Sales Compensation Best Practices: What are your 3 tips for developing a sales compensation plan?

Commission plans are never perfect but here are 3 tips to increase your probabilities of success:

1. Keep it simple and transparent. If the salesperson can't figure out quickly and easily if they're on track to make or exceed target commissions, you'll have a mis-directed salesperson. They'll spend more time on figuring out their commissions than on doing the things they need to hit goals. Or worse, they'll fly blind not knowing where they are. And keep it transparent. Shame on you if your salespeople have to wait to see they're paycheck to determine what they made for a given period. Take the time to show them how they're commission plan works, and provide them with commission statements showing them how their commissions were calculated.

2. Align the commission plan with corporate objectives. If your corporate mission is to increase margin, then the salespeople should ideally be commissioned on margin and/or margin growth. If you have a fixed priced product, where the margins are built in, or a product where the margins are out of the salesperson's control, then you can get away with commission plans based solely on revenue or new account production.

3. Align the compensation with the market. Take the time and do your research. Talk to recruiters in your area and ask them what base salaries reps like yours are making. Ask them what % of the OTE is variable comp. Ask them what the top 10% are making. Recruiters will help you because they want to earn your business if you're not already working with them. Caveat: talk to several because if they're getting paid based on a % of 1st year's base salary, they might skew the base high when you ask them.

All great points, I'll take a little different approach to this. Too often, managers see the commission plan as the only lever to managing performance. Consequently, commission plans become overly complicated, confusing, etc. with managers dumping everything that needs to be done into the commission plan (e.g., "You get so much for showing up for work.")

The commission plan is just one lever in managing performance. A strong performance planning/management culture includes performance plans/reviews. It sets basic performance expectations, MBO's, expected behaviors, etc.

A great commission plan combined with effective performance planning and management are key to driving sales performance.

Good suggestions on incentive plan design, but there is another thing we need to factor into the equation – implementing and managing those plans. In Q4 of 2011 we published the results of our annual Compensation & Performance Management study. The analysis was based on gathering data from over 1,300 companies worldwide. One of the results that I found very interesting was when we asked what approach these companies were using to calculate/manage their incentive plans we received the following answers:

- Manually Calculate – 5.2%
- Use Spreadsheets – 51.1%
- Use an Internally Developed Incentive Management System – 25.5%
- Use a Commercial CRM system – 14.1%
- Other – 4.0%

The fact that over half of all firms are using Excel for this task creates the potential for errors as you are essentially doing shadow accounting. The study data also shows this clearly limits what you can do in terms of program flexibility and analysis of the data.

With applications like Varicent, Xactly, Synygy, Merced, etc. available today, more firms should be upgrading the technology platforms that they use to manage incentive plans.

Here is another way to look at it - don't tie salary to performance and expect everyone to perform at an optimal level and achieve the company goals.

Last year I rolled out an experimental plan for all my sales teams where everyone was put on a straight salary based on the total comp for a series of performance/experience/responsibility brackets I created - and nixed any sort of performance based commission plan altogether.

So now, each person on my sales team knows exactly what they will make, what their exact goals and responsibilities are and what they need to do to get to the next level which comes with increased responsibilities, goals and compensation.

What did I get? A team fully aligned to the corporate goals of growth in the right and most ethical areas and a team aligned with being strategic about the business as a whole. What did I lose? Sales people gaming the system, sales people who whined about unachievable goals (and in fact gained honesty in what was realistic to attain) and the constant battle with 'the right commission plan' -which means I too gained more time to be strategic.

A bit controversial, yes! A tad hard to manage in the beginning as I had to re-program a bunch of sales folks, yes! But given my experience to date (9 months so far) I can't see a time when I'd ever go back to a commission based sales team again - unless I was a cash strapped start-up and couldn't afford otherwise.

3 Tips for Sales Compensation

Sales compensation is a very strategic business tool to align company’s business goals and objectives to their compensation program and get the desired behaviors and results for the sales force. But if a sales compensation program is not executed effectively from a design and administration perspective, the investment from the business is lost not only in missed sales, but potentially in additional compensation costs incurred by the business.
Many organizations don't put enough emphasis or concern in sales compensation and consider this to have minimal impact on the business, but I disagree. A good sales compensation program can really leverage your people, do more for the relationships with your customers and help the business meet their goals. So here are 3 tips for developing good sales compensation plans.
1) Tell your sales people what you value
2) Tell sales people where to spend their time and effort
3) Clear communication

1) Tell your sales people what you value
Sales compensation plans should tell your sales people what you value. This is done by aligning business goals and objectives with the compensation plan.
Applying approximately 3 to 5 measures that align to the objectives is recommended. Many company’s over complicate compensation plans by diluting the focus by applying too many measures in the design. Keep it simple and clear to be more effective and get the desired results.

2) Tell sales people where to spend their time and effort
When a sales person gets up in the morning and walks out the door, they need to know where to spend their time and efforts. When they know what to focus on they can personally earn more income, your customers product and services needs are met, and the company will meet their objectives.
The incentive weighting which is typically a percent of your target incentive is very important. The measure with the highest percent tells the sales person where they should be focusing. Also any measure with less than 15% of the target incentive will have minimal to no impact on behavior.
 
3) Clear communication
A poor compensation plan communicated effectively is better than a good compensation plan communicated poorly. Effectively communicating your sales compensation programs is critical to the adoption process.
One thing that we recommend is holding focus groups with a team of sales people and sales management. Have separate interviews for managers and sales people and gauge the audience on their views of the current sales compensation program. Get people involved in the design process. Get a sense of what the sales people are looking for and listen to your people. Soliciting feedback from the field sales and sales management will help in defining what is needed in the compensation plan design and will help in the adoption of the program. Most people innately are oppose to change, especially when it is involved with their pay and this approach breaks down that barrier.
Also many Sales Managers make the mistake of taking on the role of peer versus Superior. Sales Managers need to lead by example and show that they are bought into the plan. Some may go and devalue the plan and the cost of this is resistance from the field and ultimately plan failure. Sales Managers need to be the one to also communicate the plan and highlight all the positives in the plan. Emphasize where sales people need to focus to make the most money.

Matt Tyre, CSCP

1) Simplicity is critical. If a rep can't multiply sales dollars X a rate, you've missed the fundamental issue -- reps need to know what they'll make when they close deals.

2) Second is alignment. Are you a young company looking for new logos? Perhaps build the plan on wins instead of dollars. Selling enterprise, multi-million dollar deals -- a healthy rate is probably the way to go. Align the mission with the plan.

3) Pay for performance. Especially if you're a young co/start-up, the best way to attract talent is to have some stories get out that you're sales team is earning killer commissions.

Great points above (e.g., incenting the right outcomes, simplicity, etc)! Two more cents...

While certainly subject to the type of business/maturity/sales model/ASP, etc., I tend to be biased toward plans that are lower in fixed compensation in exchange for higher/uncapped possible variable compensation based on performance (aka, a leveraged comp plan). You can tell a lot about a sales person from their reaction when presented with such a model. One can address the cash flow issues through faster commission cycles and/or a draw. This also allows more team members on the team with a lower risk to the organization.

There is significant commonality to many of the answers posted. The majority of which, I completely agree with. One idea I did not see included that I have had success with in software sales is an escalating bonus structure after a quota (e.g. margin, product, revenue - dependent on your corporate objectives) is met and continued higher reimbursement for continual performance. The theory being that you never want to eliminate or marginalize the incentive after your very best performers have met an objective.

I agree with everyone who talked about simplicity. Every sales person wants to know what they will make. A top salesperson can tell you their exact YTD sales and their compensation for those sales.

One point I didn't see mentioned is compensation based on specific sales activities. Too often we compensate on results but don't pay attention to how salespeople achieved those sales results.

As an example, since my clients adopt a referral marketing program and focus on referral sales, they frequently adjust compensation to reward more aggressively those prospects that salespeople gain through referrals and then close. They reward the behavior, as well as the results. Salespeople are then clear on the exact sales activities that drive results for their company.

Sales compensation is a widely discussed topic. Here are my three tips:

First, make sure your sales people have a draw or a salary that allows them to pay their bills. They need a base of support so they don't have to worry about their living expenses.

Second, give individual incentives to your sales people. Group incentives are fine but they must also be individual incentives. Commission or bonuses are best.

Third, don't worry about being fair. Life isn't fair. Be as fair as you can be, but no system is ever completely fair. Create a program that meets the company's needs. If the company succeeds, the sales person will have a job. Giving sailors perks, benefits, and time off does no good if the ship sinks. The company is the sales person's ship.

Tom Black
Tom Black Center for Excellence
www.tomblack.com

Sales compensation is a widely discussed topic. Here are my three tips:

First, make sure your sales people have a draw or a salary that allows them to pay their bills. They need a base of support so they don't have to worry about their living expenses.

Second, give individual incentives to your sales people. Group incentives are fine but they must also be individual incentives. Commission or bonuses are best.

Third, don't worry about being fair. Life isn't fair. Be as fair as you can be, but no system is ever completely fair. Create a program that meets the company's needs. If the company succeeds, the sales person will have a job. Giving sailors perks, benefits, and time off does no good if the ship sinks. The company is the sales person's ship.

Tom Black
Tom Black Center for Excellence
www.tomblack.com

1. Design and MODEL it! (it's very important to know your plan is going to work right?)
2. Make sure that your sales team is on board and have all the support they need. (if you've increased their quotas, make sure they know you have added resources for them along the way...and if you haven't you should!)
3. Go back and revise your plan accordingly. If your business is constantly evolving, then so should your compensation plan.

Hope that helps :)

Andrea B.
Sales Compensation

Three major points in creating a valid sales compensation plan that maintain it's function would be:

1. Make it simple and concise so it is easily understood
2. Make sure the plan aligns with corporate values
3. Tie sales compensation to retaining customers in the long term

Hope that its helpful! :)

Janet Williams
Sales Compensation

Three Major Points I would recommend would be:

1. Make sure to keep your sales management and sales commission separate.
2. Make sure the plans work for the long-term plans of the company
3. Make sure employees are still taking care of the customers

In my experience, these are the values that make for a successful plan.

Jenny S.

sales compensation