Study Reveals Alarming Sales Compensation Plan Trends

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Your company’s sales compensation plan has a big impact on your team’s motivation, performance and results. No surprise there. What might be surprising, however, is that many companies sabotage sales success with weak, poorly understood, or mismanaged sales compensation plans. Recent results from an ongoing study confirm that such plans are the unfortunate norm; and they leave a trail of missed opportunities for small and medium-sized businesses (SMBs). Let’s see what the study revealed, and how you can use these findings to drive better sales performance with an effective sales compensation plan.

About the Study

The statistically significant results are from Sales Xceleration’s Sales Agility Assessment® 4.0. The SAA 4.0 tool analyzes sales management practices and sales performance behaviors at SMBs across the U.S. The results noted below have been compiled from hundreds of responses, primarily from business owners, CEOs and sales team leaders, including VPs of Sales and Sales Managers.

Alarming Sales Compensation Plan Trend #1: Misalignment of Goals and Behaviors

As we noted in this article, a well-designed sales compensation plan incents or rewards sales activity that supports company goals as well as individual ones. Unfortunately, according to the study, this is rare. In fact, it happens in less than one in three U.S. SMBs.

Addressing the question, Are your organization’s compensation plan(s) bringing the desired results/behavior you seek?”, only 30% of respondents answered, Yes, the sales team is focusing their time … consistent with Management’s objectives”.

Slightly more than half answered with “the sales team focuses some of their time … consistent with Management’s objectives, but not fully”; while 16% admit that, “No, the sales team seems to focus on products/customers/verticals that are different than what Management would like”.

Frankly, anything less than a full-on “yes” should be unacceptable in any sales organization. In 70% of cases a poorly designed and/or poorly understood sales compensation plan is likely to blame. Perhaps more worrisome is the likely gap in communication and understanding between sales team leadership and their salespeople. If the sales compensation plan is poorly designed or communicated, sales team members will naturally default to what is easily achieved and most beneficial for their own interests.

Best Practice Takeaway: Make sure sales performance goals are clearly communicated, understood, and have commitment from both management and sales team members.

Alarming Sales Compensation Plan Trend #2: Plans Remain Unchanged

Perhaps one reason Sales Rep activities don’t align with company priorities is because plans too often lie dormant. According to the study, nearly two in three respondents report changing their sales compensation plans less than once per year. Two in three! Not changing your compensation plan annually sends the message that you want exactly the same revenue each year, by sales rep, by product, etc. – how can that be the case when your business needs change frequently?

Six percent of respondents change their plans more than once per year. Depending on your industry and sales conditions, this could be acceptable. However, changing a plan too often could be as detrimental as not changing it often enough. Changes implemented too frequently can keep salespeople off balance and confused about expectations.

Three in ten SAA respondents reported changing their plans at the beginning of each year. For most companies, this frequency is optimal, if management wisely evaluates and updates plan components.

Best Practice Takeaway: Update your sales compensation plan annually. Make minor adjustments if necessary between primary update cycles but reinforce key goals with salespeople throughout the year.

Alarming Sales Compensation Plan Trend #3: Pay Mix Between Base and Variable Pay is Not Appropriate

Simply put, straight commission sales compensation is a terrible idea. While straight commission plans may seem low-risk and high-reward for the business owner, they seldom work. They can cause higher turnover, reputational risk, and other long-term problems. Nonetheless, 15% of respondents utilize such a plan.

On the flip side, nearly 1 in 5 companies use a base salary-only plan. While this could be appropriate if sales team members act as “order takers” and do not need to demonstrate true sales skills, this approach is not appropriate for sales organizations. (Order takers really aren’t sales professionals, are they?)

Remaining responses broke fairly evenly between high base salary, low commission (25%), low base salary, high commission (21%), and finally, a structure that pays half base salary and half commission. Twenty percent of respondents use this formula. I think this 50/50 approach is the best starting point for most sales organizations. Deviations could depend on economic conditions, industry standards, and territory and market norms, among other factors.

Best Practice Takeaway: Don’t use a straight commission plan. Do start with a 50/50 plan and adjust as appropriate for your market.

Alarming Sales Compensation Plan Trend #4: Salespeople Aren’t Asked to Demonstrate Upfront “Buy-in” to the Plan

Perhaps the most surprising (and unforgivable) result was that less than half of respondents require their salespeople to sign the sales compensation plan. Worse yet, 40% admit their sales compensation plan isn’t even in written form!

Less than one in three companies said they provide a copy of the written plan, but do not require a signature.

If your sales team members don’t sign a written copy of the plan, they are not truly committing to achieving its goals, let alone to a full understanding of the plan. What’s more, the absence of a signed plan puts the company in a poor position if corrective action, discipline or termination for poor performance become necessary.

Best Practice Takeaway: Require each salesperson to sign a written sales compensation plan to indicate their understanding and commitment. Always!

The Bottom Line:

Sales compensation plans are powerful tools when management and sales team members understand and act on them with unity and commitment. Unfortunately, our SAA 4.0 results reveal that SMBs aren’t using sales compensation plans effectively or to competitive advantage. To learn more about how your organization fares regarding best sales practices, take our Sales Agility Assessment 1.0. This version of the SAA includes 10 questions that can quickly highlight areas where your organization needs improvement. It’s quick, it’s easy, and it’s free! Then, to find your nearest Sales Xceleration Advisor, click here, or contact us at 844.874.7253.