Sales compensation plans are designed to reward salespeople for achieving set sales goals. This post gives tips on creating and implementing effective sales compensation plans.
In the world of selling, there is usually a correlation between how a rep performs and their pay.
The sales rep’s commission structure is usually revealed at the start of the calendar year andl includes their yearly goal, their weekly or monthly metrics, and how their pay will be computed.
Most sales reps are compensated for their performance relative to their sales quotas. This means their pay is directly tied to the total amount they earn. Most compensation plans are structured with an on-target-earning, the total amount a sales rep will make if they meet their goal.
If a sales representative underperforms, they will make less money than what is specified in their on-target earnings. If a sales representative overperforms, companies can offer higher commission rates or incentives that would allow the sales representative to make more money than what is specified in their on-target earnings.
Sales comp plans are great because they calculate how many phone calls, meetings and demos are needed to hit the annual target. This ensures your sales reps are compensated relatively while giving them a clear idea of what they need to accomplish.
According to the VP of Sales Strategy at The Bridge Group, Laurie Page, reps should know their exact goals for the month and be able to track their progress.
The compensation plan incentivizes salespeople to focus on acquiring new accounts. If the company wants to prioritize acquiring more clients, they can offer a higher commission for selling to brand new customers.
Similarly, if a business wants to grow its customer base, it can incentivize those sales.
Compensation Plans and Payment Structures
Most compensation packages will include a bonus payment called a Sales Performance Incentive Fund. This is usually paid out as a bonus, as additional vacation time, or as an increase in commissions for reaching a certain quota. This is often used to motivate sales reps to sell new products or features, which could help the company reach its quarterly or yearly targets.
Many sales managers use incentives to encourage their reps to sell new products or features. They do this in hopes that they can reach the company’s revenue goal.
This payment structure is similar to how other salaried employees are compensated.
Rather than paying sales reps for hitting specific sales goals, their performance metrics are instead presented as a series of benchmarks that must be met to earn their pay.
In addition to offering bonuses for hitting sales goals, sales managers can offer additional incentives to sales reps who exceed their quotas.
The no-cap, no-base-salary sales model, is an effective way to motivate your sales team. The no base or ceiling on earnings allows your salespeople to make as much money as they want but holds them to higher standards.
The pay-per-sale commission structure allows sales reps to earn as much as they can sell. There is no cap on how much a rep can make, so the more they sell, the more they earn. This encourages representatives to do their best, leading to big paydays for top sellers.
Commission-only sales models can be great for salespeople who are motivated by cash. But, they can also pressure your sales team to oversell and rush through each deal. If you don’t provide the proper training, your team members could close a deal to earn their commissions.
This is a popular sales strategy where reps are paid a salary and a commission.
A compensation plan will outline how much you can earn if you reach your sales goals.
This strategy gives reps a sense of security due to the guaranteed monthly income and allows leaders to increase motivation for over-performance with commission bonuses.
While allowing lower-performing reps to stay may save the company money, it may also hurt the business in the long run.
In the Tiered Commission Model, reps are incentivized to close as many high-ticket sales as possible. For each new customer they sign, the sales rep earns a higher revenue cut from that client, so they’re encouraged to aim higher.
A salesperson’s compensation often has tiers. This means that the more the rep sells, the more they’ll get paid. For instance, a salesperson may earn a 5% bonus on their first $50,000 in sales, a 7% bonus until they reach their sales goal, and a 9% on any deals that exceed their annual sales target.
This model is great for motivating the middle tier to strive for higher targets while giving the top earners a bonus for surpassing their quotas.
The gross profit commission structure is where sales reps earn commissions based on how much revenue a company makes. So the more a sales rep sells, the more money they’ll make.
The sales strategy incentivizes reps to upsell and cross-sell customers on more expensive deals and penalizes them for discounts.
If you have a team selling to businesses on the West Coast, Midwest, and East, then a Territory Volume Compensation Plan might be the best plan for that. This plan would assign each salesperson an allotted amount of territories and compensate them based on how many deals they close within those regions.
In this model, each region is given a set amount of commission. This incentivizes each sales rep to generate revenue in their respective territories. The reps are then given an equal cut of the profits, so everyone shares in the company’s success.
This works best for salespeople who have balanced territories.
Considering the Sales Salary
Commission has long been considered the best way to motivate sales reps.
A 50-50 split is the most common type of pay structure for sales reps. Half of their salary is their base, and the other half is their commissions.
Other companies use a high-risk, high-reward strategy in which sales reps are only compensated on commissions with no base pay.
This allows them to work as much as they want, but with no guarantee of a steady paycheck.
Dorsey believes that the commission-based format is broken and makes it difficult to recruit new employees because there is no guaranteed income. Trying to earn an income can lead to a high employee turnover rate.
“It’s about redefining what ‘incentives’ means. Your job isn’t to incentivize people; it’s to define what the job is, and then do it.”.
He’d rather pay his reps a base salary than a commission because he believes they should be motivated by their salaries.
A salesperson may be fired if they do not meet their targets over multiple sales cycles. This is similar to what can happen to other professionals if they do not perform well in their roles.
If salespeople perform well, they can earn bonuses in addition to their salaries. He said this change would help salespeople feel more secure in their jobs.
“It removes the word ‘incentive’,” he said. “It defines what the job is about.”.
“Here’s what you’ll need to do; now get to it!”.
Some people may not believe this strategy will be as effective as it should be. In Li’s opinion, commissions can help bring out the competitive nature of a salesperson, which can be an effective method for measuring performance and encouraging more action.
Call tracking is a great way to measure performance, and you can use it to drive your sales activities towards specific goals and targets.
While experimenting with a pay structure, CEO Jack Dorsey found that employees were more productive when they were paid based on performance.
They did their job, he acknowledged.
Ditch commission and pay reps full salaries.
Tips for Creating Effective Sales Compensation Plans
- Understand your company’s strategy and goals for the year.
- Keep it simple. Don’t encourage more than two or three behaviors.
- Stretch goals should be achievable. Reps will either cheat the system or quit.
- When you want reps to go above and beyond, use commission accelerators or sales performance incentive funds.
- Clawback provisions are a way to ensure reps get the right customers. However, they must be time-limited as well as clearly defined.
- Do not include cliffs. Many representatives start to treat the cliffs as part of their quotas.
- Do not increase quotas without providing additional support.
The compensation plan will continue to be the main driver of a rep’s actions, even if sales is commission-driven. It is a blueprint for how the company plans to grow its revenue and what salespeople should do to earn for the year. It would be wrong to assume that reps will work harder if they have a bigger carrot.
Reps who don’t align their compensation plans with sales strategy can manipulate the system by putting unnecessary add-ons in deals or making promises that your product won’t keep. Reps may become demotivated if the plan is unfair.
Making a compensation plan work means balancing what is best for the company and what a sales rep can control.
What to Avoid in Your Compensation Plan
Compensation plans are great, but they can also incentivize the wrong behavior. Here are some things to avoid when structuring yours.
One thing that you will never see in David’s comp plan is to have a cliff.
Don’t create a cliff in your sales rep’s pay. This will only hurt your reps and change their focus.
Don’t try to reach the goal of your entire sale; instead, do whatever you can to meet your minimum required amount.
Don’t try to sell your prospect on unnecessary add-ons or convince them to buy a deal that doesn’t fit their budget.
Either that or it leads to high employee turnover, which is bad for business.
While a sales team’s goal may be to increase company revenue, this often adds more stress to the reps.
To hit their sales goals, sales managers need to determine how much support their reps will need.
When increasing your quota, it’s important to have a strategy in place, so your team doesn’t feel discouraged. This could mean investing in some helpful SFA software, or it could mean bringing in more SDRs.
Don’t:-Don’t just change quota numbers. This will only make reps feel frustrated or resort to cheating.-Don’t just change your sales goals without planning. This will leave you in a lurch.
When companies don’t offer competitive salaries, they can expect high turnover rates, leading to unhappy customers and employees.
“The most frustrating thing about quotas is when they feel like it’s impossible to reach,” he said. “It can be demoralizing, and, by then, they may be looking for another job.”.
It’s crazy to think that some reps still don’t have a clear idea of what their pay will become in January.
Even though a sales manager’s job can be incredibly hectic, it’s their responsibility to ensure that their sales reps have their yearly plans ready by the start of the year.
Your reps should know how much they’ll be making in 2023.
“Make sure you communicate it and excite them about their opportunity,” she said. “And don’t show up late.”.
It’s frustrating when sales reps tell me they don’t have their compensation plans ready in January or February.
Business success is dependent on sales compensation plans. The right plan will help you attract top sales talent and help you reach your goals. These tips will help you improve your sales compensation plan. You can adjust and make changes over time to keep the plan current and relevant.