The Worst Kinds of Sales Compensation Plans and How They Can Negatively Impact Your Business
A sales compensation plan is a crucial part of any sales team’s success, as it incentivizes and motivates sales representatives to work towards achieving the company’s revenue targets. However, when designed poorly, it can have adverse effects on the business, causing demotivation, conflict, and even attrition among sales employees. In this blog post, we’ll discuss the worst kind of sales compensation plan that sales managers can use on their sales team and how it can negatively impact the business.
The first type of sales compensation plan that can harm the business is the commission-only plan. Under this plan, sales representatives earn a commission on every sale they make, but they receive no base salary, incentives, or other benefits. While commission-only plans may seem appealing to the business because they drive sales representatives to make more sales, they can also be detrimental to the employees. Employees who work on commission-only plans often face inconsistent income, as their earnings can fluctuate significantly from month to month. This can lead to high levels of stress and anxiety, ultimately resulting in poor morale, burnout, and attrition.
Another problematic sales compensation plan is the “winner takes all” approach, where the top-performing sales representatives receive a significant share of the rewards, while the rest get little to nothing. This plan can create a sense of competition among employees, causing them to work against each other instead of collaborating. Sales representatives who don’t make it to the top of the leaderboard may feel undervalued and unappreciated, leading to dissatisfaction and a lack of motivation.
A sales compensation plan that solely focuses on individual performance can also be harmful to the business. These plans incentivize sales representatives to prioritize their own goals over the company’s goals. This can lead to a lack of teamwork, as representatives may not be willing to collaborate with their colleagues to achieve the overall sales target. Additionally, sales representatives may not work to improve the company’s sales processes, leading to missed opportunities for growth and development.
A fourth problematic sales compensation plan is one that focuses solely on short-term goals, such as monthly or quarterly targets. While these goals may provide a quick boos in sales, they can also create a tunnel vision where representatives prioritize hitting their monthly or quarterly targets over long-term strategic planning. This can result in missed opportunities for growth and development, leading to stagnation in the business.
Finally, sales compensation plans that are difficult to understand or communicate can cause confusion and frustration among employees. If sales representatives don’t understand how their compensation plan works, they may feel cheated or undervalued, leading to dissatisfaction and a lack of motivation.
In conclusion, sales compensation plans play a crucial role in motivating and incentivizing sales representatives to achieve the company’s revenue targets. However, poorly designed compensation plans can have negative impacts on the business, including demotivation, conflict, and attrition. To avoid these negative impacts, sales managers should design compensation plans that are fair, clear, and focused on long-term strategic goals, and that incentivize collaboration and teamwork. By doing so, sales managers can ensure that their sales teams are motivated, engaged, and working towards the company’s overall success.
Also read: 5 Tips on How to Build a Strategic Compensation Plan