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While I can't comment on salesman's compensation structure specifically, I do believe there is a way to provide an incentive to sales people and the staff as a hole that is fair.
I believe it was Kevin Kehoe at a SIMA symposium who laid this concept out. His version may be different, as what I recount here is the solution I'm ironing out for our company. It's not tested with us yet, still in the planning/development stages.
The goal of any bonus or incentive system should be to reward results. Meeting goals alone is simply meeting an expectation and I don't believe should be incentivized. However, exceeding expectations, exceeding the goal should be rewarded. Rewarding results that encourages team contribution and participation should also be achieved, while allowing the individual performer to also be rewarded for his/her excellent performance in achievements above the stated goal.
The basic method of giving a bonus comes from exceeding gross margin/contribution or even percent contribution to admin and profit, considering direct costs, indirect costs and equipment. While gross margin is the contribution to overhead after paying direct costs only, I believe that your front line employees should also be held accountable to indirect costs they can control, such as indirect labor (e.g. overtime, equipment maintenance, other non-billable hours), equipment maintenance, repairs and fuel, small tools and supplies, etc. These are all things they can control in the field and can influence in their daily activity. The salesman may sell the job, and if he's involved in any of the pre production, production or post production part of it, he also contributes beyond direct expenses. His salary may be purely administrative, but his efforts will directly effect what's left for admin and profit.
Administrative expenses should be relatively fixed. Direct costs are directly proportionate to the job while indirect overhead is slightly variable, but largely fixed if controlled. The costs can be predicted, and if managed, will stay in check.
No one person, manager/owner, etc. can run the company successfully on their own. It takes a team effort of working together to be efficient. No one becomes a high profit company from doing just one or two things right. Rather, they have to perform well consistently day in and day out and meet their goals and make adjustments accordingly to be successful year in and year out.
Here's a suggestion on how to provide bonuses:
When the gross margin or measure used for the goal is surpassed, an incremental percentage is put into a bonus kitty to be distributed to all eligible employees. For instance,
Increment 1: .01 to 15.0% beyond Goal: 20% of excess to bonus
Increment 2: 15.1 to 40.0% beyond Goal: 35% of excess to bonus
Increment 3: 40.1% beyond Goal: 50% of excess to bonus
Whether you make it a straight calculation or marginal increase is your own choosing. So if you exceed the goal by 10%, which is $100,000, there is now $20,000 to provide bonuses. The company keeps $80,000 to reinvest in equipment, facilities, working capital, etc. It does not hurt the company to provide a larger share the more the goal is exceeded since the budget has been met, and employees get more as the company does better.
Distributing is based on points. Employees earn points in a myriad of ways that can be simple, creative, whatever. The sum total of all the points earned by employees is divided into the total bonus amount providing a dollar value per point. The value of each individuals bonus is calculated and distributed based on the points they have earned/accumulated and the calculated value of each point.
This method provides the entry level tech to have an opportunity to make a bonus, modest it may be, as well as the salesman, foreman, supervisor and anyone else you deem eligible. The ability for the person to earn points towards the bonus could be based on: Seniority, attendance, job position/description, training completed or certifications earned, driver's license in good standing, hours worked, peer to peer evaluations, etc.
Make it possible for enough points to be rewarded for enough different things that are relatively easy to calculate/track, but that promote team work, personal accomplishment, etc. Someone is not going to be solely rewarded on the length of time in the company, or how popular they are or the position/title. A peer review provides opportunity for someone to earn points by being valued by their peers, this might be more heavily weighted in the calculations, a true team player who helps others earn more money will be valued by their peers. It does not benefit anyone to simply give out high marks to each other since the total points will be divided into the bonus, thereby just diluting the value of each point. Strong performers should be individually rewarded while weak ones will realize areas they need to focus on for improvement. (These reviews could also be used in management training and evaluation so there is a conversation about what types of things the person can work on to improve and earn more points).
The company does not pay out bonuses if the expectations are not met. Employees don't get a reward for coming in second.
While I see there potentially being some problems with this bonus system, I have yet to hear of a more fair system that is not easy to manipulate for short term benefit and that promotes the long term health of the company.
This type of system has the employees thinking not only about sales and the top line, but also about reducing waste and cutting expenses, since there are two ways to achieve the goals - produce more work then expected, and/or produce it at a lower cost then expected.
I think the key to any bonus structure, and in particular this one, requires continual feedback and updating so the participants in the game know where they stand. Frequent discussions about goals, progress, changes in the game plan, asking for ideas on how to improve and cut waste are all built into this type of model. Getting foreman to do add on sales or set up the sale for the salesman is beneficial - it gets the company closer to exceeding the goal.
I could see a variation where field employees are eligible for bonuses on gross margin while managers, and other people who are more responsible for the decisions about indirect overhead could be compensated more on controlling costs of production, but I see separating this out as making it more complicated and then an us vs them attitude creeping in.
While this system doesn't apply to just salesman, perhaps people can share their thoughts/ideas on this form of bonus and shine a light on any pitfalls they may see.
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