There has been widespread use of specialists in designing incentives for the company. The reason is not farfetched, in a rampant season where many companies have failed system, there is a need to employ the services of a professional. Because various systems have shown to be prone to failure, we have designed plans that can meet a set target and exceed them if adequately utilized. The primary purpose of these plans is to motivate salespeople to achieve more and secondly, drive sales behavior in the direction of the company’s objectives.
The need to properly follow strategy is now essential more than ever to achieve the company’s laid out targets such as promoting new products, upselling an existing product, etc. The goals shall, therefore, form the basis of the chosen incentive system to be adopted.
We shall discuss the incentive scheme extensively in this text. First, it is imperative we know how vital the incentive scheme is.
The concept is incentive system is aimed at rewarding hard work and of course, keeping an excellent working relationship with all stakeholders. The design requires some needed technicalities to complete with several decisions, like bonus payment and commission, are to be decided with terms and conditions of disbursement clearly stated. Such conditions are; the total target compensation that a salesperson shall be rewarded, the split of the total compensation between the fixed salary and the variable part, etc.
This incentive system focuses on how a company is getting a guaranteed return depending on the number of sales made. The company decides the commissions to be paid with regards to different levels of performance. It is transparent enough to all parties so far target is met, and therefore most companies use it.
Let’s have a quick illustration of how this works
We have said that the incentive is based on the number of sales and whether target is met. Assuming a goal of $1million per annum is set, it means the company expects the salesperson to hit it within the specified period. An excellent level where the target is exceeded is a plus. In a case where it is not met, a minimum standard is to be reached by the person, say at least 40%. The company holds all right to effect this plan based on the performances.
This plan is known as RAMPED COMMISSION, where there are various commissions for different tiers of performances.
For instance, a company might decide to pay 3% revenue for less than 50% performance and 10% for performance within 50%-100%. This plan ensures that the person walks home with something regardless. However, it is most common for companies to give increasing commission for higher achievements. It is a credible alternative to a flat rate plan through all performances. Although not very common, the rate of the change might decrease and not just increasing. Nevertheless, the ramped commission system has proved to be an effective incentive plan both for salesperson and company. We shall discuss more on this incentive system and why it is the best.
The levels that commission rate changes
As said earlier, the commission rate depends on performance level attained by a salesperson with various tiers having its standard rate. A significant turning point in the system is when rate changes; this shows how vital the standard is and why it needs to be carefully selected. It is possible a salesperson passes the 100% performance mark which is an excellent level. In this case, the rate may change rapidly to showcase the company’s appreciation. This is expected to motivate the salesperson further to break more records.
The first level serves as the threshold where a minimum level of performance is required, and anything below attracts no incentive. The rate increases as accomplishment rises. Companies have the chance to choose rates and levels the way it best suits them. For example, a company looking to secure initial performance from a salesperson can decide to pay a small amount up to a certain level, let’s say 40% of target realization, and then offer a standard commission or to offer no payment for up to a minimum target realization, let’s say 30 percent of performance. This decision will be taken to advantage of the firm.
Let’s have a brief look at why ramped commission seems generally accepted by all companies. Why using ramped commission?
RAMPED COMMISSION is a psychological system that appeals to the heart because salespeople know what they can achieve when they work even harder, so it motivates them to go all out to meet their targets. Safe to say, the main objective of the incentive system is to drive them to do more. Continuous zeal to achieve more means increased commission to the salesperson and increment in the company’s revenue. In summary, these are the main reasons that ramped commissions are used:
• To motivate salespeople to different behaviors.
• When the company is asking for salespeople to reach or change their sales effort in varying levels of target realization
• When the company needs to strongly motivate (or demotivate in the case of a regressive ramp) the energy and certain sales behaviors
How to choose the best rate that suits both parties
Because the company can’t afford to get it wrong, there are some guided steps needed in selecting the best rate for ramped commission. It is a challenging decision that requires technicalities and psychology. Here are some rules to be followed when choosing the rate for this incentive system.
• Consider the total target money you give at each level and how much the level deserves to be compensated compared to the previous one.
• One needs to think the milestones where the rates should change
• Take into consideration what can drive people to work hard to earn from the next level.
One can choose to use either progressive or regressive ramp with their distinct advantages and disadvantages. A progressive is when the ramp rate increases while regressive means rate decreases. Each has suitable conditions where it is implemented.
In a situation where sales are difficult to achieve, a progressive rampcould be utilized. Also, during the need to scale up sales and when the company is looking to discriminate between achievers; these are few cases where progressive might be used.
A regressive ramphas its situations where it might be utilized. Cases such as when sales are forthcoming salespeople do not have to add extra effort, or when the company is not making any profit from excessive sales.
Having said this, it is essential to note that setting up in the wrong way has adverse effects. Just like any incentive system, setting the wrong performance level and percentage commission hurts the company, and most importantly, it deviates them from stated objectives.
Setting the wrong level and payment derails motivation and reduces the drive to sell more. With this, the salesperson is stuck at the same level, and as a result, the company’s revenue takes a big hit and subsequently fails to meet the objective.
You also risk losing hardworking salesperson, who feels the rewarding plan is not good enough. This is bad for the company because the cost of replacing them is very high, and you might not get someone as dedicated.
Finally, if the level and corresponding rates are not rewarding enough, salespeople will not work enough to reach it, they sell less than they could, and sales will be on the low.