Sales Compensation Plans for Building Your Sales Team
A company is nothing if it doesn’t have sales. There are plenty of ways to automate and utilize inbound methods, but when all is said and done, there are salespeople who take control of the deal and close the business. 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 a number of 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 turnover. 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 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.
Here are four different sales compensation plans to consider for your sales reps:
- 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.
- 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 payout commissions. Volume and quota attainment are the driving factors for many sales reps who constantly monitor their sales months vs. their determined quota.
- 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.
- 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 or 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 plan, or create additional combinations. 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 create 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 around 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 programs – 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 is due to the ‘pain’ felt by the different divisions of the company – Executive Management, Finance, IT, Human Resources and Sales Administration.The more complex the sales compensation plan, the less productive the sales force Click To Tweet
Sales focus is lost due to an:
- Inability 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)
- Inability to pay salespeople more frequently or quicker after the close of the pay period due to resolution of data hiccups, manual “work arounds”, payroll delay, etc.
- Inability to provide detailed commission statements and frequent reports on performance along with the check
- Inability to include transfers, which have a big impact on every territory, into the monthly reports to reps and daily sales reports to managers
- Limited ability to run contests and recognition programs since they must be manually administered
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 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. Choose wisely.