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 connection between their performance and their pay.
With these unfortunate realities in mind, here are five keys for creating and managing a successful sales compensation plan:
- Make the plan a “win-win” for the company and the salesperson
- Incent desired salesperson behavior
- Make the sales compensation plan easy to understand and administer
- Strike an appropriate balance between salary and variable sales compensation
- Reward top sales performers
Let’s take a closer look at each of these sales compensation plan essentials.
1. Make the Sales Compensation Plan a Win-Win
Like any good compromise, a well-designed sales compensation plan empowers both parties to win (and lose) together.
A well-constructed sales compensation plan ties compensation to individual sales performance and at least one of these two essential elements:
- Departmental sales performance
- Overall company sales performance
Ideally, how much 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.
2. Incent Desired Salesperson Behavior
I often hear 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. Often, the problem lies in how the sales compensation plan was written. Let’s face it, any good salesperson will spend their time on activities, products or accounts most financially lucrative for them. A well-designed sales compensation plan incents or rewards sales activity that supports company goals as well as individual ones.
3. Make the Sales Compensation Plan Easy to Understand and Administer
Salespeople need to understand their incentives and how to earn them. If the sales compensation plan involves too much detailed tracking of performance indicators, it will confuse the employee and waste management’s time. Build in easy links to big-picture performance results: Did sales go up or down? Did client retention remain high? Is productivity increasing or decreasing?
If you aren’t sure if the sales compensation plan is easy to understand, have a salesperson explain it to you. Ask where they will spend most of their time. The sales compensation 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.
4. Strike the Appropriate Balance between Salary and Variable Compensation
Finding the right balance between base salary and variable sales compensation can be challenging. 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?
Consider some key issues, including:
- 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 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.
You also must determine the annual sales level where commissions or bonuses kick in. Too often, variable compensation is awarded when sales performance is too low.
5. 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 plan elements. You must also pay salespeople handsomely beyond their quota. Here are 3 key reasons why:
- They did what you asked. Write the plan so salespeople receive a large bonus when they achieve 100% of their sales quota.
- “Sandbagging” goes away. Your salespeople will continue to push even at the end of the year. Salespeople who receive 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.
- 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:
Employee incentive and sales compensation programs are very powerful when employees understand the connection between performance and rewards. A sales compensation plan that includes all five of these key elements will help transform average performers into outstanding ones!
Such a plan is something our licensed Sales Xceleration Advisors know well and can implement for their clients.