“Tips for Building a Competitive Sales Compensation Plan?”
Steven Burks, PhD
Trusted & Effective Talent Recruiter - Growth Oriented Technology Companies (Specialty Chemicals, Minerals, Metals, Polymers, Fermentation, Batteries, Electronics, Food Ingredients) ([email protected])
Paying salespeople that results in profitable sales is the key to rapid and sustainable growth for any organization. A strong and competitive sales compensation plan will result in success for the employees and the company. The plan should be one that balances many factors including base salary, commission, incentives, marketplace, industry, and company goals.
Maintaining a competitive sales compensation plan is important when recruiting, hiring and long-term retention of great sales talent. Paying at the low end of the market and the good salespeople will be recruited to your competitors. Pay too much and your salespeople may become complacent, and your revenue growth will suffer.
Below are recommendations on putting together a competitive sales compensation plan. Of course, each company’s situation is different and unique. Let’s explore some of the options.
Sales Compensation Strategy
A strong sales compensation system should be aligned with company goals, be simple to understand, to measure and to communicate. It should give sales representatives and their managers objectives to work towards to achieving. The right system should achieve both sales and profitability goals.
1.???Alignment
2.???Reward Great Behaviors
3.???Company/Product Stage
4.???Commission Rate
5.???When to Pay Commissions
6.???Sales Compensation Plans and Experience
7.???Commission Caps
8.???Flexibility and Uniqueness
9.???Transparency
10. Sales Plans for Teams
11. Legal Considerations
1.??Alignment
?Every company has sales and profitability targets. Look ahead to the next year and ask yourself, “What is the most important goal the company needs to achieve? New Customers? Improved Profitability? Customer Success? Increased Market share? New Product Launch? New market penetration?” Once you’ve identified the goals, then align your sales compensation plan with those objectives.
Recommendation - Reward the achievement of your stated goals with commissions.
2. Reward Great Behaviors you’d like to see repeated
This is the key to success in growing sales. You want to promote great habits by financially rewarding positive behaviors when you see them. Reward for the outcomes you want.
If you want more new business, then offer a higher commission on net new sales. If you want your clients to buy more as repeat business, then offer higher commissions on increased sales at a customer. For example, if you want more new business than repeat purchases, offer a higher commission on net new sales.
If you want proactive inside salespeople, then reward them for increased phone time that results in sales.?Dollars/phone time. Give them a reward for each new customer account they bring in on the first, second, and third sale. This encourages a focus on repeat business and turning a new customer into a repeat customer.
If you want improved customer relationships, then do special cash awards for customer service.
Recommendation – Reward behaviors you want repeated and that are consistent with your business strategy.
3. Company/Product Stage of Life
Companies and Products both have life cycles. When companies are in a startup mode the only thing the owners are thinking about is customers, new customers, any customers. The same is true for products. Every product has to have its first customer, the first one to try it out.
A)??Stage One – Acquiring Customers
In this stage of a company’s life or a new product line the compensation plan should be focused on “hunting” new customers. Like most start-ups at this stage of development, you want to acquire customers quickly so that we could see how valuable our offering actually was to them and to see if they will be repeat buyers.
In this stage the commission was higher for obtaining new customers. The plan could pay a good commission on the first sale and a great bonus commission if the customer became repeat customer with purchases four months in a row after that.
This plan is simple, clean, and hunting oriented. It will work to accelerate the pace of new customer acquisition.
Recommendation – Start Up Phase commission should be focused on New Customers and more importantly New Customers who result in repeat orders.
B)??Stage Two – Customer Success and Retention
Once the product or company has been successfully launched the compensation plan needs to focus less on new customers and move towards a hunting and gathering phase. The company now wants to help its customers grow their business and the subsequent use of its products to increase sales.
In this phase it is important to nurture customer relationship in order to develop new applications for existing products, broaden product lines and applications, and helping customers grow their sales and by the use of your products. It is key to figure out who your best customers are and what steps will make them successful.
Obtaining customer feedback, proper diagnosis of the issues, and quick, disciplined communication are necessary during this stage. The salespeople who bring in the best customers should be rewarded with higher commissions. Your customer retention is predicated on the types of customers the salespeople chose to target and the expectations they set with each new account.
Recommendation – In Stage Two focus on retaining your best customers which you have clearly defined by profitability and revenue. Training on products so the inside salespeople can ask the right questions to grow sales is key in this phase. Have customer retention be part of the commission structure in this phase. The best customers are profitable customers. Increase the margin component of the commission in this phase.
C)??Stage Three - Sustainable growth plan.
During this phase, the focus should be on faster, profitable group. The focus is on how a product can be scaled, or the business be scaled within a market. To continue to grow during this phase one has to continue to add new customers, new markets, and improve customer retention even more.
Recommendation – In Stage Three provide incentives for repeat customers who have a twelve-month record of repeat sales. Provide incentives for yearly and multiyear customer contracts that lock in sales.
4.?Commission Rate
The commission rate can vary a lot depending on your specific business and its model. Motivated and successful salespeople will drive your sales. Commission can be based on a percentage of net profit, a percentage of total revenue, or a combination of the two.
领英推荐
A good approach to setting the numbers is to first determine the typical competitive salary for the position in your industry and geographical location. Then set the base salary/commission rate mix based on that number.
The total commission for top-performing salespeople should equal their base salary. If the salesperson makes fifty thousand dollars in salary, they should be able to double that to a hundred thousand dollars. Inside salespeople tend to be more concerned about paying their bills. Their ratio of base to commission is typically 70% base pay/30% commission.
Recommendation - A good rule of thumb for choosing the right commission rate is: The total commission for top-performing salespeople should equal the salesperson’s base salary.
5.?When to Pay Commissions
Pay commissions quickly. A reward delivered quickly and consistently increases the likelihood rewarded behaviors will be repeated. Drive instant gratification by reducing the turnaround time on commission checks and see an increase in sales motivation.
By Illinois law commissions have to be paid monthly.
Recommendation – Pay Commissions Monthly
6.?Consider a plan that changes with experience
Each sales role is different within an organization. Inside sales representatives have a different role from outside sales representatives. And both have distinct roles from the sales manager role. The type of compensation plan will change with the roles and with the tenure in the company. Tailor the sales compensation for the different sales roles within your company.
This type of compensation plan includes a substantial base salary and low commissions during the onboarding and ramp-up time. However, the base salary will decrease over time as less-experienced reps’ sales and commission rate increase.
This is only a win for the salesperson if their income total increases. The ramp-up time should be at least as long as your onboarding process, plus your typical sales cycle. You don’t want new hires to be under too much pressure too early.
Outside salespeople want to be rewarded for their efforts with significant commissions.
Recommendation – Adjust the mix of base pay/commission during the ramp up stage. Increase commission rates and targets with tenure. Tailor the compensation plan to the specific role.
7. Commission Caps
Top performing salespeople love to make a lot of money. Your company should allow and encourage them to do so. If they want to make a million dollars a year selling your product, let them. Reward them for increasing sales and profits.
Recommendation – The best performing companies do not cap commissions.
8. Flexibility and Uniqueness
As a company grows it will develop territory and product line sales roles. These defined roles would influence a salesperson’s compensation. A new territory, new products, new markets might need higher commissions during the early months.
Employees and different generations have different perceptions of incentives. If you can discover personal incentives that work best for your employee, you will be richly rewarded in results. Some employees want more vacation, special trips, childcare benefits, gym memberships paid for, education benefits, among many other things. Everyone likes to be recognized. Uniqueness can reward your company in longer term employees as this feel like you listen to them and heard what they want. In addition, you might be lowering your costs by being able to reduce commissions while providing greater value for your employees. Each person/generation is unique. Provide incentives that are valued and are motivating.
Recommendation - Be flexible when it makes sense. Cash commissions are not the only answer.
9. Transparency
Discuss and explain all of this with your sales team. Make sure they understand the goal of this plan is to reward good behaviors and maximize their income.
Recommendation – Communication and Managing to Expectations is key.
10. ?Sales Plans for Teams
We are happy to provide you with some examples for larger sales teams. Reach out to us for the details.
12. Legal Issues
?Each State and City has their own laws for minimum wages and commissions.
Recommendation – Follow all laws, Local, State and Federal.
KEY - Hire and reward your sales organization.
I hope this article will put you on the path of having motivated sales employees. If you would like to discuss your biggest headache or challenge within your company schedule some time to talk with the author directly on zoom or preferably at your local coffee shop.
?Sources used, quoted, and paraphrased for this article include:
Copywrite by Burks Search - Sanford Rose Associates - Crystal Lake?
Author - Steven J. Burks, PhD CEO
Burks Search - Sanford Rose Associates - Crystal Lake
HUNT SCANLON TOP 10 U.S./AMERICAS SEARCH FIRMS - #9
Valuation Advisor for Purpose-Driven Business Owners and their Financial Advisors. Certified Exit Planning Advisor | Author | Podcaster | Public Speaker
3 年Fantastic article. I love the concept of alignment with the company's stage of growth. I think a lot of companies forget to make this turn.
Consultant in Flexible, Rigid Packaging and Plastic Processing, and package testing and development. Sustainability, Through 3R principles, use of alternative Materials, Mono material Packaging Solutions
3 年Thanks for sharing
President, Strategic Planning Solutions
3 年Great article, thanks for posting!