How To Design A Sales Compensation Plan

Feb 17

4 min

Designing a sales compensation plan is an essential task for any sales-driven organization. This guide will help you understand how to create a sales compensation plan and why it is crucial!

The Purpose of Compensation

Compensation can be one of the biggest motivators for your sales team. High performers will be continuously motivated and engaged - even after they've hit their quotas - if your sales compensation plan is structured correctly.

Similarly, average performers will also be kept on track by establishing an incentive strategy that ensures they keep up.

Areas to Focus On

As you develop your sales compensation plan, you should focus on three key areas as defined by the Harvard Business Review: simplicity, alignment, and immediacy.

Simplicity refers to the fact that your employees should not face any confusion when calculating their incentive checks. The goal is to make sure that they understand how they are paid to drive desired behaviors.

The way you compensate your sales representatives should also align with your overall business strategy. Whether you are focusing on profitability, customer success, or market share, your incentives should revolve around activities that drive these goals.

Immediacy means that your salespeople should be rewarded as soon as the proper behaviors are completed - don't delay compensating them because this can decrease your plan’s effectiveness.

Let’s review the best practices for developing these compensation schemes:

1. Create a Strategy

The first thing you need to do when designing a sales compensation plan is to create a strategy. Incentive pay can be a significant variable expense for most businesses, and it will likely involve every department, from sales and finance to human resources.

Your written strategy should outline the program's design, how you will implement it, and what metrics you will use to gauge its effectiveness. This strategy can also help you communicate the compensation plan to your sales team and other business divisions.

2. Establish Clear Goals

Once you have created a strategy, it is necessary to establish clear goals. The objectives related to your sales compensation plan should closely align with the overarching goals in your business.

This is an area we're looking at historical data can be very helpful. Analyze past growth and create projections for current and future sales volumes that need to be achieved.

Using a disciplined approach will ensure that you not only stay within the payroll budget but also that you are working towards your optimum sales targets. Similarly, your goal should ensure that the incentives are not driving wrong behaviors - sales goals should align with all organizational goals.

For instance, if your company goal is to boost revenues by selling a product, make sure that the incentive you choose motivates your sales team to sell that specific product.

3. Set Specific Targets

Setting specific targets for how employees earn incentive compensation – and when they get it - is also necessary. Make sure that this process connects your sales team’s success to their reward!

Your sales representatives should know what they need to do to receive any commissions or bonuses, and they should be aware of when these are paid out during the sales timeline.

4. Communicate and Incentivize

Choosing the right incentives, and communicating them, are vital to the success of your compensation plan. Here are a few different ways you can reward your employees:

Straight Salary

Straight salary is just what it sounds like - your sales team has an annual salary and no commissions. This option is not popular in sales since there is no incentive driving them to perform well.

Salary Plus Commission

The salary plus Commission option is the most common strategy as it tends to be the most effective. In this scenario, your sales team receives a portion of the profit they generate plus their base salary.

Commission Only

A commission-only compensation plan is a traditional method of paying sales personnel. They are not guaranteed any pay unless they make a sale, but there are risks associated with this type of compensation plan.

Draw Against Commission

A plan that involves a draw against commission is similar to the one described above - only your employees get a pre-determined advance each month. You deduct the advance from the total commission at the end of each pay period, and they get to keep the difference.

The risk with this strategy is that your employees could end up owing you money!

Territory Volume

The territory volume strategy involves assigning a team to a specific area, then providing incentive compensation based on how well that territory performs. The compensation plan can vary from salary plus commission to other different payment methods depending on what works best for your team.

5. Adjust to the Employee Type

All of your sales rules are different, so your sales compensation plan should adjust to every role. Consider the various responsibilities associated with each role, and tailor their compensation accordingly.

The key is to ensure that your sales reps are compensated based on the tasks that they can control. Sales managers may spend more time on administrative tasks than selling, so their sales targets should be different than a full-time salesperson.

6. Consider Non-Financial Compensation

While financial compensation is usually the primary focus of these incentives, you should also consider non-financial compensation. Yes, money is a powerful motivator. However, other types of rewards can encourage your sales teams to perform as well.

Work with your sales department to determine what non-financial compensation would be meaningful to them - whether it's tickets to a sporting event or an all-expenses-paid vacation, and there are likely other motivators that you can uncover here.

7. Use Software for Automation

Take advantage of the software and technology you have to automate the sales compensation process. Likely, your sales team is geographically dispersed, but collaborative and integrated technology will save you time and money.

Invest in the tools that can automatically feed payroll and commission data – this will eliminate the risk of human error and duplicated efforts.

8. Listen to Feedback

One of the most important things you need to do when designing your sales compensation plan is to listen to feedback.

Have interactive conversations with your sales teams and honestly discuss the compensation plans. Although you do not have to use all of their ideas, listen with an open mind and utilize the feedback that best aligns with your business goals.

Gathering feedback will encourage buy-in from your sales representatives and ensure you are motivating the right activities and results!

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