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Tie Salesmen's Bonuses to Their Forecasts - Harvard Business Review

http://hbr.org/1978/05/tie-salesmens-bonuses-to-their-forecasts/ar/pr

Tie Salesmen’s Bonuses to Their Forecasts by Jacob Gonik
John and Peter are two salesmen for the XYZ corporation. John sells twice as much as Peter. John earns twice as much as Peter, right? Wrong. John may even earn less. The XYZ corporation’s sales compensation plan is not unique in the modern business world. In the past decade many companies have turned to sophisticated incentive plans that seem to challenge Darwin’s law of survival. Throughout the years salespeople have been paid by either fixed salaries or variable incentives such as commissions and shares in profits. Other forms of payment are expense accounts and fringe benefits such as paid insurance and vacations, but these are never used alone and can be set aside when discussing the motivational aspects of compensation plans. Most companies use a combination of straight salary and commissions. By including both a fixed monthly wage and a sales percentage bonus, managements seek to secure company control as well as provide salesmen with ample motivation. For example, at XYZ John and Peter will each earn $10,000 a year guaranteed, plus another $10,000 in bonuses which depend directly on their results. How, though, can Peter sell less and still earn more than John even though they sell the same piece of machinery for XYZ? The dilemma is resolved if one takes into consideration how management measures John’s and Peter’s performance. In this article I describe a sales compensation system which, unlike most incentive plans, rewards salespeople not only for their actual results but also for their effort and ability to forecast accurately. Before describing that system, however, let us take a look at the two basic compensation systems from which all others spring.

Basic Compensation Systems
Many years ago a manager’s payroll slogan was quite straightforward: “Bring