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  • Writer's pictureSteve Johnson

Common Mistakes in Sales Compensation and How to Avoid Them


Sales Compensation

For many business owners, CEOs, sales managers, and others, designing and implementing a competitive and attractive sales compensation plan is often seen as the best possible way to attract the top employee talent, keep your sales team happy, and ultimately drive the growth in revenue and sales that your company needs in order to succeed. Unfortunately, the actual design and implementation of the sales compensation plan is not as straightforward as it might seem at the outset. 


Should your prioritize a more stable base salary or a higher commission rate for your sales employees? If you opt for a focus on commission and other incentives, how exactly should you orient those incentive? Often, the incentives that you implement in your sales compensation package might not be closely aligned with company goals. When that happens, you might actually be incentivizing wrong behaviors and sales motivations for your team. When the incentives are misaligned with your overarching company goals, they will tend to discourage the best practices in your sales employees and increase the risk of losing revenue. 


In short, getting your sales compensation package right is the best thing you can do to properly motivate your sales team and ensure alignment with your company goals. In this complete guide to designing the best sales compensation packages for your sales team, we will take a look at the five most common mistakes in sales compensation. We will also offer a few ideas and suggestions for how you can avoid these common mistake, as well as explaining how the solutions offered by Scaling Sales can help CEO´s, sales managers, and others find the best strategies for motivating and incentivizing a sales team.  


Here at Scalingsales.com, our research and experience confirms that by treating the salesperson as their own CEO, companies are setting the foundation for a genuine accountability system that rewards salespeople for the quantity and quality of the sales and for the true value they create for the business. Avoiding the most common mistakes in designing and implementing sales compensation packages is the first step in ensuring a motivated, driven, and ambitious sales team that is ready to help your company achieve its sales goals. 


Mistake 1: Misalignment Between Compensation and Company Goals


As we mentioned in the introduction, the most common mistake related to sales compensation is the fact that many sales compensation plans are simply misaligned with the overarching company goals. If you are trying to train a dog to sit, but you give it a treat every time it rolls over, you will obviously be shooting yourself in the foot by rewarding the wrong behavior.


In businesses, many sales managers and CEOs don’t spend the necessary time thinking about how the incentives can be specifically tailored to the predominant and most important company goals. For example, let´s say your company has recently expanded into a potentially profitable new market. As a sales manager, you want your sales team to invest extra effort in seeking out new clients and landing sales deals in this specific market. However, if your sales compensation package does not differentiate between sales that occur in certain geographies or markets, many of your sales employees may be disincentivized to focus their efforts on this new market. If compensation is the same for every sale, then there is no extra motivation for them to invest extra energy and effort in conquering this new market. 


If, however, you scale your compensation to increase the economic reward for sales in the targeted market area, this obviously adds extra incentive and motivation to keep your sales team moving where you want and need them to move. 


The incentives designed into your compensation plan need to be specifically tailored to the sales behaviors that will help the company achieve its goals. Unfortunately, a recent Gallup poll found that only 40 percent of employees are aware of their company’s goals, strategies, and tactics. If you don´t ensure that your sales employees are completely aware of what your company´s goals are, it shouldn’t come as a surprise when you don’t meet your expected sales targets. The best way to guarantee that your sales employees are on board with your sales plans is to ensure that your compensation plan is not overly complex. We´ll turn to this common mistake next. 


Mistake 2: Overcomplicating the Compensation Plan


Another common mistake related to sales compensation plans occurs when the sales employee simply does not understand all what he or she needs to do in order to gain the compensation or incentives that they seek. When a compensation or incentive plan is hard to understand, this generally leads to high turnover within the company. When a salesperson thinks that he or she has achieved a certain incentive but did not understand the complex structuring of the compensation plan, this obviously can create frustration. 


Furthermore, many sales managers and CEOs mistakenly assume that complex compensation plans serve as extra motivation for their sales team. But, if the salesperson does not have a clear and concise idea of what they need to do in order achieve certain compensation thresholds, this can actually become a deterrent to motivation and negatively affect the company´s revenue goals. 


As a general rule of thumb, when a compensation plan is straightforward and easy to comprehend, this generally leads to more efficient execution and higher levels of sales rep motivation that coincide with your company´s goals.


Mistake 3: Inadequate Balance Between Base Salary and Variable Pay


It is extremely important that your sales employees understand exactly what they need to do in order to receive a certain amount of economic compensation for their efforts. In some sales scenarios, a higher vase salary might be necessary in order to offer the needed stability that the best salespeople require to do their job well. 


For example, if your sales cycle is long and complex, a focus on commission-based compensation might create financial and emotional stress for certain members of your sales team. If it takes six months to close a major sale, many salespeople might simply not have the financial stability needed to see that sale through to closure. 


On the other side of the coin, if your sales cycle is relatively quick and low value, a high base salary might actually serve as a disincentive to your sales team. 


The structure of your sales compensation package, and more specifically the balance between base salary and variable pay, needs to be clear, simple, transparent, and perceived as fair by your sales reps. According to one recent study, properly structured incentive programs can increase employee performance by 44 percent. In order to determine the proper balance between commission and base salary, we recommend you take a look at this recent blog post from Scaling Sales. 


Mistake 4: Lack of Transparency and Poor Communication


If your sales team perceives that they are not being properly rewarded for the sales benchmarks and/or quotas they think they achieved, this is one of the quickest pathways towards employee dissatisfaction and lack of engagement. One recent study found that companies utilizing an incentive program reported a 79 percent success rate in achieving their established goals when the correct reward was offered. When that reward is not understood, however, this can quickly lead to irritation and demotivation. 


Among the best practices for clear communication, regular meetings with your sales team is one of the best way to ensure that everyone is on the same page. It is extremely important that every member of your sales team clearly recognizes the strategic performance metrics that align with the sales objectives of the company, the growth targets of the company, and the overarching company goals. Your sales team needs to understand how their commission and other incentives are dependent upon these metrics. Ideally, the process for outlining these key performance metrics should be collaborative in nature so that every member of the sales team understands what is at stake and what they need to do in order to achieve a certain commission or compensation threshold. The “four sales meetings” approach outlined by Scalingsales.com outlines the best way to ensure that every member of your sales team is on board with this process.  


Mistake 5: Failure to Regularly Review and Update Compensation Plans


Lastly, it is extremely important that as a CEO or sales manager, you take the time to regularly review and update your company´s compensation plans and compare them to other competitors in your industry. The moment that your sales employees begin to feel like they are undercompensated or that they could drastically increase their income by moving to a competitor company, is the moment you begin to lose your best employees. In fact, one recently study found that 43 percent of sales reps say they would be willing to leave their organization for just a 10 percent salary increase. This shows how important sales compensation really is. 


When companies base their incentives and compensation plans on outdated data that does not reflect the industry standard or average, this will inevitably lower your sales employee performance and puts you on the path for losing your top employee talent. 


The best way to avoid this common pitfall is to benchmark your compensation plan against the top incentive packages offered by your competition. This will allow you to compare your compensation packages and incentive structures against peers in your industry. Not only will you be able to determine if you are paying above or below market averages, but this data will also give your company insight into how you can design and implement more strategic incentive planning decisions that will help you retain the top employee talent, keep your sales team motivated, and achieve your sales and revenue goals. 


Crafting Effective Sales Compensation


An effective and successful compensation plan is one that simultaneously incentivizes and rewards results for your company, your clients, and your sales team. Here at Scalingsales.com, we help you identify the root causes of your sales issues, clarify where you want to be, and create a plan to bridge the gap between the two. We are also one of the few coaching and consulting programs that offers free consultations where we can help you gather a clear and concise picture of your issues, a plan to solve them, and in many cases, we can even start working on an immediate sales problem you're experiencing such as identifying the mistakes in your sales compensation plan and designing innovative incentives for your sales team. 


Our innovative and effective coaching and consulting program is designed to put the CEO and their team firmly in control of converting prospects into new customers and onboarding and leading their salespeople. Together, we can come up with innovative solutions to create a compensation plan that incentivizes and rewards results for your company, your clients, and your salespeople.


If you´re ready to get to the root of your sales issues, schedule a call today with Steve by following this link. You can also use this step-by-step checklist as your first step to attracting more customers, wining more deals and getting control of your revenue.


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