An effective sales compensation plan will strongly motivate and incentivize your salespeople to help your organization achieve their short-term and long-term business goals while improving and maintaining a profitable margin.
According to the Harvard Business Review, 85% of US companies have a sales incentive plan in place. However, less than 9% believe their compensation strategies are driving optimal sales performance and business results.
That means more than 90% of companies nationwide are wasting billions of dollars on their sales forces and failing to hit their business objectives.
So, how do you develop and execute a winning sales compensation plan that will align top sales talent with your goals?
Components of the Sales Compensation Formula
The foundation of the sales compensation plan will be dependent on several factors, such as assembling a planning team, prioritizing what your business is trying to achieve, defining the roles and responsibilities of your salespeople, bundling your employee benefits package, and accounting for selling approach and sales cycle.
1. Build a Compensation Planning Team
A sales compensation strategy cannot be executed alone. Instead, recruit key players across your entire organization to help bring your plan into fruition.
Build your team with at least one director, vice president, senior manager or representative from your sales, marketing, finance, and HR departments.
Also, make sure that your legal team is aware of the changes to come so that they can review your plan in a timely fashion.
2. Prioritize Your Business Objectives
You keep hearing to align your compensation plan with your business objectives. But what exactly are they?
This is a perfect time to reevaluate what matters to your company as a whole.
Less than 9% of US companies believe their compensation strategies are driving optimal sales performance and business results.
With your planning team, ask yourselves the following questions:
- Are we more concerned with increased revenue or cash flow?
- What’s more important, the average contract length or size of the deal?
- Should we prioritize improving our retention rate or upsell rate?
There are no “right” or “wrong” answers here.
However, your planning team should focus only on 2-3 concise goals at a time. Otherwise, it will be more difficult to align the rest of your organization with these objectives.
Some other goals to consider include acquiring specific customers, cutting expenses, and driving sales for a given product or service.
3. Define Salesperson Roles
Some products and services sell themselves. Other times, customers need some level of guidance or assistance in order to complete a purchase.
Money drives behavior. So, if a salesperson is playing a strong role in your sales process, then you should recognize that with a competitive mix of base salary and commission.
The opposite also holds true. If the sales process is more collaborative and requires more heads to finalize a purchase, then lower the commission rate.
One exercise is to create a sales positions chart, where each role is identified. Look back at job applications and descriptions to help match hiring criteria (knowledge, skill sets, years of experience, etc.) with appropriate pay.
You may even need to create junior and senior roles in order to adjust for new hires and promotions.
4. Create a Competitive Employee Benefits Package
Richard Branson famously said, “Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.”
A competitive employee benefits package will do just that - offer perks that are important to your candidates and employees.
Start by creating a master list of the benefits your company offers. Show every fully subsidized benefit they get from joining your team.
Here is a list of popular employee benefits you should consider offering:
- Health insurance
- Dental insurance
- Vision insurance
- Life insurance
- Pet insurance
- 401(k) with matching
- Profit partnership program
- High earning potential
- Non-recoverable draw
- Direct training with the company's CEO
- Potential for career growth
- Potential for management positions
- Paid time off (PTO)
- Flexible work schedule (4-day work week, option to work from home)
- Fun office environment and work/life balance
- Gym membership or discounts
- Relocation assistance
- Commute assistance
5. Factor In Selling Approach and Sales Cycle
Aggressiveness is another important factor to account for when creating your sales compensation plan.
We’re not talking about who has the shortest fuse, but rather who’s more willing to ask the hard questions and bounce back from failure.
Salespeople with strong D-personalities are more inclined to welcome failure due to their tenacious nature to hit the goals they've set for themselves.
If you’re looking for salespeople to generate and close new leads, then offer a higher commission. If you opt for low outreach and upselling existing accounts, consider a more conservative pay.
Make sure to account for the sales cycle and types of products or services being sold, too. Will your sales team need to sell once or multiple times a year? Should people who sell newer products be rewarded higher than those who sell older products?
Example Sales Compensation Plans
Remember, there are no “right” or “wrong” sales compensations plans.
They each have their pros and cons. What matters is which plan is going to incentivize your sales team and help your company realize their business goals.
1. Salary Only
Salary only is the most straightforward compensation plan: salespeople have a fixed annual income with no commissions or bonuses.
It offers stability. It’s probably favorable by the finance department because it is the easiest to manage. But it also the least common plan put into practice.
Why? Because your top sales talent are no longer motivated to work hard. Unless you have a strong company culture, don’t be surprised if they soon walk out the door.
We only recommend the salary only structure for companies that operate in industries that prohibit direct sales, have small sales departments, or expect their salespeople to spend most of their time to other responsibilities.
2. Salary Plus Bonus
Salary plus bonus structure offers a fixed annual income and an annual, bi-annual or quarterly bonus for hitting a target number sales.
This plan makes it easier to predict if a sale rep will miss, meet, or exceed their quota. And if they are consistently hitting their target, then they are somewhat guaranteed more of a stable income.
However, top performers may think twice before onboarding if the bonus isn’t high enough or if they’re being micromanaged. If they do decide to stay, your sales team may just perform the bare minimum to get by.
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3. Salary Plus Commission
Salary plus commission is the most commonly used plan. It offers a fixed annual income plus commission sales, which are paid out weekly, monthly, quarterly, or bi-annually.
Salespeople are more productive, motivated, and independent under this plan. It provides a safety net when business is slow or the market is volatile. Plus, the company is able to grow more aggressively.
The obvious drawback is that reps won’t get commission if they don’t make any sales. This structure can instill a more competitive environment around the office. Also, it makes it more difficult to change accounts and direct salespeople to perform non-sales activities.
60:40 is the industry standard for fixed income and variable compensation. This can adjust depending on the complexity of the sale and sales cycle, involvement of the sales rep in the customer’s purchasing decision, origin of leads (i.e., were they provided or generated by scratch?), and selling approach.
4. Commission Only
The commission only model pays out salespeople after performing certain activities or milestones. For example, a sales rep gets $1,000 for every new account or upsell.
It’s not the most attractive structure, but that’s the point. This compensation plan invigorates superstars who are against quotas, confident in their sales ability, and aligned with your company’s goals. For the right salespeople, the payout outweighs the risks.
It’s still equally as terrifying if you aren’t making sales. Non-performers will naturally be weeded out. A lack of steady income can burn out reps who feel overworked or stressed.
This plan also doesn’t account for market penetration or the quantity of opportunities, meaning there could be an severe imbalance of leads among salespeople.
5. Territory Volume
The territory volume sales compensation plan is team-oriented. Multiple reps work together in clearly defined areas and are paid for their efforts across said regions. Total sales are then split evenly among all sales reps in that given territory.
It’s ideal if sales territories are clearly outlined and rich enough to support competitive wages. Otherwise, they run the risk of losing their territory to competitors.
6. Profit Margin
Profit margin, also known as gross margin, compensates based on profit rather than sales. For example, if $100,000 is generated in sales and $70,000 is spent on the cost of goods sold, then the profit margin is 30%. The commission is then calculated as a percentage of the margin.
It’s an attractive model for those who are interested in long-term incentives (e.g., company shares). It also helps drive the sales of certain products and services, whatever yields the most profit for the sales rep.
Keep in mind that this strategy should only be used if you’re focused on generating revenue and able to properly track profit margins. Also, sales reps will need some level of discounting power or else it makes for a harder sale.
Communicate, Implement, and Measure
Once your planning team has picked a sales compensation plan, the next step is to address it to the rest of your organization.
High-level executives should speak about the plan with utmost transparency. Focus on the good - new business goals, higher earning potential, more benefits. Do prepare to answer questions as seasoned players may contend these new changes.
Once everyone is on the same page and the strategy has been implemented, monitor your plan and analyze the results after 3-6 months. When under review, have your planning team ask themselves:
- Are our sales objectives clear and easy to understand?
- Do the incentives encourage wanted behavior or unintended consequences?
- Are we on track to achieving our short term and/or long-term business goals?
Adjust accordingly and revisit the plan in another 3-6 months. Your compensation plan should be strong enough to attract, motivate, and retain top sales talent while aiding your company as a whole.
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