Since ancient civilizations began trading goods, certain individuals have consistently excelled in this process. The sales profession, among the oldest and most widely recognized, remains essential for businesses of all sizes today. Sales talent is highly prized within companies, often even more so than top executive roles like CEO or CFO. This is largely due to a straightforward but crucial strategy: the Sales Compensation Plan.
Nothing speaks louder to a recruiter than a top-notch Sales Compensation Plan when it comes to attracting and retaining sales talent. Paying too little risks losing valuable team members or facing high turnover rates, while overly generous compensation may lead to complacency and reduced sales performance. Crafting a Sales Compensation Plan involves more than just adding variables and bonuses to a contract—it’s a nuanced process. In this article, we, as experts in the field, will guide you through the best practices/tips for developing an effective Sales Compensation Plan.
First, let’s clarify what a Sales Compensation Plan entails. We define a Sales Compensation Plan as the payment framework designed to reward sales team members for their outstanding performance. This incentivizes them to excel, thereby driving increased revenue for the company.
Having said that, here are some characteristics on the best Sales Compensation Plan:
- Alignment with Company Goals: Effective sales compensation plans are closely aligned with the overall goals and objectives of the company. This ensures that sales efforts are directed towards driving outcomes that are beneficial for the organization as a whole.
- Clarity and Transparency: The plan should be clear and transparent, with sales representatives understanding exactly how their compensation is calculated and what actions they need to take to earn rewards. Ambiguity or confusion can lead to dissatisfaction and decreased motivation.
- Fairness and Equity: The plan should be perceived as fair and equitable by all sales team members. This means that compensation structures should reward performance fairly based on objective criteria, such as sales volume or revenue generated.
- Motivational Incentives: The plan should include motivational incentives that inspire sales representatives to achieve their best performance. This can include bonuses, commissions, or other rewards tied to reaching specific sales targets or milestones.
- Flexibility and Adaptability: A good sales compensation plan should be flexible and adaptable to changing business conditions. It should allow for adjustments based on shifts in market dynamics, product offerings, or other factors that may impact sales performance.
- Supportive of Long-Term Relationships: While short-term incentives are important, the best sales compensation plans also consider the long-term relationship between the salesperson and the company. This may involve incentives for building and maintaining customer relationships, as well as opportunities for career growth and development within the organization.
Now that we’ve explored the key characteristics of an effective sales compensation plan, it’s time to delve into the process of constructing one. By understanding what makes a compensation plan successful, we can apply these principles to create a customized plan that aligns with the specific goals and values of our company. Let’s examine the fundamental steps for designing a compensation plan that not only motivates our sales team to achieve their short-term goals but also fosters strong, lasting relationships with both customers and the company.
We have define 6 key steps or aspects to creating a Sales Compensation Plan:
- Clarity in Goals: defining the objectives and goals that the sales compensation plan aims to achieve. These goals could include increasing sales revenue, acquiring new customers, retaining existing customers, or promoting specific products or services. By having clear objectives, the entire sales team understands what they are working towards and how their efforts contribute to the overall success of the company.
- Grasp Your Sales Positions: Understanding your sales roles entails identifying the different roles and responsibilities within your sales team. This could include inside sales representatives, outside sales representatives, account managers, sales managers, etc. Each role may have different responsibilities, targets, and performance metrics that need to be considered when designing the compensation plan. It’s essential to tailor the compensation structure to each role to ensure fairness and effectiveness.
- Selecting the Appropriate Compensation Framework: Choosing the right compensation structure involves determining how sales representatives will be rewarded for their performance. Common compensation frameworks include salary, commission, bonuses, profit-sharing, or a combination of these. The chosen framework should align with the company’s goals, sales strategy, and industry standards while also motivating sales representatives to achieve desired outcomes.
- Define Transparent Performance Measures: Setting clear performance metrics is crucial for evaluating sales performance and determining compensation. These metrics could include sales revenue, number of new accounts acquired, sales targets achieved, customer satisfaction ratings, or any other key performance indicators (KPIs) relevant to the company’s objectives. It’s essential to communicate these metrics clearly to the sales team and ensure they understand how their performance will be measured.
- Decide on Compensation Amounts: Determining compensation levels involves setting the specific amounts or percentages that sales representatives will receive based on their performance. This could include base salaries, commission rates, bonus structures, or other incentives. Compensation amounts should be competitive enough to attract and retain top sales talent while also aligning with the company’s budget and financial objectives.
- Establishing a Transparent Payment Schedule: Establishing a clear payment frequency involves defining when and how sales representatives will receive their compensation. This could be monthly, quarterly, annually, or based on specific milestones or sales targets achieved. It’s crucial to communicate the payment schedule clearly to the sales team to avoid confusion or misunderstandings.
So, effective sales compensation plans play a vital role in driving sales performance and achieving organizational goals. By aligning with company objectives, offering clarity and transparency, ensuring fairness and equity, providing motivational incentives, and supporting long-term relationships, these plans can empower sales teams to excel and contribute to the overall success of the company.
As we’ve discussed, constructing a successful sales compensation plan involves careful consideration of various factors, including defining clear goals, understanding sales roles, selecting appropriate compensation frameworks, setting transparent performance metrics, determining fair compensation amounts, and establishing a transparent payment schedule. By following these fundamental steps and incorporating best practices, companies can create compensation plans that not only motivate their sales teams to achieve short-term objectives but also foster lasting relationships and drive sustained growth.
Ultimately, a well-designed sales compensation plan serves as a powerful tool for maximizing productivity, increasing revenue, and accelerating business growth. By investing time and effort into developing and refining these plans, companies can position themselves for success in today’s competitive market landscape.
“It is very useful to leave space in the compensation budget to incentivize and promote specific and specific behaviors, for example, incentivize in the short term some metric that is declining due to calls, meetings, pushing new products, discounts, etc. It is difficult for compensation plans to be flexible or it is not advisable for them to have to be modified very frequently. So, these special budgets are very effective to react effectively as necessary.”
Jose Miguel Guerra – Head of Sales at Xepelin
“For me it is important that it is very easy for the seller to understand, that it is trackable and measurable day by day. You should consider edge or dangerous cases that happen if a deal exceeds the average and triggers commissions abruptly, it happens a lot when there are accelerators or extra incentives. Compensation plans must be auditable.”
Emilio Segreste – Head of Sales at Grupo Defensa
“A good compensation plan usually includes 3 factors: fixed salary + monthly/quarterly commissions + annual bonus, it is necessary to understand that each of them has a different action factor and, consequently, our payment model must maximize what we want to maximize.
Fixed salary: allows us to ensure a minimum payment that, in a sales profile, should cover close to 60% of the cost of living of our executive. Why? for 2 reasons in different senses: (i) the regressive: if the fixed salary is greater than 60%, there is little room to reward overcompliance (and reach 100% of what we can pay) so the best and worst salesperson will be statistically very close, avoiding the incentive to over-fulfill; and (ii) predictive: if our incentives are firmly placed on the fixed salary, we will attract an executive profile that is not commercially aggressive.
Commissions: we must define a “calculation unit”, which will be the unit with which we will calculate our commissions. In the SaaS world this unit is usually 1 recurrence (1 nMRR). This part encourages sales in 3 lines.
100% compliance: it must be calculated so that the company is cost efficient, meeting EBITDA and cashflow/breakeven > 0 in a predefined period. About 30% of the salary (considered 100%) should come from this “compliance base.”
Commissions between 100%-120% fulfillment: you should be rewarded with a climber who is “half the next climber” (>20%), for example, rewarding a 110% commission for what was sold between 100% and 120% compliance. If the fixed salary represents 60% and the baseline compliance adds 30%, this point 2. should add 10% to reach 100% and everything that adds between 110% and 120% will be “excess commission” (which we will pay with pleasure!)
Commissions on 120% fulfillment: if the goal is set well, here are the best salespeople, who we want to “earn more than everyone in the market” (even more than our CEO in the company). We will pay them a number close to 130% of compliance (this entire amount being >100% of the salary they would expect to earn per market).
Annual bonus: this number binds us to compliance with the company, team, sales area and has two effects: rewarding in the long term and preventively retaining talent so that our best salespeople are not stolen.”
Eugenio Llanos – VP of Sales at Healthatom
“The compensation plan is one of the most important tools in the arsenal of a CEO or VP of Sales to direct, guide, and drive the business strategy. However, it is important to understand that there is no generic commission scheme that can be applied to all companies, as it depends not only on the type of business but also on the growth stage it is in.
The most common mistakes I have encountered are:
- Not aligning the plan with the growth stage.
- Lacking clear measurement metrics.
- Lacking easily accessible reports and dashboards with automatic updates to check quota attainment and commissions.
- Not developing the habit of periodically reviewing whether sales executives reach their quota or not.
- Trying to create a plan without clear processes and well-defined responsibilities.
Some recommendations and comments that I always make to my clients:
- The plan should be as simple as possible.
- The plan should be reviewed and updated periodically (based on the length of our sales cycle), providing an opportunity for improvement but giving enough stability to see its results.
- You will never be completely satisfied with your plan; there will always be room for improvement, but it’s worse to not have one.
- Immediacy: any plan that does not generate a rapid feedback loop and does not impact the seller’s pocket will fall short as an incentive system.
Finally, once we have a basic action plan, we can complement it with other game dynamics that encourage the right habits and results, for example:
- Contests and competitions to encourage individual responsibility.
- Commissions and bonuses for collective results to encourage teamwork.
In my experience, considering these points will prepare us to start our compensation strategy, and while starting is the most important step, we must be clear that it is a process of continuous improvement.”
Diego Ventura – Regional Director at Tryolabs