Sales Compensation Plan – What's Missing?

May 30, 2022
Diya Mathur
Diya Mathur
Diya Mathur
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The sales compensation plan is the most important document in any sales organization. The sales compensation plan is what makes the salesperson want to get out of bed in the morning and hit their phones. It's what gives them the motivation to sell. Many sales managers, according to research, realize that their sales incentive plans fail to motivate their salespeople, forcing them to reward poor performance. Studies have also shown, most employees find no link between their performance and their compensation.

A successful sales compensation plan is critical to the health and growth of your company. A well-crafted plan will help you get the most from your sales team by rewarding behaviour that produces results.

So what makes a plan successful? Here are five keys to keep in mind when you're evaluating or creating a sales compensation plan for your business:

Make the Sales Compensation Plan beneficial to both the company and the salesperson

Too frequently, sales compensation agreements only allow one side to win. A well-negotiated bargain, like any successful compromise, is one in which all sides win and close jointly. So, how do you go about doing that? Compensation in a well-designed plan is linked to at least two of three crucial elements: individual sales performance, departmental success, and corporate sales performance. If a salesperson's remuneration is solely based on performance, the firm may do poorly while the salesperson is highly compensated.

Alternatively, if the firm meets its sales target, each salesperson should profit from the general success of the organisation. The percentage of an employee's pay that is related to each component is frequently decided by how much they can influence a departmental and/or corporate sales objective. Consider an environment in which every member of the sales team is interested should be the ultimate aim, enhancing overall sales velocity!

Encourage the Behavior You Want to See

I frequently hear business owners complain that their sales force isn't selling the items and services they want. For example, the sales staff looks to be focusing their efforts on less profitable items and clients that are not in the best interests of the organization. Business owners are certain that the problem stems from the sales team's lack of focus on what is genuinely vital. After reviewing the sales compensation plan, I frequently find that the fault is in the way the sales plan was designed.

A competent salesman examines the sales compensation plan and then decides how to effectively use the scheme for personal gain. The conduct of a salesperson is extremely predictable. They devote most of their attention to the activities, items, or accounts that will bring them the most money, aligning their efforts with what will maximize their OTE compensation. If a sales incentive plan is properly constructed, this "activity" is spent on what the firm and its management favor. Align your sales compensation strategy with your company's objectives. By doing so, you will quickly discover that your team's activities will shift to focus on the desired regions without even asking them to do so.

Make the Sales Compensation Plan Simple to Understand and Implement

Maintain a straightforward approach! A good sales plan is simple to implement and follow. Salespeople must understand what they can accomplish to earn an incentive and what that reward will be. If the sales compensation plan includes tracking a large number of precise performance metrics, management's time will be wasted, and the employee will be confused. Consider the overall picture of performance: Did sales increase or decrease? Is client retention still high? Is productivity rising or falling?

When a sales compensation plan becomes excessively convoluted, a salesperson's attention can easily veer away from what you have identified as most essential. If uncertainty persists about the complexity of the sales incentive plan, consider enlisting a salesman to provide an explanation. Concurrently, inquire about their preferred focal points for time allocation. This approach can illuminate whether the plan adheres to the principles of the MBO acronym, emphasizing its efficacy in directing sales efforts toward overarching organizational objectives. The person in charge of the sales compensation plan might also provide valuable knowledge. If it takes them a long time to finish the monthly or quarterly sales quota spreadsheets, it is too tough to compute and hence too difficult for the sales force to grasp. Keep things simple, and everyone will be satisfied.

Strike a Good Balance Between Salary and Variable Compensation

Finding a happy medium between salary and variable pay is sometimes the most difficult task. How do you keep salespeople motivated on a low income while yet paying enough to attract the type of salesperson you want to work for you? How can you avoid overpaying a salesman who had a bad sales year?

There are several answers to this conundrum. The essential topics to examine are the projected yearly percentage of client retention, retention metrics, the required annual growth, the launch of new goods, and the emphasis on new sales verticals. If considerable sales growth is necessary, a considerably higher percentage of "new business" must be paid. If only moderate growth is anticipated and customer retention is critical, a lower sales commission % on retained sales is necessary. If new items are released or new verticals are sought, bigger sales commission percentages on the new areas of concentration are required. It is critical to strike the proper balance between each of these aspects.

Finally, you must select the yearly sales threshold at which sales commissions or incentives are payable, taking into account the OTE compensation structure. At what sales level are you willing to pay variable compensation in addition to salary? Too often, company owners provide variable remuneration to employees who perform poorly.

Top performers should be rewarded

When is the best moment to give a salesperson an additional bonus? Reward them if they have met their quota in full and have completed all of the plan's requirements. You must also continue to pay salesmen much beyond their quota.

There are three main reasons why you should:

  1. They completed the task you assigned to them. Create a strategy such that salespeople earn a substantial individual incentive if they meet their sales quota in full. You will only payout to those who have done their duty.
  2. Towards the end of the year, individuals consistently strive to excel. The practice of "sandbagging" is now no longer acceptable. Sales professionals witnessing their bonuses and commissions rise beyond meeting their sales quotas are further motivated to intensify their efforts. It's advisable not to impose a cap commission. During a prosperous year, your top salesperson might emerge as the organization's highest earner. If the achievements result in remarkable salary growth, it's important not to let management envy or greed hinder the process.
  3. You can recruit better salespeople by offering bonuses and escalators at and over 100% of the quota. Every excellent salesman will pick a position after determining how much money they can make at 100% quota achievement and above. Providing escalators at or over 100% will help you to hire a more competent salesman. You don't want them if they aren't thinking about what they would make at 100% and above!

Conclusion

First and foremost, never be reluctant to lavish large sums of money on your best achievers. It is not unusual for them to be your best-paid staff, even outperforming the owner's income. Remember that if the compensation plan is sound, the more they earn, the more profit the organisation will make.

Employee incentive and sales compensation programmes are extremely effective when employees understand and perceive the link between their sales success and their incentives. A sales compensation plan that incorporates all five important factors, including on-target earnings, can assist in transforming a firm with ordinary performance, where employees come to work to simply do their job and get paid, into one where excellence and great outcomes are attained!

And finally, if you are here to know more about the products that help you automate sales operations and keep your sales reps motivated, you take a quick look at Sales Performance Management and Incentive Compensation Management, two of our industry-accepted solutions that are independent tools but can work together seamlessly to help you build and nurture a highly productive sales team.

Author

Diya Mathur

Diya is a Product Marketing Associate and content writer specializing in Incentive Compensation Automation. Diya has honed her ability to bridge the gap between intricate software functionalities and accessible, reader-friendly content. Her articles are a testament to her dedication to breaking down intricate SaaS solutions into digestible insights that cater to both tech-savvy professionals and those new to the software landscape.

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