Why are Sales Compensation Plans Important

A company is nothing if it doesn’t have sales.

There are plenty of ways to automate and utilize inbound methods, but having salespeople who take control of the deal and close new sales was the next level.

Building sales compensation plans for them can be a difficult task.

Because guess what? Salesmen don’t work for free.

Salesmen don’t work for free. Click To Tweet

They need to be paid, but how?

  • The first considerations are if your company is a startup or an established business?
  • What is the length of the sales cycle?
  • The delivery cycle?
  • What is it you’re selling?
  • Who are you selling to, C-level prospects, vendor managers, or small, one-man shops?
  • What is the pricing model because there’s a difference between selling jumbo jets and a monthly SaaS service?
  • How are the leads coming in?
  • Are you utilizing inbound and email campaigns?
  • Are sales being initiated through outbound calling?

There are several factors to consider when putting a sales compensation plan together.

Taking all of those variables into consideration and coming up with a fair and profitable comp plan that motivates and rewards sales reps for their efforts can take many forms.

A plan that rewards the best performers will attract quality sales reps and keep turnover low.

If you are capping your comp plan and rewarding top and underperforming reps the same, there will be a lot of turnovers.

That turnover costs money in time and training, so make a winning comp plan from the beginning.

You will need to understand the cost of sales.

A simple way to figure it is to take an individual’s base salary, plus commissions earned at 100 percent of quota, their potential bonus opportunities, and then divide by that salesman’s revenues to figure out the percentage that sales cost.

4 Types of Sales Compensation Plans

Here are four different sales compensation plan examples to consider for your sales reps:

1. Profit-Based Plan

Commission rates will change as profit margin levels increase. These types of plans will usually be based on invoice, product, or monthly averages of profit margins generated. The greater the profit, the greater commission – it scales – but it can be a double-edged sword because razor-thin profit margins mean razor-thin commissions.

2. Revenue/Quota Based Plan

Compensation is based on sales volume achieved over the previous sales period (monthly/quarterly) or on a percentage of quota achievement levels. Many plans are structured this way as it is an easy way to track and pay out commissions. Volume and quota attainment are the driving factors for many sales reps who constantly monitor their sales months vs. their determined quota.

3. Balanced Plan

Compensation is based on a combination of profit margin, revenue, and a third variable, like a targeted number of new clients or a targeted number of upsells, or a specific product or service the sales rep has been tasked with selling.

4. Group/Team-Based Plan

Bonuses go to all team members when monthly or quarterly sales goals have been achieved. This creates accountability and motivation for each member of the group or team because additional compensation is based on the continued efforts of each rep. This plan can either create a very competitive and productive sales team or one that can suffer from disharmony due to reps not pulling their own weight. Take caution when implementing this plan. It is a great motivator but can be counter-productive with the wrong team.

There are many other ways to tweak each of the sales compensation models or create additional combinations.

6 Reasons Why Sales Focus is Lost With Complex Compensation Plans

Some additional considerations to keep in mind are if the majority of sales are coming from a few long-term steady customers, the sales effort is minimal and the compensation should reflect that lower threshold of effort on the salesman’s part.

Also, inbound and marketing automation creates a larger pool of leads for a salesman, so the compensation should differ from that of an outbound new sales hunter who not only generates the lead but works it and closes it.

In a white paper by David Fritz of Growth Solutions, LLC entitled “Sales Incentive Compensation Best Practices Research” the firm completed a benchmark survey on sales compensation plans and practices.

The benchmarking effort was focused on sales compensation plans administration within sales organizations of 20 – 500 payees.

The benchmarking study consisted of approximately 30 confidential, in-depth interviews with participating companies.

The scope of the interview covered the following topics:

  • How companies develop, implement, and administer sales incentive programs
  • How companies view sales incentive compensation; as a tactical administrative tool or as a strategic sales performance tool
  • The costs associated with sales incentive program administration
  • The issues and challenges faced in program design, implementation, or administration
  • The characteristics and potential value of systems to help better and more cost-effectively manage sales incentive programs

The report goes on to detail how organizational complexity reduces sales productivity due to the high likelihood of having complex sales compensation models – the number of unique plans within an organization with different types of sales forces, incentive/bonus measures, and formulas to determine levels of compensation.

The more complex the organization and thus the sales compensation plan, the less productive the sales force.

The more complex the sales compensation plan, the less productive the sales force Click To Tweet

This is due to the ‘pain’ felt by the different divisions of the company – Executive Management, Finance, IT, Human Resources and Sales Administration.

Sales focus is lost due to an:

1Inability to provide real-time and accurate feedback to sales reps on their performance to goals and incentive earnings (e.g., show progress to all plan elements with updated credits/returns)

2Inability to pay salespeople more frequently or quicker after the close of the pay period due to resolution of data hiccups, manual “workarounds”, payroll delay, etc.

3Inability to provide detailed commission statements and frequent reports on performance along with the check

4Inability to include transfers, which have a big impact on every territory, into the monthly reports to reps and daily sales reports to managers

5Limited ability to run contests and recognition programs since they must be manually administered

6Inability to provide accurate leads, or sales development opportunities

I’d be remiss not to cover this last bullet in more detail since this is exactly what LeadFuze sets out to do.

LeadFuze is a software solution that helps you build lists of accurate leads automatically while integrating with sales outreach tools to allow you to contact those freshly verified leads.

sales compensation plans

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The more variables worked into a sales compensation plan, the more the chance of creating uncertainty in the sales force.

If salesmen are not given easy tools to accurately predict their take-home commission, there can be negative repercussions due to a lack of confidence and fairness in the plan.

An unsettled sales force is an unpredictable and unproductive sales force.

Crafting a sales compensation plan can surely be a difficult endeavor, but when you put one together that addresses the delicate balance of complexity vs. simplicity, it will be the kind of plan that drives and rewards performers who want to do well and not just pick up a paycheck every month.

It can mean the difference between a high-performing and low-performing, frustrated sales team.

How to Retain Sales Reps in Your Company

Draft talent, develop talent and then put that talent to the test when it’s ready for the spotlight.

Your job as a sales leader is much like that of a sports franchise general manager.

But as any fanatic knows, it’s a hard pill to swallow when a cultivated prospect turned star player leaves your team voluntarily in their prominence.

Hiring a sales rep is a challenge, but what about retaining sales reps? When a prized rep jumps ship on their own, it’s a similar feeling.

All of that time and resources devoted to onboarding, now gone.

Morale and optimism around heading into a new quarter with an all-star team, also gone.

Most obvious of all, a chunk of future sales and revenue, poof, gone — just walking out the door.

Hate to say it, but it gets worse.

It’s not just that top talent and subsequent quarters’ closed deals have left your organization, but it’s the fact that all of that goodness has been replaced with a demanding need to start from square one with a new rep — forget finding a great replacement, but securing a suitable one at the very least is difficult.

All while you’re forced to watch deals pass you by in the process.

It hurts in more ways than one, and you need to be working to stop the bleeding.

The obvious question is, how?

Which can’t even be answered until you answer the “why?” as in, why are reps leaving? Especially the good ones?

What is it that first triggers top performers to even entertain the idea of departure?

You better believe your sales compensation plan is a major reason, but there are others that I’ll get into as well.

Here’s the trick for retaining sales reps: Keep any thought of just how greener the grass might be from ever creeping into one’s mind in the first place.

It’s easier said than done, of course, as even the slightest crack in the door can tempt a rep to peer through, and eventually open it to leave altogether.

To help keep that exit closed and locked, the peephole taped up and out of commission, here are some things to consider — and pitfalls to avoid when it comes to retaining your reps.

Don’t draft talent just to fill gaps

Treat every hire like a superstar in the making. Typically, when a rep leaves, there is often misplaced comfort placed in a conclusion like “oh well, they just weren’t right for the role.”

It’s like “poor fit” is a get out of jail free card.

It wasn’t anything with their role, the compensation you were offering, or the culture you created.

They just didn’t fit, and oh well. That shouldn’t be the case.

The people you hire are just as much of a controllable factor as any of the other buckets presented below.

It’s a vicious cycle, though. The rep leaves, so you scramble to replace them, and hurriedly, you hire the wrong person — or maybe even the right person but fail to inadequately onboard them.

They soon leave, too, and off you go once again.

Simply, put as much work and effort into hiring the right sales reps as you do in keeping them around.

Adapt the mindset that you aren’t just looking for someone to fill a vacancy or a stop-gap — you’re looking for your next superstar.

Remember that no new hire is immune from improvement.

Whoever you think is the best quarterback to have ever played the game of football would have failed miserably had he been never taught how to properly handle the team’s playbook.

And the best actor? Nothing without months of preparation for their roles.

Catch my drift?

No matter how talented your reps are, they need proper onboarding.

In fact, it’s the number one reason reps leave their jobs voluntarily, according to our research — inadequate professional development, including coaching and training.

Not salary; not bonuses. That’s right, it’s nothing to do with your sales compensation plan. It’s… Development.

One-third of employees reported having left a job within six months of commencement, according to a survey led by BambooHR.

And worse, between 16-17% of respondents did so between the first week and third month at their new companies.

Thus, there isn’t time to waste.

Your goal should be to get reps to quota-bearing status quickly, but thoughtfully, and then coach them to success.

Ensure you’re buttoned up; all the way up — with crystal clear product messaging, a complete competitor landscape, and a bulletproof sales process.

And most importantly, that you’re doing all you can to pass that info along quickly, yet thoroughly.

Hold up your end of the bargain.

A dangled carrot loses its appeal if it’s delivered stale, half-eaten, or not even given at all.

Meaning, while incentives drive behavior, if they are not adhered to, or not paid accurately or even on time, rep satisfaction is sure to decrease.

A 3-8% error rate. Doesn’t sound too bad, right?

When it comes to compensation, it’s far too much.

Gartner estimates that sales comp plan administration carries a 3-8% error rate.

Automation, though, leads to faster payouts and greatly improves that figure, while also providing access to what-if scenarios regarding potential payouts and real-time visibility for increased motivation.

In the end, you can dangle whatever you want, but poor execution is de-motivating and difficult to come back from once even one mistake has been made.

Sales compensation should be motivating but complemented

Companies that pay the 75th percentile or higher see 50% less turnover, according to Xactly Insights’ aggregated, anonymous pay and performance data.

There needs to be balance, and this point is twofold.

“Balance” needs to be found between the base and variable pay being offered, meaning if your variable piece is lacking, the overall pay mix might not be motivating enough.

But balance here also means it isn’t always about the money (per the point above), and you need to steady your attack of retaining reps by figuring out financial compensation AND providing the opportunity for reps to grow professionally in a positive working environment.

Again, we all know these things are important, but unfortunately, knowing isn’t even half the battle: Eight in ten firms identify professional development and organizational culture as areas of importance.

But, of those same companies, only 42% recognize themselves as effective in the training and coaching that is put in place to foster such development.

Stats aside, “people leave managers, not companies” as mentioned here on Forbes.

Employees simply can’t progress in their careers if their managers don’t make sufficient training and coaching top priorities.

Answer questions and calm fears

Consider this scenario:

You’re a rep with an incentive plan, and you know payments are coming.

In your mind, you rationalize that you should have a check by the end of the week, and in the amount of $10K.

Well, the target date passes, and no check.

Where does your mind go?

Probably a million different directions, naturally.

Then, the check finally comes, but only for $5K.

Now, what are you thinking? Again, a million different things. You just can’t help doing so.

Point is, it’s human nature to assume the worst at times.

If you present your reps with unknowns around when their checks are coming and if the amounts are correct, you’re inviting them to think in negative “what ifs,” which can run a mile long.

The only way to curb questions, doubts, and confusion is to embrace transparency with your plans.

Informing reps on what’s coming down the pike in terms of payment, and when increases reps’ motivation, driving higher performance.

To do so, systems must be accessible — giving reps, managers, and finance the ability to easily view compensation wherever and whenever they want.

Praise and recognize performance

Sales reps are determined and competitive.

They drive hard to the hoop and have thick skin.

Thus, if you don’t praise or recognize their performance, they’ll just brush it off, right? So wrong.

It’s for all those reasons that they will in fact care, and tremendously at that.

Anyone of competitive spirit wants their victories known and broadcasted.

They work hard for achievement, but they also want that achievement recognized just as bad.

But before a rep can win a contest or outrank their peers, they need to be given the opportunity.

Contests, SPIFs, and gamification in any fashion all provide the chance for reps to feed their competitive spirits, and then, be praised for their results.

With all the above points, even a small misstep can have consequences on your sales compensation plans, which is why we did some research.

A recent survey by the Sales Management Association, highlights the absolute need for businesses to increase their sales coaching, training, and development to decrease rep turnover.

With the findings, in partnership with Xactly, here’s an infographic summarizing the detriment and root of sales turnover, which can be found below:

retaining sales reps
Take it all in, and take it to heart. The stakes are high.

I’d like to thank Alaysia Brown, a Content Marketing Specialist with SalesLoft, and Ryan Barone, the SEO/Growth Marketing Manager at Xactly Corporation, for helping contribute to this article.

Have other thoughts on sales compensation plans? Or suggestions on retaining sales reps? Connect with me on LinkedIn and let me know!

Editors Note:

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Justin McGill
About Author: Justin McGill
Justin McGill is the Founder of LeadFuze - a lead generation platform that discovers new leads for you automatically. Get 25 leads free.