A well-designed sales compensation plan motivates superior sales rep performance and maximizes revenue. It empowers your reps to thrive when your company thrives, but also holds them accountable when personal objectives and measures of success fall short. As important as it is, mistakes in how to develop a sales compensation plan are common.
The Ideal Sales Compensation Plan
The ideal sales compensation plan motivates your reps to make the most money – for themselves and your company. It is clear and concise. Easily communicated. Easily understood. Easily embraced and put into action.
Sounds simple, right? But too often, things get complicated and critical errors are made. What kinds of sales compensation plan mistakes do companies and their sales organizations make? Here are the top (or maybe they’re the bottom) five mistakes that undercut sales rep motivation, sales team morale, and bottom-line revenue performance:
Sales Compensation Plan Mistake #1: Not Having a Clear Link Between Individual and Company Performance
It is essential for any employee to understand their importance in achieving company goals. This is especially true for sales reps. That’s why, in companies that succeed year after year, sales compensation plans are written so the organization’s success and the individual rep’s success go hand in hand. If the rep performs well, your company benefits; if your company reaches its revenue goals, the rep benefits, too. However, if there is not a clear and easily understood alignment between individual and overall sales results, motivation and performance can suffer.
Sales Compensation Plan Mistake #2: Lacking Balance Between Salary and Variable Sales Compensation
In most industries, a mix of base salary and variable (i.e., commission, incentive, or at-risk) compensation makes sense. Typically, a 50-50 salary-to-variable sales compensation pay mix ratio is a good place to start. Of course, in such a “leveraged plan,” the actual percentages of each type may vary, but few sales organizations use a salary-only or commission-only structure, as these are usually counterproductive.
Salary
As a rule-of-thumb, keep a sales rep’s base salary high enough to meet basic needs and financial obligations, but low enough so corresponding commissions and incentives encourage the rep to reach higher. Ideally, the base salary should range between 40 and 60 percent of anticipated total compensation. This is a sliding scale because as the sales rep makes more incented sales, the ratio of salary to total sales compensation decreases.
Commission
Opting for commission-only (or “straight commission”) sales compensation might seem tempting, but it can be de-motivating, especially for newer sales reps or those considering joining your sales team.
When using commissions as part of your sales comp plan, base them on sales or gross profit, but avoid basing them on sales whenever the rep controls any aspect of pricing. Why? Basing commissions on flexible pricing invites price reductions to make the sale.
It may occasionally be appropriate to pay commissions before the rep earns them, especially early in a rep’s tenure when pipelines are being established. So, a commission could be in the form of a draw. However, consider making the draw “recoverable” if commissions aren’t “earned” within a specified period.
Bonuses and Other Incentives
Bonuses and other incentives can motivate the sales rep to aim higher still. Bonuses are typically paid after the reporting period for meeting or exceeding sales goals. Other incentives may include non-monetary compensation such as trips or gifts. These are often associated with sales contests but are usually best to bolster short-term results.
Remember this: Unless you strike an appropriate balance between salary and variable pay, your organization will struggle to keep sales reps motivated and performing at top levels.
Sales Compensation Plan Mistake #3: Poor Plan Design and Communication
Even the most well-conceived and financially attractive sales compensation plan can fail to incent and produce results if poorly designed and communicated. Simplicity and clarity are key. Make the plan relatable. Make it clear how the rep fits into the bigger picture and can benefit by individual performance and contribution to the company’s success.
Keep in mind that sales compensation plan communication shouldn’t just take place once the plan is designed. Communicate with sales reps beforehand to understand their challenges and ideas. If you know what matters to them and their families, you’ll be able to adapt your plan to enhance motivation. When complete, communicate your plan team-wide and with each individual rep. Answer questions and make adjustments as necessary – to the plan, to your communication process, or both.
Sales Compensation Plan Mistake #4: Not Updating Your Sales Compensation Plan
Frequently Enough (or Adjusting it During Unplanned Circumstances)
Many companies craft a sales compensation plan that works well and then leave that plan in place year after year. Why mess with success, right? Wrong! Your industry, your marketplace, the employment pool, and the economy are ever-changing. So, your compensation plan should probably change, too.
Even if changes are minimal, every plan can benefit from annual updates, either to the plan specifics or how those specifics are communicated. Simply put, leaving an outdated sales compensation plan in place year after year puts you at a competitive disadvantage. Unfortunately, according to a recent Sales Xceleration survey, only 30% of companies follow this best practice.
It’s also important to update your sales compensation plan when unforeseen situations arise that impact your sales rep’s ability to achieve original quotas and goals. For example, if economic factors or crisis conditions significantly change the marketplace or competitive landscape, be prepared to modify your plan as necessary. Your sales compensation plan should reward sales reps for performing at a high level, but never penalize them for falling short due to circumstances beyond their control.
Sales Compensation Plan Mistake #5: Not Gaining Support and Buy-In for Your Plan
By communicating before and during the plan development phase, you send the message that the rep’s challenges are recognized and their insights and ideas matter. Listening and incorporating their feedback into the plan will go a long way toward gaining their support. Once the plan is designed and communicated, be sure to have the rep sign to acknowledge their understanding of plan specifics. This will help eliminate or settle disputes later.
Download a Free Compensation Plan Template
What does the perfect sales compensation plan look like for your organization? Obviously, there are many variables. But a good place to start is with a sales compensation plan template. Download your free sales compensation checklist here and customize it to suit your organization.
If you’re still not confident in how to develop a sales compensation plan, I’m here to help.
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Ted Brown is the President of Growth Ascent, powered by Sales Xceleration, in San Diego, CA. He has over 30 years of executive leadership and sales management experience, having led sales organizations to achieve success in start-ups and Fortune 500 companies. He enables business owners to increase their company’s value by building the best sales organization they have ever had.
You can reach him at tbrown@salesxceleration.com, by phone at 858-260-9930. You’ll find him online at www.salesxceleration/advisors/ted-brown
