A sales compensation plan is a critical tool to motivate, reward, and align your sales team with your business goals. However, designing and managing a fair and effective plan can be challenging, especially in a dynamic and competitive market. Here are some of the best practices for developing a sales compensation plan that works for your organization.
Before you start crafting your plan, you need to define and differentiate your sales roles clearly. Different roles may have different responsibilities, skills, quotas, and incentives. For example, you may have hunters who focus on acquiring new customers, farmers who nurture existing accounts, and specialists who provide technical or product expertise. Each role should have a clear job description, performance expectations, and compensation structure that aligns with their contribution to the sales process and the overall revenue goals.
An effective sales compensation plan should align with business objectives, be tailored to the sales process, and balance fixed and variable pay. It's crucial to set clear, achievable targets, maintain simplicity, and regularly review the plan for adjustments. The compensation should be competitive, fair, and reward not only sales outcomes but also beneficial sales behaviors. Transparency in communication, legal compliance, utilization of data, and incorporating sales team feedback are also key components for a successful plan.
Your sales compensation plan should be based on SMART goals: specific, measurable, achievable, relevant, and time-bound. SMART goals help you establish clear and realistic targets for your sales team, as well as track and evaluate their progress and performance. For example, you may set a goal to increase the number of new customers by 10% in the next quarter, and use metrics such as leads generated, conversion rate, and customer satisfaction to measure the results. SMART goals also help you communicate your expectations and priorities to your sales team, and provide feedback and recognition along the way.
Implementing SMART goals in a sales compensation plan can be challenging due to the need for setting realistic, yet motivating targets, ensuring goals are measurable and align with broader business objectives, and accounting for variability in sales roles. Additionally, maintaining fairness and equity, managing the pressure of time-bound targets, and effectively linking these goals to compensation are complex tasks. These challenges require careful planning, ongoing adjustment, and clear communication to ensure they drive desired performance without causing undue stress or inequity.
The pay mix is the ratio of fixed and variable pay that makes up your sales compensation plan. Fixed pay is the base salary that your sales reps receive regardless of their performance, while variable pay is the commission or bonus that they earn based on their results. The right pay mix depends on several factors, such as your sales strategy, market conditions, sales cycle, and sales culture. Generally, you want to balance the stability and security of fixed pay with the motivation and reward of variable pay. For example, if you have a short and simple sales cycle, you may opt for a higher variable pay to incentivize quick and frequent sales. On the other hand, if you have a long and complex sales cycle, you may prefer a higher fixed pay to retain and support your sales reps.
In a complex scenario like a global tech company launching a new product, the sales compensation plan must be tailored to different roles and sales cycles. Inside sales reps focusing on frequent, smaller deals might have a pay mix with higher commission to incentivize volume sales, while field sales reps handling larger, longer-cycle deals would have a higher base salary to provide stability during lengthy negotiations. Sales engineers, with a more supportive role, would have a higher base salary with variable pay tied to client satisfaction and technical performance. This approach addresses the need for motivation, stability, and role-specific incentives while aligning with the company's go to market direction in a diverse market.
You measure variable pay percentage of total pay (if targets are achived). You want the percentage to be equivalent to the risk you want them to take, higher percentage for high risk, lower for lower risk. Then you set the payout cycle equivalent to the deal closing cycle. For example large deals take longer to close, so the cycle can be quarterly. Sales team that close faster smaller deals can be paid variable monthly.
Your sales compensation plan should not only reward outcomes, but also encourage behaviors that support your sales strategy and customer value. For example, if you want to promote cross-selling and upselling, you may offer incentives for selling multiple products or services, or increasing the average deal size. If you want to foster collaboration and teamwork, you may implement team-based or shared incentives, or reward referrals and introductions. If you want to improve customer retention and loyalty, you may reward renewals, repeat purchases, or referrals. The key is to align your incentives with the actions and attitudes that drive your sales success and customer satisfaction.
This may be relevant to Sales leaders. But in the context of Sales compensation, Sales people are usually to the point and don’t pull through with this dimension. So i suggest you drop this topic all together.
Aligning incentives with the right behaviors is crucial for both companies and sellers. Misalignments can lead to problematic practices, such as salespeople using high-pressure tactics due to overly aggressive sales targets, neglecting high-value products when commissions are uniform across all items, or focusing solely on new client acquisition without incentives for retention. These cases illustrate how incorrect incentive structures can drive undesired behaviors, adversely affecting both the company's interests and the sales team's effectiveness.
Your sales compensation plan is not a one-time project, but a dynamic and evolving process. You need to review and adjust your plan regularly to ensure that it remains relevant, competitive, and effective. You should monitor your sales performance and feedback, as well as the market trends and changes, and make necessary modifications to your plan. For example, you may need to update your goals, quotas, or incentives to reflect new opportunities, challenges, or priorities. You may also need to revise your plan to address any issues, such as underperformance, overpayment, or turnover. The best practice is to review your plan at least once a year, and communicate any changes clearly and transparently to your sales team.
Regularly reviewing and adjusting the sales compensation plan is crucial for ensuring its continued effectiveness. It allows for adaptation to market changes, alignment with evolving business goals, and maintenance of fairness and motivation among the sales team. This process also enables the incorporation of sales team feedback, ensuring the compensation remains competitive to attract and retain top talent. Additionally, it helps in updating performance metrics to reflect current business realities, ensuring that the compensation plan supports the company's strategic objectives and market positioning effectively.