Five Keys to More Successful Sales Compensation Plans

Sales Compensation
Reading Time: 3 minutes

Studies show that many sales compensation plans fail to motivate salespeople and end up overpaying poor performers. Studies also show that most employees see no meaningful connection between their performance and their pay. With these unfortunate sales compensation realities, here are five keys for creating and managing a more successful sales comp plan:

  1. Make the plan a “win-win” for the company and the salesperson
  2. Use better sales comp to incent desired salesperson behavior
  3. Make your sales compensation plans easy to understand and administer
  4. Strike an appropriate balance between salary and variable sales compensation
  5. Structure sales comp plans to reward top sales performers

Let’s take a closer look at each of these sales comp plan essentials:

  1. Make Sales Compensation Plans Mutually Beneficial

Like any good compromise, a well-designed sales comp plan empowers both parties to win (and lose) together. How? Well-constructed sales compensation plans tie compensation to individual sales performance and at least one of these two essential elements:

  • Departmental sales performance
  • Overall company sales performance

Ideally, how much sales compensation gets tied to each component depends on how much the salesperson can impact bigger sales goals. Imagine the possible results if each salesperson was as concerned about overall goals as individual ones.

  1. Incent Desired Salesperson Behavior

Too often business owners complain their sales team is not selling preferred products and services. In other words, the sales team spends too much time on less profitable products and accounts. Time and again, the problem lies in how the sales comp plan was written. Let’s face it, any good salesperson will spend their time on activities, products, or accounts most financially lucrative for them. Well-designed sales compensation plans incent or reward sales activity that support company goals as well as individual ones.

  1. Make the Sales Comp Plan Easy to Understand and Administer

Salespeople need to understand their incentives and how to earn them. If sales compensation plans involve too much detailed tracking of performance indicators, they will confuse employees and waste management’s time. To avoid this, be sure to build in easy links to big-picture performance results: Did company sales go up or down? Did client retention remain high? Is productivity increasing or decreasing? By linking individual sales performance to metrics like these, your plan will be clearer and better received.

If you aren’t sure if your sales comp plan is easy to understand, ask a salesperson to explain it to you. Ask where they will spend most of their time. The plan’s administrator can also give keen insights. If it takes too long to calculate monthly or quarterly sales quota results, the plan isn’t simple enough for the sales team to understand.

  1. Strike the Appropriate Balance between Salary and Variable Sales Compensation

Finding the optimal balance between base salary and variable sales compensation can be challenging – but worth the effort. How do you keep salespeople motivated with a modest salary, yet pay enough to attract the kind of salesperson you want? And how do you minimize the risk of overpaying a salesperson having a poor sales year?

Key issues to consider include:

  • Annual growth needed
  • Expected annual percentage of client retention
  • Introduction of new products
  • Focus on new sales verticals

If significant sales growth is needed, the sales comp plan should base a much larger percentage of compensation on “new business”. If modest growth is expected and client retention is crucial, higher commissions for retained sales are required. If new products are being introduced or new verticals pursued, then higher sales commission percentages are needed for those areas.

To benefit from better sales comp, you also must determine the annual sales level where commissions or bonuses kick in. Too often, variable sales compensation is awarded when sales performance is too low.

  1. Reward Top Performers

When is it safe to reward a salesperson with extra compensation? When they have achieved 100% of their quota and hit all required sales comp plan elements. You must also pay salespeople handsomely beyond their quota. Here are 3 key reasons why:

  1. They did what you asked. Write the plan so salespeople receive a large bonus when they achieve 100% of their sales quota.
  2. “Sandbagging” goes away. Your salespeople will continue to push even at the end of the year. Salespeople who receive better sales comp via escalated bonuses and commissions beyond 100% sales quota attainment work harder. Don’t place a limit on their earnings; in a great year, your top salesperson may be the highest earner in the company. That’s okay. If results are that good, don’t let managerial envy or greed interfere.
  3. You can attract better salespeople. Great salespeople are attracted to companies that offer bonuses and escalators at and beyond 100% of quota. Simply put, if salespeople aren’t focused on what they would make at 100% of quota and above, you don’t want them!

 The Bottom Line:

Effective employee incentive and sales compensation programs are very powerful when employees understand the connection between performance and rewards. Sales compensation plans that include all five of these key elements will help transform average performers into outstanding ones! Better sales comp plans are something our licensed Sales Xceleration Advisors design and implement for their clients. To learn more, click here to find your nearest Sales Xceleration Advisor, or contact us at 844.874.7253.