How to Determine What Your Business Should Spend on an Incentives Plan

It’s a problem every small business owner wants to avoid: You hire a sales rep to bring in business, only to find out down the road that the base salary, commission and car allowance you’re paying that employee is actually cutting into your bottom line.

It’s crucial to evaluate how much your business can really afford to spend on compensating your sales team so you can put a viable incentives plan in place that not only contributes to the growth of your business, but also motivates employees and attracts and retains top talent.

Pete Fasulo, president and founder of PJF Sales Training, a Long Island, N.Y.-based company that trains new hires for Comcast Corp., Aflac Inc., Clear Channel Communications Inc. and many small businesses, offers the following advice for determining what to spend on a sales incentives plan:

Know Your Profit Level
The first step to structuring an incentives program is knowing your business’ profit level—after all, if you’re not aware of it, anything you pay an employee is arbitrary. Even if an employee is bringing in business, you could lose money if you’re paying them more than your business can bring in.

Know What You Can Afford
Knowing your profit level will help you determine what you can afford to pay a sales rep or if you need to restructure your sales incentives program. Ask yourself if you can, after paying a base salary for an extended period of time, still make a profit and afford to pay that employee, Fasulo says. Determine that based on your profit level and on the existing business you’re bringing in, rather than on the business you anticipate bringing in through your sales team.

You’ll need to decide whether to pay commission only or commission in addition to a base salary. (See: Common Ways to Pay Your Employees). “You’ll get a better employee if you offer benefits, but you run the risk of paying them…and never seeing anything in return,” Fasulo says. Remember, offering a base salary with commission, and paying for health benefits, car allowances and cell phone bills can add up. “There is a lot more to it than the average business owner thinks,” he says.

Set Incentive “Levels”
When it comes to commission on sales, employees should be compensated more for bringing in new business than for making repeat business, Fasulo says. Instead of paying your employees 10% commission on any sale, you could, for example, pay them 5% commission for making repeat sales and 9% for bringing in new business.

Accelerate and Decelerate Commission
As an alternative to the previous model, give your reps a monthly quota, and pay them a percentage based on whether they meet, exceed or fall short of that quota. For example, a sales rep that has a quota of $7,000 a month could receive 10% commission if they meet the quota, 13% if they exceed it and 6% if they don’t meet it. “You need to entice sales reps to go above and beyond the sales quota,” Fasulo says. When you accelerate the percentage, don’t set it so high that you cut into profit.
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