The Essential Guide to Designing an Effective Sales Compensation Plan

As a business leader, you know that your sales team is critical for driving revenue and achieving your company’s growth objectives. But compensating salespeople is trickier than it seems. Getting your sales compensation plan right requires careful strategy and planning.Designing Effective Sales Compensation Plans

This article will provide you with a step-by-step guide to designing a sales compensation plan that incentivizes your team to meet and exceed goals. Follow these optimum practices, and you’ll have a plan that aligns sales behaviors with your business objectives.

Align Compensation with Business Strategy

The foundation of any effective sales compensation plan is understanding your overall business strategy. Executive leadership and Sales leadership should meet annually and take into consideration the following:

    • What are your short and long-term business goals? What metrics define success?
    • Who are your target customers and what value do you provide them?
    • What products and services do you offer? How will new products and services affect the focus of your sales compensation strategy?
    • What is your pricing strategy?
    • What changes to the market have occurred?
    • How do you go to market? What sales channels do you use?
    • Who are your competitors and what is your competitive advantage?

With a clear sense of your business strategy, you can design sales compensation around behaviors that support your strategic objectives. For example, if a priority is acquiring new customers, you may want to add accelerators for achievement beyond target goals to incentivize sales professionals to exceed goals.

Understand Your Sales Organization

Next, analyze your sales organization and how compensation fits in:

  • What roles make up your sales team – hunters, farmers, account managers, etc.?
  • What metrics are used to measure sales performance by role?
  • What should the cash compensation mixed be for each job(fixed vs variable) based upon the role
  • What behaviors does your current compensation plan reward or discourage?
  • Do you have clearly written sales compensation plan documents so your sales team understands how they are compensated and what drives their pay?
  • Does your sales team consistently achieve or exceed their target sales goals?

Getting input from sales leadership on these questions will uncover what’s working well versus areas needing realignment.

Set Your Compensation Components

With strategy and sales structure defined, decide the components that will make up the plan:

    • Base Pay – Fixed base pay providing a consistent income.
    • Variable Pay – Variable pay incentives paid for achievement of sales goals and other metrics.
    • Equity – Stock options or RSUs that tie long-term pay to company value.

Determine the right mix of these components based on your sales roles, business model and objectives. Use base pay for essentials then layer variable pay on top to incentivize target results.

Define Your Sales Metrics

The metrics you choose to measure, and reward will directly impact sales team priorities. Tailor metrics to your business objectives:

  • New Accounts/Revenue – Reward new customer acquisition.
  • Profitability – Drive sales with better margins.
  • Renewals/Retention – Incentivize retaining and growing existing accounts.
  • Customer Satisfaction – Reward customer loyalty and satisfaction.

Communicate clearly how compensation is calculated so employees understand how to maximize pay.

Set Targets for Metrics and Variable Pay

With metrics established, set target levels and payouts:

  • What metrics warrant accelerators or additional compensation for overachievement?
  • Will you impose penalties/decelerators (lower payouts) for underperformance?
  • How much will reps make at 100% of target vs. 110% or more?
  • How will your variable pay vary by product, profitability or deal size?

Model different scenarios to find the optimal balance between profitability, achievability of goals and perceived fairness of the plan. Test the model with your sales leaders before finalizing.

Administer and Optimize the Plan

Once launched, monitor your plan closely:

    • Gather feedback from managers and sales representatives on how well the plan is working.
    • Track achievement of targets and estimate total compensation costs.
    • Identify needed adjustments based on salesforce feedback and business trends.
    • Automate administration through compensation management tools.
    • Keep detailed records of all transactions for accurate payments.
    • Provide easy-to-use sale incentive plan calculators for each sales professional so they can establish their own production and financial goals.
    • Provide visibility into compensation dashboards so sales representatives can track their progress against the goals they have set

By continually optimizing your plan, you’ll boost motivation, retention, and bottom-line results.

Designing an effective sales compensation plan requires cross-functional collaboration between Sales, Finance and HR. By following this blueprint, you’ll have a sales compensation plan that fuels growth and productivity.

For help reviewing or redesigning your current sales compensation practices, contact us today. Our team of experts is ready to partner with you.