Sales Compensation Modeling Do's & Don'ts

Gone are the days of the salesman of yesteryear who wants to work commission only or at a low base salary with high OTE (on target earnings) based on commissions earned. 87% of top performers are intrinsically motivated, not externally motivated, or money motivated. Don’t get me wrong, top sales performers love earning money and strive to be a high income earner, but it’s not their top motivator or the driving reason why someone accepts a sales role.

Over the past 2 years, Sales BQ? has interviewed over 3,000 candidates for various sales and sales management roles across the country. Whereas it’s not a huge sample size, we feel it gives us enough data to speak intelligently on this topic.

 Top trends in compensation modeling:

1. High base salary
2. Respectable OTE
3. Attainable variable compensation like commissions and bonuses, not pie in the sky numbers that have never been achieved by anyone in the role, previous or current
4. Easy-to-understand compensation model that doesn’t take a forensic accountant to calculate total earnings at plan (quota)

Key components of a Sales Compensation Model

1. Competitive Base Salary

Today’s job market has created intense competition for sales roles. High demand exists for top performing sales people. Our recruiting conversations have taught us passive candidates, non-active job seekers, want a minimum 10% increase from their current base salary to consider a change in career. They also ask for more in their base salary if the role has not been proven for the company (example, the company has had numerous sales reps fail, none achieving the quota or compensation targets aligned with that role), the product or service is still being built, not fully rolled out, has a backlog of tech roadmap releases required to compete in the market, no established marketing department or lead flow, and other various reasons. Be prepared to offer a competitive base salary to recruit and retain the right sales talent.

 We’ve found success offering candidates 2 -3 comp plan options. The first is the low base, higher payout options, The second is middle of the road on base and commission. The third option is high base and low commission payout. When they’re able to see 3 options lined up side by side, they can make the right decision for their stage in life, personal financial goals, and risk temperament.

 2. Earned Commission

 Earned commission should be based on either a flat rate payout or percentage payout based on units of sales won, total gross revenue, or gross profit on revenue. Ensure your compensation plan is clear and indicate what type of commission can be earned on each available product or service that can be sold. Many companies have 3rd party products or services that are resold and have smaller margin, causing a different method of commission payment or calculation to be considered to ensure margins are protected. Map all this out in advance.

We recommend including a scaling commission payout based on performance. Example, once $100,000 in top line new sales revenue is achieved, increase the commission multiplier from 5% to 7%. Another example is better suited for transactional sales, once 25 new units are sold for the month, offer a higher payout for units 26+ in that monthly period.

 Get creative on creating scaling commission payouts based on performance. This is a proven way to increase performance.

 3. Quarterly Bonus

 Offering a quarterly bonus based on quota achievement allows the rep to continue to fight to achieve their quota even if they miss a month in the quarter. Implementing a quarter bonus incentivizes the rep to consistently achieve a quarterly quota. This bonus is ideal for sales departments who have monthly quotas but it still works for those with quarterly quotas. It may also help to protect the employer from a scenario where the rep may significantly over-exceed their first 2 quarters and then underperform for the remaining 2 quarters of the year.

 4. Annual Bonus

 An annual bonus incentivizes sales people to achieve their full annual quota. It can also work as a retention tool. We recommended paying out the annual bonus 2-3 months after the sales year ends to ensure the rep stays employed through the first 2-3 months of the new sales year to avoid a top rep leaving at the conclusion of the current sales year. Often times, a top rep who may be considering other employment will stay to collect their annual bonus and if you delay the payment, they may change their mind on leaving if they hit the ground running in the new sales year.

We recommend the annual bonus be a flat dollar amount or a percentage of annual sales.

 5. Milestone Bonuses

 As mentioned earlier, 87% of top performers are intrinsically motivated, which means they are fueled by competition. Create a fun bonus structure that fuels their competitive nature. Here are examples of several milestone bonuses.

1. Fast-start bonus. Offer a 4 month bonus (flat fee or percentage) to sales reps who accomplish 50% of their annual sales quota in the first 4 months of the sales year.
2. Top revenue producer bonus. Offer a quarterly bonus payout (or monthly if your sales are high volume, transactional) for the highest revenue achiever for the given period.
3. Product specific incentive bonus. Also known as spiffs, product or service specific incentive bonuses help the company grow revenue on a specific line or product in a short period of time. Be cautious when implementing this type of bonus and ensure the team exudes the right integrity when selling to customers.
4. Sales contest bonus. Get creative. Sales reps love to compete. We hold nationwide telemarketing blitz competitions and award cash bonuses to the reps who set the most qualified discovery meetings.
5. Sales activity bonus. For sales reps with activity requirements like outbound prospecting, create a bonus structure for achieving activity objectives on a weekly, monthly, or quarterly basis. Even a small $25 bonus can incentivize healthy competitive sales behavior.

 Key Components for Qualification Awards & Trips

 Sales reps love earning trips and awards in addition to bonuses and commission. Create annual award qualifications that promote excellence in sales performance. Your top reps will put forth a significant effort to achieve these. Please note, if you recruit top performers from a large company, chances are they’re used to having the ability to qualify for awards and trips. Even if you’re a small employer, find a way to offer an award from the list below.

1. Annual President’s Club. This is common nomenclature for the first tier awards trip. Set the revenue or sales unit qualification for the trip slightly above the sales rep’s quota to incentivize them to perform above expectations. At a large scale, a Presidents Club trip might include a multi-day conference in a tropical resort filled with speakers, training sessions, team building events, an awards ceremony, and night-life parties. On a smaller scale, you might create a weekend stay in a desirable destination not too far from your home office (to limit travel expense) and allow the top performers to invite their spouses or significant others.
2. 2nd & 3rd Tier Award Qualification Levels. Create 1-2 additional levels of sales achievement, like an elite qualification and a platinum status (or other creative names) that require significant revenue or sales unit achievement. These award levels might include an all-expense paid trip for the rep and their family or +1 to a destination of their choice and a bonus payout.
3. Lifetime Sales Achievement Incentives. A proven retention strategy for top performers is to offer incentives based on lifetime sales achieved, not just in a single year. Those incentives may include an increase in base salary, cash or prize earnings, and additional bonuses, awards, or trips.

Developing the right sales representative compensation model can be difficult and may require iteration based on data accumulated through feedback and monitoring of performance metrics, but this should give you a solid start. 

We have created a free download sample with a few different styles of compensation plans. 

Listen to the video or audio Quota Crusher? Podcast on this topic.

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Mary Grothe, CEO Sales BQ?

Twitter @MaryLGrothe