Human resources

Steps to an Effective Sales Compensation Plan

Steps to an Effective Sales Compensation Plan
Vlad Kovalskiy
April 1, 2021
Last updated: April 1, 2021

Assemble a Team


When compiling a sales compensation plan, you need to take into account all the subdivisions of the organization. This is why the team of experts that determines sales compensation should include representatives from all departments.

If you believe that a small team will be more efficient, consider inviting representatives from the following departments:

  • Sales. Specialists of this department share a profound understanding of the company goals. They can impartially estimate their own performance and, consequently, the revenue of the company. These professionals understand market trends and capabilities very well. They can accurately estimate the effect of sales compensation on the business' recruiting potential.

  • Finance. Members of the finance team should decide whether the organization can afford the plan. They can assess costs and model the optimal sales compensation expenses.

  • HR. Staff from the HR department will be responsible for the overall sales compensation strategy and the mission of the business. They can help the team to concentrate on the issues of fairness and compliance with legislation. HR specialists will let others know market pay data and will list benchmarking criteria.

Those who do not want to limit the team to the representatives of just three departments should consider inviting specialists from the following subdivisions:


  • Compensation analysts. They can share valuable insights on how to set up and maintain the plan. The most important information you can get from them is the degree of complexity of your sales compensation plan and its automation potential. However, these analysts would hardly take the leading role in designing the plan.

  • Legal. Before you put your sales compensation plan into practice, it should pass a legal review. Actually, the plan is a legal agreement between the staff and the organization.

  • Marketing. These professionals typically work side by side with sales teams and have a good understanding of their sphere. Marketing specialists can share insights that might affect future sales flow. Plus, they can inform their colleagues about upcoming product releases.

It would be wise to invite independent experts to assess your sales compensation plan. These can come, for instance, from strategic services or consulting. They can share big data insights, industry knowledge and best practices. Experts will express their unbiased opinion on the practicability of your plan.


Twist the ABCs Model


Corporate



The ABC abbreviation, in this case, stands for Align, Base and Construct. But we would like to reword it a little bit. The catchy acronym is good for memorizing, but such it might shift the accent from the essence of this approach.

Separate the Roles


The job roles of professionals of the same department might differ significantly. Let us consider, for example, the roles of salespeople. Some team members specialize in building long-term relationships with clients. They encourage people to use the organization's products or services once again, invite them to discounts and so on. Other employees sign contracts and secure the inflow of money.
It would be unreasonable to apply an identical sales compensation scheme to these two types of staff roles. When calculating the reward for each of these two groups, you should rely on different mechanisms and formulas.

Stay True to Your Corporate Culture


The sales compensation should meet your staff's expectations. If your employees are used to receiving generous perks, be ready to reward them above the average market level. If you find out that your sales compensation plan is not as generous as what other organizations offer to their staff, consider improving it.

The paramount notion here is fairness. Your staffers are not isolated from the professional community. They know the fair level of salary for their position, depending on their geographical location and experience. They talk with their colleagues from other companies and know about their incentives. If you want to retain your best talents and motivate them to impressive achievements, you should offer them better conditions than elsewhere on the market.

However, you should avoid overpaying for performance. Also, you should not distribute rewards among staff with the poorest performance. Your sales compensation strategy should feature a multiplier or a premium that reflects the productivity of each employee.

Keep It Simple


Your staff should clearly understand what they should do to deserve a reward.
Your sales compensation model should be transparent and comprehensive.
This will enable you not only to show respect to your employees but also inspire them to meet the desired sales indicators.

Structure Your Payouts


payout


If a specialist receives a base salary and variable pay, the sum of these two components is known as on-target earnings.
The ratio of these components is called the pay mix. The pay mix typically varies within the range from 60/40 to 90/10.

To calculate the individual ratio for each professional, you should take into account the following aspects:

  • How many transactions do they handle?

  • How long is their sales cycle?

  • Which kind of products or services do they sell?

The 90/10 or 80/20 ratio is optimal for those who are in charge of consultative or strategic roles. It is also recommended for specialists who deal with longer sales cycles.

The 70/30 or 60/40 ratio can apply to those who significantly influence people's purchasing decisions.

The 50/50 ratio suits staff members with an extensive range of responsibilities.

The sales compensation strategy should also take into account such indicators as payout curves, accelerators, gates and rates. To pay your employees, you can use one of the following schemes:

  • An add-on bonus model

  • A goal-based quota

  • A commission plan

When choosing an optimal option, it would be wise to ask your HR experts for advice. They will probably offer you a career-progression model that you can employ to design plans for professionals with different roles.

Balance Team and Individual Achievements


rewards


Once your sales compensation plan is ready, review it to make sure it is balanced enough. It should not make your staff wonder or ask questions. 

All your team members should agree on the following aspects:


  • Each of them receives a fair reward

  • You set achievable goals for them

  • They understand how you measure their success

The variable pay should be based on one's individual achievements. If this part of the reward depends on the achievements of a team, it would be tricky to identify the contribution of each person. Of course, team bonuses have a right to exist. But team members need to clearly realize why they receive them and in which way they are different from the variable pay.


Communicate Your Plan to Your Staff


plan


Some of your employees might be biased towards your plan. Most often, this happens due to the following reasons:


  • People are afraid that their reward will be too small

  • They might worry about the fairness

  • They might feel inferior because you did not invite them to design the plan

To maximize the efficiency of your communication, ask the heads of departments to explain the new strategy to their teams. These are the aspects they should focus the most on: 


  • The difference between the new and old plans

  • The advantages of the new one

  • Ways to increase earnings

Once you have implemented the sales compensation plan, you can adjust and improve it in a few months. You might need to do so if your employees fail to understand your demands or are generally unhappy with the new strategy. It might be reasonable to analyze the efficiency of the new plan 6 months after implementing it.

At that moment, you should pay attention not only to your employees' reactions but also to market trends and the overall condition of your business.


Conclusion


percent


A good sales compensation plan should be tailor-made. A responsible business owner would never copy someone else's sales compensation strategy. 

If you invest enough time and effort in compiling a good plan, it will help you to hire and retain the top talents of the industry. Your business will be better prepared for fierce competition, its reputation will strengthen and your revenue will grow.

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