7 Things Your Sales Compensation Plan Must Have

Posted by Ryan Bretsch

What to include in your sales compensation plan

When sales figures aren’t meeting projected goals, your sales representatives’ performance is often the first thing that’s scrutinized. Though there are a multitude of well-documented reasons why selling issues may exist, hiring the right sales professionals is one of the most important remedies to improve an under-performing sales team. And paying those sales professionals properly is another.

In two previous blogs, “How to Hire a High-Performing Salesforce, Part 1” and “Considerations for Hiring Correctly in the Sales Organization, Part 2,” I addressed how problems in sales performance often start with and lead back to hiring the RIGHT people to meet organizational sales goals. However, there is one factor that attracts and retains exceptional sales talent – a fundamentally sound sales compensation plan. If you don’t have the right people being properly compensated for meeting their sales objectives, revenue will suffer.  

But what does proper sales compensation mean?

Sales Compensation Plan Tailored to Your Sales Professionals

Surprisingly, if you have the right sales team, sales performance isn’t just about the money. The number one reason why top performing salespeople leave companies is NOT that the company doesn’t pay them enough. In fact, most top-performing salespeople don’t even look at it from the perspective that the company pays them at all. High performers look at companies as simply the corporate mechanism by which they get paid. This is the BIG difference in perspective that’s absolutely critical to the success of your sales compensation plan.  

Top performing salespeople DO leave because the compensation plan keeps changing and, from their perspective, it is poorly designed. When the sales compensation plan is constantly in a state of flux, your best talent can no longer hone-in on the ideal path to maximize the various compensation mechanisms that get them paid. If this happens too often, they no longer consider your compensation plan to be stable. And some percentage of your sales talent will leave to find an organization whose compensation plan IS stable. 

To recruit and retain the sales team you need, here are 7 Requirements Your Sales Compensation Plan Must Meet to create a forward-focused company that retains high-performing salespeople and drives measurable sales production.   

1. The Plan is Properly Incentivized to Motivate Your Sales Team

A good sales compensation plan properly incentivizes and motivates your sales team to perform. That is the whole goal of a sales compensation plan. There are so many variables to consider here – length of the sales cycle, average contract value, on-boarding ramp-up periods, activity and interval requirements, and even sales demographics and psychographics are just a few factors that go into understanding what motivates your team to perform. Balance and communication are key. A base compensation plan that makes the sales team very happy doesn’t necessarily get your sales team to perform like the company needs them to. But if the plan makes it hard to earn a satisfactory and stable wage or your communication of the plan is poor, then you actually stand to de-motivate a sales team. And then you have problems. 

2. The Plan Ensures Attainability of Sales Goals

This is simple in concept but very difficult to execute. The number one complaint I hear from sales representatives is that when a compensation plan is rolled out, it seems no one thought to analyze what would truly be needed to accomplish the goal from the sales representatives’ perspective. Only when no one reaches the sales goal does the company come to realize the plan itself made it functionally impossible to reach the sales goals. Worse, sales professionals will see this mistake as the biggest example of a company’s lack of competence.  Make sure you have a deep-seated, analytical understanding of what a sales professional’s typical sales day truly looks like, from a sales-activities standpoint, to understand what is realistically attainable.

3. The Plan is Stable and Promotes Sales Staff Retention

The more stable your sales compensation plan is without requiring subsequent changes, the more it will promote staff retention. The best sales compensation plans only change due to a change in customer, market, or growth conditions. When a compensation plan is stable, your top-performing salespeople can work to leverage the plan to maximum benefit. Hint: Salespeople HATE to constantly figure out new compensation plans.  Also, please reconsider doing things like putting caps on sales commission earnings because you believe your sales reps “make too much money.” The sales professional is one of the very few people in the organization who bears a significant portion of their income and compensation “at risk.”  It is irksome for them to have to take on that risk only to see their earnings arbitrarily capped.

what do the best sales compensation plans include?

4. Design and Communication of the Plan Must Be Understandable to the Sales Team

Another thing salespeople immensely dislike – requiring a PHD in economics to figure out all the various nuances of their complicated compensation plan. Salespeople interpret this in very simple terms – that the management of the company is trying to figure out creative ways to play them less, not more. Your sales team must trust you to work hard for you. Don’t incorporate fancy compensation shenanigans into your plan that does nothing but erode trust. 

Also, communication of the sales compensation plan is just as important as the design of the plan itself. I have seen very well-designed and thought out compensation plans disintegrate because communication of plan's roll-out was an afterthought.


5. The Plan Must Support Proper and Ethical Sales Behavior 

Salespeople sometimes deviate from script and exhibit unethical or incorrect sales behavior.  An incorrectly designed or communicated sales compensation plan can encourage and greatly magnify the ramifications of this. Be crystal clear about acceptable sales behavior to ensure your team is selling ethically and representing your company in the best possible light. Make sure your compensation plan doesn’t entice people to game the system ... or even worse, game your customers.

what to avoid in your compensation plan


6. The Plan Must Meet Budget Allocation Considerations

The importance of keeping variance to allocated budget to a minimum is imperative. Not doing so drives up the cost of sales, sometimes with extreme effect. Keep an eye on the budget with KPIs and metrics to maintain sales and profitability performance. Allow for re-assessing and adjusting the pace of goal attainment through Sales Accelerators or Sales SPIFS (Special Performance Incentive Funds) to push through more sales/revenue and/or manage certain expenses to offset ROI production. It is important to note that SPIFs are taxable and that the IRS considers them incentive pay. Therefore, they fall under the rules for 1099 Miscellaneous Commission, which means that you need to track and report all SPIF payouts.   

7. The Plan Must Produce an Appropriate ROI Against OTE

All the considerations named above don’t matter one hill of beans if your compensation plan is not producing the correct return on investment (ROI) against on-target earnings (OTE). OTE is used to provide a calculated and more accurate forecast of what total compensation of a particular sales position should be when performance targets are realized.

ROI production of the sales compensation plan is the most important consideration. However, in the best compensation plans, measurement of ROI production is often the last consideration. Inputs = Outputs. ROI measurement of the sales compensation plan’s “inputs” validates that the compensation plan is well designed.  

The Order in Which You Determine the Plan Matters

In way too many compensation plans, ROI calculation for the company is the first thing considered, before defining realistic sales goals and the sales compensation plan. This results in backwards planning. It MATTERS in what order you design against your plan requirements. This doesn’t mean that ROI calculation is last in priority, it is still first, however, before you define achievable ROI goals, you must make sure you have defined your sales compensation plan with all other factors evaluated. This way you will know that the sales team will benefit, and in-turn, sales and revenue will grow.

Consider Who Designs the Plan

Lastly, be sure to understand the implicit biases of WHO designs the sales compensation plan. For instance, if accounting is given the task, the compensation plan will probably reflect strong weight towards company benefit. Remember, it is about balance and finding the win/win.

Launch Revenue with the Right Sales Compensation Plan

A well-executed sales process with the right talent and a fundamentally sound compensation plan will provide the engine for the earnings you desire. But the salespeople always provide the horsepower. If you have questions about your sales compensation plan or would like to schedule a complimentary revenue assessment, contact Atomic Revenue today.

Topics: Sales Operations, sales teams, sales compensation,

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