Providing Equal Earning Opportunities When Territories Are Dissimilar in Size
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Individual Commission Rate
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As noted earlier, commission formula pays an established rate for sales production (for example, revenue, gross margins, or units sold) The commission schedule is constant for all sales personnel in the same position (Individual quotas may affect access to different ramp levels, but, for the most part, payments are similar for similar levels of sales production) Target incentive commission plans require territories to have similar sales potential Sales organizations use account assignment and reassignment to keep territories balanced Organizations with the latitude to make account changes can easily keep earnings comparable by equalizing the sales-loading among sales personnel through account reassignments This is not a preferred
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practice for income producers, but in the case of sales representatives, managing territory size through account assignments ensures that target incentive pay opportunities remain comparable among sales personnel However, in many instances, it s not plausible to reassign accounts In these cases, the movement of accounts is disruptive to customers and sales personnel Simple geographic realities do not always allow for reassignment to other sales personnel As territory size becomes more dissimilar, the use of commission programs becomes more problematicThe eventual solution is the use of a bonus formula method that pays a percent of target incentive as a percent of quota accomplishment Prior to adopting a bonus formula, two methods can extend the utility of commission rates: individual commission rates and sales force stratification
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An individual commission rate (ICR) provides each person with his or her own commission rateThe purpose of ICRs is to manage payouts to a similar target incentive amount even though territories are dissimilar in size Sales management creates an ICR for each salesperson by dividing that person s target incentive amount (which may be unique for him or her) by the unique quota sales volume expected for the territory Figure 5-31 illustrates how to calculate ICR
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Calculating Individual Commission Rate (ICR)
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Individual Target Incentive x 100 = ICR Individual Sales Quota
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For example: Sales Representative A ICR
$60,000 x 100 = 24% $2,500,000 $58,000 x 100 = 305% $1,900,000
Sales Representative B
Figure 5-31 Individual Commission Rate Calculation
In this manner, sales management assigns an individual ICR to each salesperson Figure 5-32 is the incentive plan for ICR
Component ICR Commission Schedule Quota Performance 0 100% Over 100% Commission Rate ICR% ICR% x 15
1 Commission Rate nd 2 Commission Rate
Figure 5-32 ICR Commission Schedule
An interesting variation on this design is to provide an ICR for each salesperson up to quota But once past quota, all sales personnel in the same job get the same commission rate This hybrid model (see Figure 5-33) helps to equalize dissimilar-sized territories up to quota performance But once above quota, dissimilar-sized territories now pay out according to actual performance, and pay opportunity is not equalized by using an ICR
Component ICR and Commission Rate Hybrid Quota Performance 0 100% Over 100% Commission Rate ICR% 7%
1 Commission Rate nd 2 Commission Rate
Figure 5-33 ICR and Commission Rate Hybrid Model
ICR-Commission or Bonus An ICR has all the outward appearances of a commission payment for each occurrence However, it accomplishes what a bonus formula does equalizing the earning opportunity regardless of the size of the territory
Observations ICR provides a transition formula technique between commission and bonus formulas Most companies eventually adopt a commission plan after several years with an ICR program
Sales Representative TI-Commission: 6B Stratified Commission Rates
This final commission technique for sales representatives is not really a unique commission formula, but, instead, a method to use commission plans for a stratified sales organization Sales force stratification segments customers into categories such as size and/or potential For example, the larger opportunities are placed in global accounts, mid-sized accounts are grouped into major accounts, and the remaining smaller accounts are grouped by geographic territories and may be labeled as general business Stratification groups sales territories by size From a sales compensation perspective, this configuration supports the use of commission plans because territories of like size are grouped in the same category Each job category has its own commission rate correctly sized to the volume opportunity and target incentive opportunity for that category Figure 5-34 shows that the larger territories have lower commission rates than the smaller territories However, the volumes are much larger, assuring a higher payout for the large territories, even though the effective commission rate is lower
Component Commission Rates by Stratified Sales Segment Below Quota Global Account Executives Major Account Managers Territory Sales Representatives 15% 30% 60% Equal & Above Quota 20% 45% 85%