The Price of Success: Drafting Your Sales Compensation Plan

A strong sales compensation plan, smart hires and next-generation organizational tools are mission critical to every organization’s success. Sales management consultant, Ken Thoreson, has previously written a very popular post about sales compensation. We wanted to make sure the information stays current and update it for 2014. Learn about the latest in sales compensation plans as you set goals in the new year.

How To Create A Sales Compensation Plan

When it comes to paying your salespeople, there is no single sure-fire approach. Even within organizations there are often diverse products and services that are sold to range of buyers: think event sponsorship opportunities and consumer products. Not all salespeople are operating on the same playing field, some aren’t even in the same park. That is why some organizations pay commission based on sales, while others only pay on margin while others blend both with incentives and other bonus plans.

The burden falls on the management to set the course. The leadership team has the best view of the company’s overall goals and structure. With future success in mind, management is responsible for creating a compensation that attracts top talent, inspires sales and keeps the margins deep in the black.

Questions to Ask Yourself

Sales strategies are informed by a company’s products and services. New and existing businesses have to ask themselves where they stand in their industry so they can calculate the best approach for paying their people.

Get clear on these questions:

  • Where is the company in it’s life cycle? Established, pivoting or starting-up?
  • What is our product and what value does it bring to the customer?
  • What are our sales goals?
  • How long are our sales cycles?
  • What are the highest priority objectives: new clients, retention and up sales, increased margins?
  • Are we targeting a new vertical or rolling out new products?

Each answer will help you influence your decisions as you craft your compensation plan.

Consider the Options

It is the wild west in the world of sales compensation, and we are here to give you the lay of the land.

  • Accelerators: Accelerators offer ambitious salespeople higher commission rates as they surpass their sales targets.
  • Profit-Based: Sales reps earn a percentage of profit (sale minus cost) for every unit sold.
  • Revenue/Quota: Compensation is based on total sales receipts, regardless of cost.
  • Blended: Compensation is based on profit, revenue and incentives, such as quota achievement.
  • Team: Bonuses go to everyone on the team when quarterly sales goals are achieved.

The Cost of Doing Business

It is tempting to “control costs” by capping sales compensation, but in the long run you get what you pay for. If you hire good people and compensate them poorly, they’ll leave – plain and simple. A sales plan that compensates strong performance will allow you to attract the best salespeople — and retain them as well.

Companies need to balance it’s market’s cost of living with your business’ cost of sales (CoS). Calculating CoS is an important part of planning a compensation package. For a quick CoS ratio, simply take an individual’s salary plus commissions earned at 100 percent of quota and potential bonus opportunities, then divide by that person’s revenues to obtain the percentage. There is a more sophisticated approach to calculating costs which adds marketing expenses, corporate overhead, and direct expenses paid to the salesperson, but even a rudimentary calculation will help inform decision making. Cost of living calculations are especially important in hot markets where minor variations in compensation packages can lure away talent.

Make it Your Own

As companies codify the customers they aim to attract, they make a decision about the kind of sales incentives they need to offer. Mature, market-leaders have the most flexibility when it comes to attracting talent. Salespeople seek out established companies when they are looking for secured sales. This is a dramatically different orientation than one will find in the sales team of a burgeoning industry. Disrupters and innovators have to work harder to score deals – salespeople at those companies must be compensated in kind.

Make sure to write a compensation plan that reflects the organization’s standing – because with the new guys there is no one industry standard.

Culture Counts

As working professionals, we spend much of our waking hours at work. While we are all here to earn that bottom dollar, money isn’t the only motivating factor. Even the most competitive salespeople perform best in an environment of respect. Everyone gets that the data counts, but make sure sales management doesn’t neglect the human touch. Team-building activities, happy hours and schwag keep the energy up and cultivate a feeling of belonging that contributes to staying. And minimizing turnover means more money for everyone. We wrote about a smarter way to think about sales commissions a while back.

Creating an effective sales compensation plan is complex, but the effort pays for itself in spades. Just be sure to compliment the compensation plan with a solid vetting hiring process and professional tools, like Base, that drive sales.

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