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  • Writer's pictureSteve Johnson

Designing an Effective Sales Compensation Plan: A Step-by-Step Guide

Effective Sales Compensation Plan

If your company is looking to attract, recruit and hire the best sales talent in your region or in your industry, designing and implementing an effective sales compensation plan should be your number one priority. Though your innovative product offering, unique business atmosphere, and other similar perks may be able to draw interest to your company, most salespeople will be primarily interested in knowing the sales compensation plan that awaits them. 


According to a study published by the Harvard Business School, companies in the United States spend upwards of $200 billion US dollars each year in compensation plans for their salesforce. The same study indicates that, in order to stay competitive and to attract the top employee talent on the marketplace, over 80 percent of US-based firms review and renew their sales compensation packages at least every two years. 


If your company is having a hard time attracting and retaining a quality, motivated, and driven sales team, then this step-by-step guide will walk you through the process of devising strategies to bring onboard the best talent that will help your company achieve its goals.


This article will outline the best approaches and tactics for designing an effective sales compensation plan that works for both you and your sales team. We will also explain 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 through the sales compensation plan.   


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. 


Designing an attractive sales compensation plan is the best way for a company to attract and retain the best employees in their industry. It is also an essential component of creating a trustworthy business atmosphere and instilling motivation and incentive for your salesforce. 



Definition and Key Components


Let´s start with some basic terms and concepts. Sales compensation refers directly to the total amount of money/income that a member of your sales team is paid each year. For sales-related jobs, a sales compensation plan is generally divided between a base salary and commission payments based off the number or volume of sales that they make. Many compensation plans may also include additional monetary incentives that are implemented to inspire your sales team to meet or exceed the specific quota set up for a given time period.  It is important to note that a sales compensation plan should be differentiated between different members of your team depending on their specific job-related tasks. The proportion of base salary, commission, and other incentives need to be planned out in order to find the best ways to stimulate the best performance for your sales team. 


Importance for Sales Teams


According to a recent report from the U.S. News and World Report, the salary benchmarks for sales employees in 2022 was as follows:

 

  • The average salary for a sales representative in the United States stood at $63,230.

  • The best employee talent in the top 25 percent of the compensation bracket made $93,280.

  • The lowest-paid sales reps in the bottom 25 percentile made $47,220.


Your sales employees will most likely know the average salary and compensation plan in their industry. If your company is offering significantly lower compensation plans without any incentive to earn more, this will most certainly be the first deterrent to attracting the best salespeople for your business. 



Key Considerations in Designing a Sales Compensation Plan


Aligning Compensation with Business Goals


Despite the obvious importance of sales compensation planning, it is important to understand that offering high base salaries might not always be the best path of action for your company. Designing a sales compensation plan that is aligned with your overarching business goals should be the prime determinant in the planning process. 


For example, if your company is looking to capture an important emerging market during a critical moment in your business expansion, you might want to tweak your sales compensation plan in order to incentivize sales that are directly related to the conquering of that emerging market. You may temporarily reduce base salary and significantly increase the commission on sales that are oriented towards that market sector. Additionally, you may add extra financial incentives to encourage employees to exceed quotas in that sector. 


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. 


Understanding Sales Roles and Functions


According to one recent study by Gallup, sales teams that are motivated and engaged can lead to a  17 percent rise in productivity. The best way to motivate a sales team is to ensure that everyone is on the same page when it comes to your principal business objectives and goals. Your sales employees need to understand their specific sales roles and functions in order to contribute to the growth of the company. Furthermore, when they have a firm understanding of their roles and functions and how these interact with the commissions and other incentives that are embedded in your sales compensation plan, this can drive motivation and encouragement. 


The “four sales meetings” approach outlined by Scalingsales.com outlines the best way to ensure that every member of your sales team understand their specific roles and how they can work towards the most enticing sales compensation for their own benefit while simultaneously helping to drive your business forward. 



Steps to Design an Effective Sales Compensation Plan


Let´s turn our attention now to the process for designing and implementing an effective sales compensation plan. 


Analyze Historical Performance Data


As we mentioned above, many companies might decide to differentiate a sales compensation plan for different sectors or members of your sales team. The best way to personalize the incentives through an individual sales compensation plan is to take the time to analyze the historical performance data of individual sales employees or sectorized sales teams. 


If you choose to go this route, you will need to analyze the apparent market opportunities available in the different territories or sectors where your employees will be working. This will allow you to determine the different quotas and incentive structure more easily. 


Some of the historical performance data you might want to consider includes: 


  • The average contract value,

  • The average deal size,

  • The number of salespeople on your team,

  • The average revenue per salesperson,

  • The monthly or quarterly qualified leads,

  • The proportion of qualified leads that are closed.






Set Strategic Revenue Goals


You will also need to set strategic revenue goals that are clearly communicated to your sales team. The established sales quota needs to reflect openly the time-bound revenue target set by sales managers or other decision-makers in the company. By strategically determining and clearly communicating your company´s revenue targets, you will have a key performance indicator that will allow you to evaluate the success and progress of your sales team. Revenue targets also provide a strategic direction for your company and can help you determine how compensation plans can be fine-tuned to help drive those revenue targets. 


Design the Compensation Structure


Once you have analyzed historical performance data and set your revenue targets and goals, you need to design the specific compensation structure considering the proportions of base salary, commission, and other incentives. Many sales managers struggle with the decision to prioritize a more stable base salary or a higher commission rate for your sales employees. 


Though the best compensation structure will always be contextual and business-specific, here are a few suggestions to keep in mind when designing the optimal compensation structure for your company: 


  • A commission-only compensation plan will certainly allow your company to forgo a lot of risk. If your sales team is successful in selling your product or service, your business revenue increases. When they aren´t successful, your company doesn’t perceive lost revenue through expensive base salaries. The problem, of course, is that commission-only compensation plans may drive the best salespeople away from your business. Many experienced and talented salespeople will generally want a bit more financial security in their compensation plan, especially in situations where sales cycles are long and complex. 

  • Base salary plus commission is the most common salary compensation structure used by businesses, as it combines the stability of a regular salary with the added economic incentive to sell provided by the commission. It is important to determine the commission variables, such as when the commission kicks in, percentage rate, etc. In general, the shorter and simpler the sales cycle, the smaller the percentage of variable compensation. 

  • A gross margin commission plan is one commission structure wherein you pay your sales team based on total profit/revenue generated, rather than on individual sales. For example, if employee A sells a product with a $10,000 gross margin, he or she would be compensated more than employee B who sells a product with a $2,500 gross margin. This can be an important strategy to disincentivize employees from discounting to close deals while also driving your revenue goals. 

  • Profit sharing and equity deals are less commonly used in sales compensation plans. However, in some cases this might be an innovative motivational technique to help a company succeed. For example, a startup company with limited capital to pay any sort of desirable base salary might be able to attract the best salespeople through a profit-sharing mechanism that could incentivize them to work hard to drive up your business revenue. 


Best Practices for Implementing Sales Compensation Plans


Once your company has settled on a sales compensation plan, there are several things you will need to do to ensure the best implementation of that plan. 


  • Regularly Review and Adjust the Plan: To be fair to your employees, you should regularly review and adjust the compensation plan based on external market factors, employee performance, employee satisfaction and motivation indicators, and the competition from other companies in your industry. 

  • Engage and Train Sales Reps: To help your business grow and achieve its revenue goals, you should also offer regular training for your sales reps and engage them individually and as a group. This will help sales managers know what sort of specific training is needed and how aligned the sales reps are with the company´s overarching goals. 

  • Keep Plans Simple and Transparent: Lastly, you will also want to ensure that your sales compensation plan is simple and transparent. Every member of your team needs to be able to understand exactly what he or she needs to do in order to achieve a certain commission or bonus. This is an essential factor in keeping your sales team motivated and encouraged. 



Attract Talent and Drive Growth with Effective Compensation Plans


With an effective sales compensation plan, your company will be able to attract the best employee talent while establishing the motivating mechanisms to help drive your business growth goals. 


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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