Q.  I sell advertising for a local newspaper.  In our pay plan, we compete with our revenue numbers from the previous year, and approximately 6% is added to the previous year’s revenue number.  That becomes your goal for that particular month.  We get a salary plus commission and have a stair-step commission that starts at 80% of our goal.  The problem is there is no motivation between the sales people due to the fact that we are competing with numbers from the year before.  When we have talked to management about it, they say that if we changed the pay plan, we would have to lower salaries.  In most months our company keeps approximately 92% to 96% of the total revenue I bring in.  I’d like to know your thoughts on this kind of pay plan.

A.  I suspect that this kind of question lurks in the back of the minds of many sales people -- “Is my pay plan fair?” 

I’ve been on both sides of this issue.  As a sales person, I’ve worked under a number of different compensation plans.  In every sales position I had, my compensation plan was changed at least once. 

As a consultant, helping companies refine their compensation plan is a regular part of my practice.  Almost never does a week go by that I’m not involved in a compensation plan project somewhere.

Over the years, I’ve developed some criteria for evaluating a compensation plan.  Here’s one of them:  A good compensation plan should be a win-win plan.  That means, good for the sales person and good for the company. 

From the sales person’s perspective, that means that the compensation plan should be competitive with others in the market, that it should fairly compensate them, and that it should financially reward exceptional performance.

From the company’s point of view, it means the same things, with one provision:  A good compensation plan should cost the company an appropriate amount of the gross profit generated by the sales force.

There is, unfortunately, a good deal of misunderstanding on the part of sales people on the economics of business.  Your statement that the company “keeps 92-96% of the revenue you generate” is an indication of that misunderstanding.  You are implying that the money is yours, totally due to your efforts.  I can empathize with this feeling, because for years, I shared it.

However, a more reasoned investigation into the issue will reveal that you are just one part of the company.  The people who reliably turn out every edition of your newspaper -- who distribute it, who pay the bills and run the presses -- are just as much a part of the reason your advertisers choose to spend their money with your paper.  To say that the company keeps the money you generate is to over-inflate your contribution.

Secondly, you are implying that something is wrong with that percentage...[Click Here To Read The Entire Article Online]