How to Set Up a Sales Compensation Plan
Advice for small businesses on how to create the best compensation plan for your sales team, by determining sales goals, performance measures, payout formulas, and the sales cycle of your business.
One of the biggest management challenges for a growing business is compensating salespeople effectively. You know you need an incentive compensation plan that encourages your sales force to land new accounts and continue to upsell existing customers, but where do you begin figuring out the best way to compensate them? It often boils down to finding the right balance between base pay and commission. But other questions also may come in to play: Will a commissions-only model work for you? How do you set parameters for performance? How do you measure that performance?
If these issues seem daunting at first, don't worry. You're not alone. Sales incentive programs can have an enormous impact on the bottom line and on future growth of the business. Executing a well-designed sales compensation plan can help companies create a sales culture of high performance where individual goals are aligned with those of the larger organization. Furthermore, building a reputation for recognizing and rewarding good performance accurately also helps companies attract and retain top sales talent.
"It's probably one of the fundamental keys for success for a business, provided they have a sales force -- which would apply to vast majority of businesses," says Jim Stoeckmann, senior practice leader for sales compensation for WorldatWork, a not-for-profit professional association focusing on compensation, benefits, and work-life issues. "Going to market is really a fundamental part of planning your business. The compensation plan is how you operationalize the sales force, get them aligned with the business goals, and get them motivated and driven to implement your go-to-market strategy."
The following pages will detail what to include in a sales compensation plan, how to select a pay formula for your sales force, and how to implement your sales compensation plan to further business goals.
Dig Deeper: Keeping Your Sales Strategy Relevant During Tough Times
How to Set Up a Sales Compensation Plan: The Elements of the Plan
A sales compensation plan is a way to put your marketing strategy into operation. Given the impact that sales compensation plans can have on growth, almost every company with a sales force should take a more strategic approach to designing their incentives plan. Fully understanding both the key drivers of successful sales incentive programs and the ways to optimize them can be complex, and plan specifics can vary widely. Nevertheless, there are a few key factors that you should consider when designing and administering an effective sales incentive program.
Writing the Sales Compensation Plan
Virtually all sales compensation plans are written and documented. The sales compensation plan should be available and distributed to the sales force. The front line manager should use it as a tool to communicate the sales strategy and goals and motivate the sales staff to sell. Here are some of the essential elements to include:
- Strategy. The business' sales strategy, what the business case is, and what the business is trying to achieve.
- Performance measures. Spell out benchmarks and performance measures to help guide the sales force in terms of their focus.
- Payout formula. This is perhaps the most essential component that spells out to your staff what is in it for them. The payout formula lays out how they will be paid in terms of straight compensation or commission for sales.
- Governance. Detail how you will resolve questions or conflicts over sales compensation that are not covered in the plan and may arise.
The compensation plan won't be able to cover everything. Issues are going to be raised, whether it's what constitutes a new account or what happens when several different people claim credit for a sale. "There are going to be things that come up during the course of the year that are not covered or are a matter of interpretation," Stoeckmann says. "You need to spell out the way those are going to be resolved. It may be a committee or a chain of command." When a sales person brings a question to the sales manager, nine times out of 10 they will be able to resolve the situation, but when they're not there needs to be some means of resolving the issue. A committee might have representatives from sales, human resource, and finance to arbitrate.
Develop Meaningful Sales Goals and Performance Objectives
While most sales managers want to design sales compensation plans that 'pay for performance,' those managers often have inconsistent and conflicting views about just what 'successful selling performance' means. "Meeting quarterly sales quotas can be one measure of performance," says Scott Shimamoto, the principle in charge of incentive compensation for ZS Associates, a global management consulting firm specializing in sales and marketing consulting, capability-building, and outsourcing. "But what if those quotas are met by selling products at a deep discount? Should those sales count as much as those that protect the company's margins?" Meeting the existing needs of current customers is also important, Shimamoto points out. But you may question whether product sales to an established account deserve to be rewarded with the same vigor as product sold in a new market.
That quandary is something you need to consider when designing your sales compensation plan. It may very well depend on your business objectives. Your business may want the sales force to focus on a new product. In that case, the sale of a legacy product should not be rewarded at the same level as the sale of the new product. Similarly, your business may want to focus on landing new accounts. In that case, you may choose to not compensate increased sales to existing customers at the same rate of commission.
Shimamoto says that tying individual performance parameters to a company's broader growth objectives is crucial for the success of any sales incentive program. "You must clearly identify sales-related actions and behaviors that support larger business objectives," he says. "Then you can design the sales incentive program so that the sales force is motivated and rewarded for behavior and actions that comply with the corporate strategy." Taking the guesswork out of the definition of 'successful selling performance' reduces ambiguity and angst, and provides clear marching orders to your sales troops.
Sales Compensation Formulas
After identifying your sales goals and spelling out the vision of success for your sales staff, you need to figure out how your business will compensate the sales force. Some companies pay their sales people with straight salaries; others put their sales people on 100 percent commission. Those are the extremes. A straight base salary guarantees that valued sales staff members are compensated even during an economic downturn, when a lack of sales is attributable to factors outside the salesperson's -- or the company's -- control. On the other hand, variable pay, such as commission, incentivizes salespeople to work harder to land new accounts and drum up new business -- they will see the results of their hard work in their paychecks.
The vast majority of businesses opt for a middle ground. In 2008, WorldatWork surveyed its members in conjunction with the National Association of Sales Professionals (NASP) and found that a mix between base salary and variable pay were the most prevalent forms of sales compensation. Eighteen percent of respondents used a mix of 80 percent salary and 20 percent commission. Sixteen percent used a 70 percent salary, 30 percent commission ration. And 14 percent reported a mix of 60 percent salary and 40 percent commission.
How you decide to structure your pay formula should depend on a variety of factors, including the following:
