Salary and wages are simple compensation plans that let us know what to expect—a standard amount at the end of every pay cycle. Sales compensation plans take a lot more work to get right. Due to the quota-based performance measures that follow the work of sales representatives, employers often prefer to provide sales incentive plans to motivate them to perform better. Sometimes these are given as additional bonuses for good performance, while other times these are tied into entire salary compensation plans.
Choose sales compensation systems that suit your company. (Image Credit – Freepik)
According to Xactly, businesses on average spend 10 percent of their revenue on sales compensations. QuotaPath found that 90 percent of leaders don’t trust their compensation structure while 75 percent of sales reps do not believe they are paid fairly. With such investments in compensation systems, it is useful to design a comp plan that actually motivates employees and brings in revenue for employers.
Effective Steps to Create a Sales Compensation Plan
Creating effective compensation plans does not have to be complicated. Compensation systems can be based on metrics your company prioritizes as well as a consideration of what is feasible for your company.
1. Identify Company Goals
Good sales compensation plans are based on a clear goal and identifiable performance measures. Having a clear idea of the plan is necessary to decide how to build the rest of the system around it.
Define Overall Business Objectives
Define the company goals in terms of numbers as well as value additions and qualitative performance indicators that matter to the company. Examples of business objectives can include market expansion, revenue growth, cost reductions or optimization, product development, etc. These are the overall business objectives not specific to the sales team but important nonetheless. These can help build the sales compensation plans at the next stage.
Align Sales Goals with the Business Goals
Now that you understand the purpose of the company, shift the focus to the sales goals in particular. The most simple sales goal would be to hit a specific number of product sales every quarter to bring in the revenue. However, sales goals can be more complex as well, combining customer loyalty with the sales process in an efficient manner.
- Individual sales targets
- Market penetration
- Customer conversion
- Increasing revenue from existing customers
- Streamlining the sales process
- Increasing market presence
Identify Key Performance Metric
Once the sales goals and overall strategic plan have been defined, you can then set fixed numbers for each goal. These must be rational and achievable according to past performance and scalability as per the resources available to the company.
2. Define Sales Roles and Responsibilities
Compensation systems should clearly state what each role is, what it entails, and what form of compensation will be offered for the same. Whether it is a sales representative or a sales manager, their compensation plans will differ accordingly, and establishing what that means can give them a goal to work towards.
Example:
Sales Representative:
- Role: Responsible for prospecting, pitching, and closing deals with new clients
- Responsibilities: Take care of market research, identify new leads, reach out to old clients
Sales Manager:
- Role: Oversees the sales team and sets team targets
- Responsibilities: Provide leadership, coaching, and support to the sales team, while working on strategies to achieve collective goals
3. Choose the Right Compensation Structure
Now that you’ve established performance measures as well as the role of your sales team, you can begin to shape your compensation plans. You can assess past compensation systems as well as external systems to see which might work best.
Assess Industry Standards
Sales is a competitive field and there is a constant need to keep an eye on competitors and learn from the industry norms to see if you would like to do something differently. Your sales incentive plan can also introduce an innovative edge to attract top talent towards boosting your team. Align these standards with your own business and sales goals and set benchmarks to review your progress regularly.
Evaluate Compensation Systems to See What Works Best
Consider three important components: Base salary, commission, and bonuses. In compensation plans, the base salary forms the basic pay that sales reps can receive regardless of their performance. This is their standard pay but not all compensation plans have a base salary.
Some compensation systems are commission-only, where the amount the sales rep earns is directly linked to how much he is able to sell. While this structure can push people to sell more, it can also be difficult to plan and enforce. A pay mix can be set where the ratio of the employee’s base salary and the compensation percentage can be decided.
The bonuses come in as a reward for exceptional performance exceeding the established performance measures. Sales incentive plans always benefit employees who go beyond their requirements to hit the bonus. They have to be calculated carefully, however. Too low and too many people might suddenly be eligible for a bonus. Too high and no one might achieve it, causing the team to lose motivation instead.
Example:
Sales Representative:
- Structure: Commission-based with additional bonuses for exceeding targets
- Incentives: Higher commissions for acquiring new clients
Sales Manager:
- Structure: Base salary with performance-based bonuses tied to team targets
- Incentives: Additional incentives for overall team success and meeting collective goals
4. Address Clawbacks and Risk Mitigation
While guidelines are set for when compensation will be awarded, regulations can also be set for when they might be canceled or taken away. A clawback is a mechanism that allows the company to reclaim previously paid compensation under specific circumstances. Clawbacks are enforced in cases of misrepresentation of sales figures, unethical behavior, poor performance, or a drop in company profits. Ensuring the rules are clear on this component reduces the chance of pushback from employees if it is ever enforced.
- Clearly outline events or conditions that warrant the activation of clawback provisions
- Define the timeline within which this process can be initiated
- Clarify the process of the clawback and how it will be conducted
- Discuss any legal considerations and ensure all guidelines align with legal requirements
5. Implement a Performance Management System
It is necessary to clearly articulate compensation plan details and communicate these performance measures and compensation plans to the employees. Once complete, you can also establish a performance management system to oversee the progress of the sales incentive plan and review whether any adjustments need to be made.
This is also a good time to establish performance reviews and regular feedback systems to assess what the employee is doing right and also provide them with areas of improvement. It can also be a review of what internal training a company might want to offer its employees. Such a feedback and correction system can instill a culture of learning while still holding on to the competitive nature of the industry.
With these five steps, companies can create an effective sales compensation plan for their employees and establish performance measures that are best suited to their company. Sales incentive plans can always be adapted when the goals and measures are clear, as all the other components can be adjusted to fit in accordingly.