The U.S. Environmental Protection Agency (EPA) is initiating a peer review of draft scientific modeling approaches to inform EPA’s evaluation of...
A few weeks ago, a client was interested in changing his company’s remuneration plan. We came up with a pay plan that could give a company important advantages.
My client figured that monthly costs are about $8,000 per month, normally selling around 40 systems per month. That means his fixed costs run about $200 per system sold. He realized that if he could sell more than 40 systems per month, all his expenses would be paid and his profit per item sold would be much higher. Next, he came up with the idea of paying his sales staff more on systems sold more than 40 in a month. He pays 15 percent of the selling price in commission and salary on his current plan, and he decided to pay his normal 15 percent plus a 15-percent bonus on any systems sold in a month more than 40 systems. That’s quite an incentive for his sales people to sell a lot of systems.
Creating The Perfect Team
One thing bothered my client about his sales team: They only looked out for themselves and not the overall good of the company or even other team members. To solve this, he devised a twist on this pay plan. The bonus was paid out not based on your sales but based on their overall contribution to the company. That’s right, based on his arbitrary opinion. Sales people accept this because the bonus is a gift—on top of their normal 15 percent commission.
Now, the sales team will care about their contribution. They might be interested in the following things:
The sales team cares about how much the company sold in addition to their sales, and they want to be good employees. The bonus money allotments were announced at a sales meeting each month and confirmed in writing. But now for the second twist….
Preventing Competitors From Taking Successful Team Members
We decided to pay half the bonus money in cash the day the shares were announced, and half in a retirement fund. This solved several problems. First, it was a good benefit for the team; second, it relieved the pressure on the company for retirement; and third, it prevented competitors from stealing great team members.
Let’s assume that this month the sales team sold 55 systems at $3,000 each. That means that on the first 40 systems, the sales people earned 15 percent commission, or $18,000. On the 15 systems over the bonus line, the company paid the sales people their normal 15 percent or $6,750 in commission and also paid $6,750 based on their contribution to the company—$3,375 in cash and $3,375 in retirement money. Since the company has three sales people, the average cash bonus worked out to just over $1,000 per month. The average sales person also has $1,000 put aside for retirement or about $12,000 per year.
Any employee who stayed with the company would have a tidy nest egg for retirement and the company would be taking care of a 10- or 15-year employee in the case of sickness or retirement.
In addition, the employee gained control of the money (was "vested") in the retirement plan after five years. At any point the employee would have five years of money not vested, which would be kept by the company if the employee left. For an average employee, this could mean that a five-year veteran would lose as much as $60,000 in non-vested savings. That means a competitor would have to provide large compensation.
The result of these twists? A team that is motivated to sell a maximum amount of systems. A team that cares about how much each member makes, how much the company sells and their contribution to it. Finally, a team that is virtually impossible to steal and will be with the company for many years.