Do You Know the 4 Parts of a Successful Sales Compensation Plan?

Money

In an early article on the Sales Xceleration website, I shared the 5 Keys to a Successful Sales Compensation Plan. In that article, I noted that successful plans accomplish the following. They:

  • Benefit both the company and the sales team employee
  • Incent desired sales behaviors and performance
  • Are easily understood, implemented and managed
  • Strike the right balance between guaranteed and variable compensation
  • Reward top performers

Now let’s dig a little deeper and look at how you can accomplish these goals.

Define your sales objectives.

Speaking of goals… What are the specific sales goals of your organization? Here are some common ones:

  • Increase revenue (by how much?)
  • Expand market share (by how much?)
  • Win new accounts (how many?)
  • Expand key accounts (how much additional revenue per account?)
  • Win back lost customers (which ones are worth the effort?)
  • Improve account management and customer service (what are the key performance metrics?)
  • Reward sales process activities (how?)
  • Introduce new products (when and how?)

businessman on tightropeThe 4 Parts of a Winning Sales Compensation Plan

Now that you know the overall and specific goals for your sales team, how can your sales compensation plan help to make them achievable? Here are the four essential components to consider when designing your plan:

Salary

If you pay your Sales Reps a base salary, keep it low enough to allow room for sufficient incentives and motivation, but high enough to give your Reps some “breathing room” in meeting ongoing financial obligations. Ideally, the base salary should range between 25 and 50 percent of anticipated total compensation. Obviously, this is a sliding scale: as the Salesperson gains more incented sales, the ratio of salary to total compensation will fall.

Commission

One option for a sales compensation plan is to forego salary and instead pay the salesperson a straight commission. Certainly, it can be tempting to base compensation on the results of the salesperson’s efforts. But be aware that straight commission compensation could be a disincentive that might keep potentially outstanding Sales Reps from joining your organization.

Whatever portion of the total compensation package is comprised of commissions, you can structure those commissions based on sales or gross profit. Be careful to avoid basing commissions on sales whenever the Sales Rep has any control over pricing. Why? Sales Reps are human; and basing commissions on flexible pricing only invites price reductions to make the sale.

A commission could also be in the form of a draw or recoverable draw. There are many occasions where it is appropriate to pay commissions prior to when a Sales Rep “earns” the commission. This is most often applicable in the early stages of a rep’s career, as he or she builds their pipeline. The decision to make the draw “recoverable” revolves around your desire to collect commissions paid if they are not “earned” within a particular time frame.

Bonuses

Adding a bonus structure to a sales compensation plan can incent the salesperson to aim even higher and reach new levels of success. Normally, bonuses should be paid after the end of the year for meeting or exceeding sales goals. The key benefit to an annual bonus is that you are paying this additional sum after your desired performance is already attained.

Other Incentives

Other incentives are generally non-monetary compensation such as trips or gifts. These are often associated with sales contests, but can also be a strategic and attractive part of a sales compensation plan. Incentives like these are best used for achieving short-term results, but should be significant enough to get the Sales Reps “revved up.”

The Bottom Line:

Along with baseline company benefits, an effective sales compensation plan can provide balance between financial needs and desires. They reward the Salesperson for meeting or exceeding goals, but also provide a safety net when conditions make it more challenging to close sales. Effective compensation plans are thoughtfully structured, with the right proportion of salary, commission, bonus and other incentives. They should also be designed so that they are easily understood, implemented and managed. Most of all, they create a “win-win” for the Sales Rep and the company.

If you’d like to learn more about the best way to structure an effective sales compensation plan for your company, contact us today. Our Advisors can help your sales organization achieve stronger sales performance through well-designed sales compensation plans and other sales programs.