Guide to Designing a Successful Sales Compensation Plan

Winning sales compensation plans are the secret ingredient to not just hiring professional sales representatives, but also motivating them to deliver the best performance.

What is a Sales Compensation Plan?

A good sales compensation plan needs to set the expectations for reps with clear goals so they know what is expected of them. There are three essential elements of a sales compensation plan:

• Base Pay: The paycheck that reps get which is unaffected by their performance.

• Incentives: The extra amount that reps get based on meeting certain sales targets. 

• Kicker: Any additional perks that they get based upon closing deals and competitions.

Sales Compensation Challenges

Highly credible sales companies understand the criticality of their compensation plans and work efficiently to plan, communicate and monitor those plans. While creating a sales incentive plan, there are a few challenges that many organizations may stumble upon:

• Crafting Sales quota that drives revenue

The first and foremost thing which every sales rep is keen to understand is what their quota is and how to align it with the sales compensation plan. If the quota does not seem attainable, the plan will eventually not encourage the sales employee to drive the ideal results to the company.

• Complexity in the Sales Compensation plan

With the rising complexity in businesses, one cannot take the risk of putting anything and everything in the sales compensation plan. While the old plans might have paid on revenue only, present-day plans might not just pay on profits or revenue but on the revenue type too and the type of product. Such combinations can actually weaken the C-level objectives.

• Calculating Cost and ROI

It is quite important to have the answers to the following burning questions. Chief executive officers would want to know the answers:

• What exactly do we get out of the sales incentive plan?

• Is it worth the cost? If yes, how much?

How to Develop the Winning Sales Compensation Plan

While it is daunting to surpass the challenges, but following these highly effective ways will ensure your sales compensation plan drives profitability and growth:

Building the Sales Planning Team

You must have the key team members from each sales planning team so your final compensation plan provides incentive across to the whole corporation. Following are the key members of your team:

Sales Leadership or Sales Team: Experienced sales representatives keep market demands in consideration and truly comprehend the effect of incentive plans in hiring and retaining sales talent.

Human Resource: HR usually takes care of the incentive strategies and policy or terms & conditions of the company. HR will mostly give attention to employees’ job roles to facilitate the career path within the sales department.

Finance: Often, the finance department concerns about the cost of the compensation plan. They are responsible for the design of the plan and cost assessment.

External Professionals: It is best to introduce the design experts to provide excellent work practices, vast industry knowledge, and expert data insights.

Legal Experts: Prior to sharing the sales compensation plan with the sales team, it must undergo a legal review.

ABC of the Sales Compensation Model

After the compensation team is fully built, outline the base of your plan. To put it more simply, use the ABCs of a sales compensation plan:

Align Sales Roles: Always remember that varied compensation plans are necessary for each sales role. So, each and every plan must be customized to the individual’s roles in the sales process.

Base on Company Philosophy: Just like your company culture, every company has its own payment policy. Certainly, fair market pay has a huge impact on hiring, motivating, retaining talents, and switching costs for representatives. Make sure you reward the top-performing employees across the entire year.

Construct to Drive Sales Performance: A powerful sales compensation program must align with your company goals and give managers targets to accomplish as this kind of approach will improve the sales performance.

Establish Pay Mix

Pay mix is the portion of salary and incentive/perks at target goals, which means ‘quota’. The sum of the salary and incentive must be equal to the Total Target Compensation for the job. Pay mix varies by the type of job and several factors that consist of the sales process, type of sale, features, and types of customer.

Always keep in consideration that as sales managers have a bunch more responsibilities than reporting reps, so they should get the less aggressive pay mix. The less aggressive mix aims for 80/20 while the more aggressive mix goes for 50/50 or 60/40.

Set Upside Potential

Upside potential refers to incentives/perks that are available to the top performers, usually the 90%, and usually, it is computed as a multiple of incentives. Upside potential is a crucial element to assist the corporation to hire and retain fresh blood in the industry.

You need to tell about the high performance of the company as it plays a vital role. Also, you need to differentiate the incentive amount for top performers from average performers.

Establish Team Performance

What is a threshold? It is the beginning of accomplishment where the compensation plan starts to pay the incentive. Usually, the threshold means the minimum acceptable performance, beyond which a representative would not be in association with the organization anymore.

In the case of an account executive with a good base of retained business, an organization might have a hard threshold. On the other hand, it may not have a threshold, when there is a business manager for whom every sale brings in another increment.

Set Performance Measures and Priorities

Performance measures talk about the focus elements that are very essential for each and every role. Each measure must have significant priorities in place of the corporation and that is in the control of the role.

The important element here is to have a goal of three or more measures with no less than 20% weight.

Establish Performance Levels and Timing

For each and every performance measure, the corporation should set the performance level at which that particular measure will be monitored for the sales compensation plan. For instance, the company may decide on a revenue measure for sales representatives at an individual or region level, whichever exists.

Each performance measure will be evaluated and paid, be it, monthly or quarterly. The decision made for measurement levels and timing can greatly impact the behavior of sales representatives.

Set Design Mechanics

Mechanics form the connection between pay and performance. It is the stage where many sales executives would jump first instead of going through the previous steps. Although, mechanics are a little complicated with several rates, gates, hurdles, point systems, accelerators, and the fact that they can be divided into 3 components.

Rate based mechanic: Also known as commission, it pays a definite percentage of revenue per unit of sale.

Quota based mechanic: It pays an incentive for meeting a particular goal or quota and may increase or decrease the payout to the performance level.

Link: It creates an interdependency or relationship between two performance measures.

Team Coordination

A complete sales compensation plan consists of a wide range of sales and management roles. Plan designs should interface as an all-inclusive team to work with more cooperation as a team.

This team coordination will check for how sellers work with each other in the sales process that comprises: account managers, business developers, product experts, channel partners, and sales support professionals.

Align Objectives and Quotas

All company objectives and quotas must be market-based. It should represent the opportunity in every accounting assignment. Also, it must have a process that is well comprehended by the sales representatives so they can incorporate their inputs at ease.

Clear Approach to Governance

An excellent governance process works similar to the constitution of the sales incentive plan which progresses from a big set of plans to a rewarding program that helps the organization grow massively.

Not having an excellent approach to governance will make the laws go by all around the year in a reactive mode.

Monitoring the Sales Compensation Plan

The last step is to execute the compensation plan which is easily comprehended by the sales team. Once executed, your sales compensation plan should be evaluated to see if any changes are required.

Tools for collecting information and monitoring how your plan is working can be very useful. If you observe that there is still scope for change or improvement, then ask yourself these questions:

Does every one of the sales team understand how this plan works?

Are incentives motivating sales reps enough to perform the best or are they just futile? Are we on the same page to accomplish organizational goals?

At the mid-year, monitoring of the sales compensation plan will aid you to decide the ideal with your plan in place.

Conclusion

Understanding how to design a sales compensation plan can help you build a strategy that rewards your sales team for the good results they have delivered. Following this guide will help you create such an agile sales environment that makes sense for your business goals and motivate your sales representatives too.