What you need to know about sales compensation

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What you need to know about sales compensation

Formulating the right compensation plan can be a bit like solving a Rubik’s cube

Matthew Cook on July 28, 2016

A business owner sits at his desk and wonders why his year-to-date sales are well below forecast, his cash flow is suffering and he can’t seem to motivate his sales team to sell the new product. Everyone had bought into the targets at the beginning of the year; but now, the frustrated manager would be happy to hit 60% of plan. Is this a sales-management problem? Should he fire his team? What, exactly, has gone wrong?

Scenarios like this aren’t uncommon among small and mid-sized companies. But in many cases, the problem isn’t the product or the people. It’s the sales compensation plan.

Salespeople are your company’s frontline champions for the products and services you sell. They’re the connection between your company and its customers. They find revenue, and they make a primary contribution to top-line growth. More than anyone else, your salespeople influence how the marketplace perceives your firm and values its products.

But the way they do those things is largely a product of how they’re paid. And as most business owners and sales managers know, formulating the right compensation plan can be a bit like solving a Rubik’s cube. How do you know whether your plan is designed properly? An effective sales compensation plan does the following:

Attracts and retains top talent by being market-competitive

Every CEO or sales VP will tell you that they want to hire the top salespeople in their industry. But from my experience, companies give little thought to how their sales compensation plan is perceived by potential employees. Ask yourself these questions:

-Is our base salary competitive?

-Is our commission structure in line with that of our competitors?

-Is there a cap on commission at a competitor?

-How frequently are salespeople at the competition paid?

-Do salespeople at the competition get paid based on revenue or margin?

Only with these benchmarks can you build a plan that’s as good or better than the competition’s. Find the information in industry research reports, online guides such as Payscale and even by interviewing your competitors’ sales reps. Use competitive information as a starting point, and make adjustments that fit your business based on the next three points.

Aligns employee interests with the company’s business objectives

The DNA of salespeople forces them to spend more time and energy on the activities that earn them more money, so it’s important to define your business objectives clearly and ensure your sales compensation plan communicates those objectives to your sales team. For example, if an organization wants its sales team to focus on developing new business, the sales compensation plan should be designed to pay out more commission for acquiring new accounts than for renewals.

Admittedly, guiding behaviour through compensation is not always simple. One company I worked with had a suite of high- and low-margin products and a commission plan based solely on the gross margin of the products they sold. But that was not enough to encourage the sale of the higher-margin products. The lower-margin products were much easier to sell and could be moved in higher quantities, so that’s what the sales reps sold; high volumes with low commissions trumped low volumes with high commissions.

Your sales plan should deal with such complexities. Salespeople are driven by money, so when compensation is attached to certain activities and results, it adds weight and gets their attention.

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What you need to know about sales compensation