How Much Bonus Opportunity Should I Provide to My Sales Employees?
To determine how much incentive opportunity a sales employee should have, we have to look at the employee's market. Is the product sold to the end user or to a middle person or value added reseller? What is the market for the product? What is the demand for the product? What competitors exist in the market? The answers to all these questions are important and should be researched to help define the selling task. However, the most significant question is the following: "What degree of personal selling is required by the sales employee?"
Imagine selling fine white beach sand to the industrial market. The product is undifferentiated, a commodity, and sold primarily on price and delivery. What differentiates your beach sand from a competitor's? Easy - the sales employee. A good sales employee will probe a prospect to find all possible ways to differentiate his/her product and to convince the prospect that this product is the best for the customer. The degree of personal selling and persuasion is significant and to reward the sales employee's selling efforts, one would expect this job to have a high incentive opportunity. ~ Now imagine selling the new and improved, chrome-plated, high efficiency, and environmentally friendly widget. Everyone wants one. Stores cannot keep them on their shelves. Customers are rationed quantities of this product as the factories are able to produce them. What is the sales employee's job here? The sales employee has to use very little, if any, personal selling to sell the product. The selling task is primarily order taking. A sales employee in this situation might have a small incentive opportunity until more of the product becomes available or competitors enter the market.
Normally a traditional outside sales employee has an incentive opportunity of 30% of total cash compensation. That is, 30% of the total of base salary and incentive opportunity. Does this mean that all sales employees will earn 30%? The answer is "No." This is the target incentive level. This is what the sales employee can expect to earn if the employee achieves the sales target or quota and satisfactorily accomplishes any assigned objectives. A sales employee can earn from zero upward depending on the terms and conditions of the sales plan. ~ Once we determine what percent of total cash is to be the incentive opportunity, how do we convert this percent to a dollar incentive target? The first point is what is the expected target cash compensation to be paid to the sales employee if that employee achieves the sales target and objectives. Sales compensation surveys, market intelligence, sales management judgment, or a desired relationship between sales volume and earnings assist in establishing total target cash. The incentive percent is multiplied by total target cash and the result is the incentive target in dollars. The remainder is the target base salary.
Incentive opportunities should be determined by reviewing all possible factors influencing the sales job, but the heaviest emphasis should be placed on the degree of personal persuasion or personal selling involved to secure the sale.