Everything You Need To Know About Sales Compensation

Not All Sales Comp Plans Are Effective At Driving Sales Rep Behavior

Sales Compensation PlansUpdated March 19, 2020 - Did you know 43% of sales reps would be willing to leave their companies for a 10% salary increase?

Compensation is an important factor in attracting and retaining employees, especially in sales. Imagine if almost half of your sales team left the company because of a poorly designed compensation plan.

When establishing a sales compensation plan for your company, you need to pick one that’s going to benefit both your employees and your organization. Sales reps do what you pay them to do.

Choosing the best plan will motivate your sales people to work toward your business’ overall goals.  

No one has developed a “one-size-fits-all” compensation plan, which means you need to consider what is going to be the best fit for your company, our sales team and your prospects.

Straight Salary

The most straightforward compensation plan, straight salary is just as it sounds: salespeople are offered a yearly salary with no commissions. Though common in other areas of an organization, straight salary is not often used in sales. 

It’s best used as an option when sales departments are small, versatile departments; where everyone works collaboratively (and equally) on multiple projects; and if salespeople are expected to spend large amounts of time on other responsibilities (that are not selling). 

However, straight salary for sales teams is becoming more and more common. Primarily when sales teams are asked to be more guides than pushy closers. If you want your team to spend more time helping prospects and less time trying to close them. Then you could consider a comp plan that is more base salary and less commission.

Salary Plus Commission

This is the most common form of sales comp plan. Sales reps get paid a base salary plus commission based on their agreed-on activity or performance.

But from here, I’d say there are as many different versions of sales plus commission plans as there are companies.

You can pay sales reps a percentage of revenue on everything they sell. Sell a deal for $100,000 and get 2% of revenue or commission of $2,000.

You can pay sales reps a percentage of profit on the revenue they generate. Sell a deal for $100,000 and get 20% of the 5% profit generated from that sale. $5,000 in profit generates $1,000 in sales commission under this plan. This type of plan is good when sales reps give out discounts. The more they discount the more the diminish company profit and their own commission. This discourages them from doing too much discounting.

Another option is to set targets for sales reps and align their commission structure to their goal attainment. A simple example is all sales reps have a month sales quota or target or goal of $50,000 a month. If you hit your goal, you get 5% of revenue or $2,500. If you exceed your goal your commission rate goes up to 6%, so if you so $60,000, you get $3,600. But if you miss your goal you get 3%, so if you do $40,000 in the month, you only earn $1,200.

Remember to try your hardest to keep your sales commission plan simple. The more complicated you make it the harder it will be for reps to understand it and then act accordingly.

Keep in mind that any commission-based plan is going to need to be tracked closely, sales reps are going to need reports and incentive data to understand how they earned what they did and these reports are important for driving additional performance.

Which brings up a point about reporting and communication. Sales reps are historically very competitive. They don’t want to be at the bottom of the list and most of them strive to be at the top of the list.

Make sure you publish rep rankings based on performance (not earnings) regularly. Whatever your performance metrics are, reps need to see how they’re doing when compared to their peers. This can be one of your more motivating tools when pushing reps to achieve at higher levels month over month.

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Commission Only And Draw Against Commission

This is an old-school compensation plan format. In this form, there is no guarantee of compensation. A sales rep will only make money when sales are made. This model tends to attract fewer candidates, but those it does attract are often hardworking individuals who are confident in their ability to make sales and support the company’s business goals. 

If a salesperson feels they are capable, they should be comfortable accepting a comp plan that is 100% commission. This type of plan is very low risk for the company. In situations like this, companies often over hire, bringing in two or three times the number of people they need knowing that most will quite or wash out because they’re not making enough commission.

Leaving the remaining top performers to produce at a desired level.

There are risks with this type of plan. Sales reps will be push. If they don’t sell, they don’t eat. Are they protecting your brand? Are they bringing on customers who will be referral sources for your company? Are they signing anyone with a dollar just to make commission only to have them cancel later?

Make sure your commission only plan claws back money for commissions paid if customers don’t stick around long term.

Similar to commission only, draw against commission is also based entirely on commission. The difference is that at the start of each pay period, your employee is advanced a specific amount that will then be deducted from commission at the end of each pay period. After paying back the advance, he or she then keeps the remaining commission. 

The disadvantage to employees is that in lean months, they may end up owing you money, and after several lean months in a row, they can end up in significant debt.

Both commissions only and draw against commission are not seen as frequently in highly productive, highly professional sales organizations. These types of programs are much more common in high volume, B2C organizations. Here the turnover, and quality of salesperson is less relevant. We would not recommend either of these comp plan options.

Territory Volume

Team selling is much more popular these days and assign a team of sales reps to a territory, then compensating them based on the performance of that territory works well.

This might also work well if you have NBRs (new business reps) out looking for new prospect opportunities and then turning those over to traditional sales reps to close the deal. There could even be customer service reps who are taking care of customers in that territory and generating additional revenue from cross sell and up sell opportunities. All three types of reps share in the success of that region and work together to drive revenue.

All types of comp plans would be in play here. You can pay everyone straight salary, salary plus commission on revenue generated or profit. You can even set goals and pay the entire team accordingly. Remember, keep it simple and make sure reporting and data is solid.

There are other aspects of sales compensation that you need to consider.

Make Sure Compensation Incents Behavior, Not Just Results

One of the keys to successful sales efforts is a team that works in a similar way. This means they use your CRM, they follow your documented sales process, they use the sales tools provided by marketing, they have an SLA with marketing and live by it, they share feedback and track their activities.

It might make sense to include some element of your compensation plan that rewards sales reps for the right behaviors. You know that these behaviors produce better results, give you the data you need to analyze performance correctly and strategically align marketing and sales. You need to reps to understand that too and paying them to do it is almost always worth it.

Create A Plan That Helps The Team Succeed

Having one or two top performers is good, but having the entire team succeed is much better. Consider adding team incentives too that reward everyone when you meet or exceed your goals. This can help pull the average performers into the top performing category and help low performers move into the average category and pull up the entire company’s performance.

By setting up a matrix related to performance that incents them for more than quota attainment you can get people to work on improving their own performance and drive team performance at the same time.

Set Incentive Timelines Strategically

You need to align your sales compensation plans with your company’s objectives. That might be quarterly, monthly or annually. The shorter the time frame the better. Sales reps usually have short term-oriented mind sets. What can I earn this month or this quarter?

In some cases it might make sense to align plans with your performance appraisals or time-based performance goals associated with other company initiatives like new product launches. Finally, make sure very sales comp plan has an expiration date. We’re working with the 2020 Sales Compensation Plan and there is an understanding that in 2021 there will be anew Sales Compensation Plan.

This give you the flexibility to change plans as the business changes and to change plans when parts of the plan don’t work as expected.

Here are a couple of other best practices to keep in mind.

  • Make sure you’re motivating all levels of performance and all roles. Some roles might be more incentive based than others, but almost everyone in sales and marketing should have a component of their compensation that is related to sales and revenue growth.
  • Set challenging targets. Goals should not be easy to attain but not so far out that reps feel defeated before they start. Setting goals and targets for quotas is as much a science as coming up with their comp plans.
  • Don’t cap commissions. In fact, don’t ever cap the amount of money a sales rep can make. They should never reach the upper limit. The more they sell, the more they make. Really good sales reps should be one of the highest paid people in the company—and rightfully so.
  • Pay sales reps quickly. If they have a great month, pay them for it in a week or two. Create these payment cycles so they immediately see the rewards for their hard work. If they have to wait two or three months to get paid for work, they did months ago, they are going to be less likely to maintain that momentum and help you grow.
  • Personalize incentives and recognize early and often. Sales reps are motivated by public recognition as much as they are by money. They want to shake hands with the CEO. They want to be mentioned in the company email for their work on the big deal. They want to see their name at the top of the leader board. Build solid communication, personal rewards and clear reporting into all your sales compensation plans.

Sales reps do what you pay them to do. Your sales compensation plans can carry you toward exceeding your goals or cause you to crash and burn. Make sure you think them through strategically and then clearly and simply roll them out to your reps. Keep constant communication and make sure they know how their activities and performance contributed to their compensation.

Square 2 — Building The Agency You’ll LOVE!

Posted By Author Mike Lieberman, CEO and Chief Revenue Scientist

Co-founder, President and Chief Revenue Scientist at Square 2 Marketing the only inbound marketing firm in the world that has cracked the code on how to use inbound marketing to generate leads for their clients.

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