Creating an Effective Sales Compensation Plan

Creating a sales compensation plan is a complex process and very dependent on the type of business you are managing.  What works for a SAAS sales team may be very different from what motivates a sales reps at a traditional distributor of physical products.

Regardless of your business, there are a few key principles to follow to ensure a successful sales compensation plan that drives results and is financially sound for both your sales team and the company.

 Align sales behaviors with key business goals.  

You can be sure that once a compensation plan is rolled out, your best sales reps will be working the numbers to see how they can best optimize their earnings under the plan.  That’s fine as long as you’ve properly aligned behaviors and incentives with your most important business goals.  Companies all may have very different goals depending on what stage of their lifecycle they are or the type of business they are in.  They key is to take the time and identify what goals are currently critical to the business and prioritize them. Consider the following when devising your plan:

•  Total Revenue
• Gross profit margins
• Account P&L
• Customer retention / repeat business
• New account revenue
• Specific product / service mix

You can also reward secondary business goals with smaller incentives.  Some potential secondary goals to consider are:

•  Key target marquee customers closed
• Early payment on orders / contracts
• Cross selling / upselling key products
• Pipeline based activity metrics

Additionally, consider adding an overall enhancement or multiplier when certain volume thresholds are reached. This can be volume based or percentage based, however when doing this you will certainly create strong incentives for your top performers.  It's well worth the investment to create additional incentives that only our top 20% of the team will be able to attain.

Keep your plan simple.

Above all try and keep you plan as simple to understand as possible.  Many times we try to incorporate too many goals and moving parts into a plan. This complexity has a negative effect, causing confusion and doesn’t drive behavior. You want your sales team crystal clear on what is most important for the company and what will earn them the most money.  At most lay out two main drivers or behaviors to the bulk of the plan and possibly add two secondary incentives.

Finally when it's time to roll out and communicate your plan, take the time to show actual performance and earnings examples for your sales reps. If your plan is clear, simple to understand, perceived to be fair and properly communicated it will provide strong motivation for entire sales team.  For additional information and help on devising the right compensation plan for your sales team visit Ratio Advisory.