What Makes A Good Compensation Plan?
A compensation plan might seem like a complicated series of calculations and most of the blame in this should go to some of the “plan designers”. In fact, the basic principles for having a good, solid compensation plan are quite simple.
Not a Starting Point
When setting up a direct selling business, “the plan” should never be the starting point. I have seen over and over again where an entrepreneur develops a plan and looks for the products to sell, and builds the business around that plan. It should never be forgotten that a compensation plan is just a tool (albeit a very important one) to move the products to end users.
Part of the Overall Strategy
A compensation plan is a strategic element of a direct sales business. Being such, it has to be in harmony with all the other elements. The target market, intended characteristics of the field force, chosen tone of communication, to name a few… all have to be considered together with the plan.
Rewarding All Key Behaviours
A company expects various behaviours from its sales force. Some well-known examples are: Consultant acquisition, personal selling, organizing online and offline sales parties, training, coaching… The compensation plan has to make sure each desired behaviour is rewarded in full accordance with its importance. It is just as crucial not to reward unwanted direct seller behaviours.
Easy to Understand – Easy to Explain
Sale force is motivated, directed and incentivized by the compensation plan. There is no proven direct correlation between the complexity of a plan and the earning potential it provides. So, there is no point in having an unnecessarily complex plan that only discourages newcomers.
Unlimited Opportunity for the Direct Seller
Restricting the earnings potential (which can easily be accomplished by limiting “depth”), means the compensation plan will not be able to attract strong field leaders from outside or to create them within. Unless the idea is to have a sales force consisting mainly of part-timers and of those who are not that ambitious, it is not advisable to to do this.
Limited Expense for the Company
By looking at a public company’s income statement, one can quickly see how a significant expense item is sale commissions. While providing unlimited income opportunities to an individual direct seller, there should always be a cap on this expenditure as a percentage of company revenues. Believe me, it is not that difficult to achieve these two simultaneously.
Last but not least, a compensation plan has to comply with the regulations, period! It is true that there may be some differences in this field from country to country, but universally accepted principles are pretty straightforward.