TCP
  • Some companies have support sales activities to bring in leads and incoming calls that lead to contracts. If the company has invested in such support activities, the TCP of the salespersons need not be higher as most of the initial sales activity is borne by the company. The expected effort from the sales person is not huge in those cases
  • The sales cycle in some target companies can be big. This means the salesperson should be constantly persuading all the parties involved in bringing the sale to closure. The sales person has to double his effort to influence the decision of the client till the deal closes.  In that case, the sales person needs to get a higher TCP

The company’s business rules also have an impact on the level of TCP offered. 

  • A company’s sales budget depends on its revenues. The board of directors decides the amount of TCP to be allocated in the budget. The allocation should depend on the industry, size of the business and the company’s growth stage. Depending on these factors, the company should allocate more or less budget to TCP levels
  • How much of the profit margin from the product is the company willing to give back to the sales people in the form of commissions? Is the company willing to pay an average 15% of the profit back as commissions or 6%? The higher the commission, the higher the company emphasizes the sales profitability

How to decide the TCP level in simple steps

  • Identify your business goals. Always link your compensation to the strategic goals. This gives employees clarity about where their efforts are going. Examples of a few business goals could be
  • Getting new business (like in the case of a startup)
  • Sales quota – a sales target, a salesperson is accountable to achieve
  • Retaining sales – keeping customers from one time to another
  • Win back sales – getting back the old customers
  • Upselling – selling add ons and other expensive items to the current customers
  • Clearly define the sales roles in your company. This should include the nature and title of the job, job description, the level at which the job would be, the geographic location etc. apply TCP level to each role
  • Determine the type of plan the company wants to adopt. The company could have the same plan to the entire sales team or have different plans for different sales roles. Which plan to choose, depends on the nature of the job and the business goal associated with it. A quick look at the types of plans
  • Fixed salary – A base salary plan with no incentives.
  • Straight Commissions – The salesperson is paid a commission based on sales volume
  • Combination plan – Base pay + variable pay
  • Subscribe to the current salary survey details of the said positions in the similar industry. 
  • Determine the company’s pay policy. Does the company want to pay at the 75thpercentile or 90thetc?  Calculate the salary ranges accordingly. Decide on the total budget for incentives and salaries. 
  • Clearly define what the sales role involves in terms of daily activity and effort

A few special considerations while designing the TCP

  • The company can implement this TCP type sales plan for one particular sales role too. However, it will be useful to establish why that role is different. 
  • The sales commissions offered should be in proportionate to the quotas assigned. For example, a company cannot pay 60% of what others pay but have as high targets as a company that pays at 80% percentile of the market

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