7 Steps to Develop an Effective Sales Compensation Plan

Sales Commission plans can make or break a company’s success – and they’re not one-size-fits-all. Make sure you’re setting up your team for success and take all the necessary steps in designing a compensation plan.

You've probably all heard the saying, "People don't quit jobs, they quit bosses." But new research contradicts that well-known fact: sometimes, people aren't quitting a boss, they're indeed quitting a job.

In the world of sales, you could be the best manager in the world, but sometimes that's still not enough. Employee job satisfaction is also about the company, culture, and making sure your team members are happy, engaged, and motivated. And the best way to ensure this is an attractive sales compensation plan.

What Is Sales Compensation?

Before taking steps in designing compensation plan, it's worth while understanding that sales commissions is one of the critical components of any sales strategy. It's the incentive for certain outcomes, the reward for specific behaviors, and the satisfaction of a job well-done at the end of every quarter.

Broken down, it's the combination of base salary, commission, and other incentives (such as a bonus) that you pay your sales rep to reward them for their work. There's no "one-size-fits-all" sales commission plan because each company sits at a unique intersection of industry, company culture, size, and goals. Because of this, it can be a complicated process to figure out what's the right plan for you.

Here are our key steps in designing a sales commission plan that will stop you from losing talent, prevent sales reps from underperforming and missing their quotas:

1. Identify your company objectives and values.

Write a list of short and long-term goals for your team and company. Pick what products and services you want to focus on, identify your ideal customer profiles and industries, and profitability goals. Finally, understand how much and what type of sales talent you will need to meet those goals.

2. Define concrete actions and behaviors.

Align each company objective with a desired action and outcome. This will identify which behaviors you want to reward and see repeated, and which to stay away from. By aligning your business goals with actions, you're creating a system that reinforces and rewards positive behaviors.

3. Equip the plan with basics.

Every plan requires a base pay, target pay, and pay mix. You should use data to calculate and forecast these numbers and let your team know where these numbers came from. It would be best if you also determined your total On-Target Earnings (OTE) – that is, what the person would be paid annually (base salary and variable pay). This is a large part of motivating your team and can determine the level of talent on your sales team.

4. Decide when to provide compensation.

Try to reward your sales reps as quickly as possible – the sooner the rewards, the more excited and satisfied your team members are with their commission plans. Instant gratification (or immediate loss) makes your sales team motivated and excited, all by reducing payment turnaround time.

While quicker is better, this depends on the industry, company size, and team. Find something that works right for your unique situation, and make sure you're paying attention to your sales team. Standard commission payouts may vary from monthly to quarterly, or even bi-yearly. Remember that the longer the wait between closing a deal and receiving the commission decreases satisfaction and leads to higher employee turnover, underperformance, and lack of motivation.

5. Pick your payroll software.

If your company already has a payroll software, this should be easy to implement and start using! It should automate tax calculations, ensure paycheck accuracy, and make your life easier. Make sure you're not making any errors, miscalculations, or spending more time on learning this software than it's saving you. The goal is to stay away from manual entry into spreadsheets and other time-consuming data entry that can lead to error or data loss.

6. Establish expectations for compensation.

Set your quotas for individual sales reps or the whole team. You can develop quotas with Top-Down or Bottom-Up Target Setting. Communicate often so your team knows what's expected of them and how they can maximize the compensation plan.

It's essential to make this well-defined and extremely detailed. Shared commissions and bonuses are a fun way to bring creativity into your environment – however, this can quickly get tricky. It's a good protocol to legally review your compensation terms so that there's no unnecessary tension or conflict down the road.

7. Remain Flexible.

Sales compensation plans must be tailored for different sales roles, experience, and industry. Remember, the sales compensation strategy is designed to increase desired outcomes by rewarding certain types of behaviors – NOT deter or scare people off. Consider how each unique team member's perspective and experience impact their performance and adjust accordingly. Finally, make sure your team knows that you're dedicated to finding a plan for everyone.

What Next?

As a sales team manager, it's your responsibility to maximize your resources and support your team, so your goals are met as quickly and efficiently as possible.

That's why Performio developed easy to use sales commission software. Your sales reps will receive timely, easy-to-read reports and leader-board rankings, so they're motivated and performing at their best. Best of all, Performio is so easy to use - sales reps will be able to understand how it works without any additional training. And you won't have to worry about processing late or incorrect compensation payments.

A SaaS-based system, Performio has saved more than 500,000 administrative hours and calculated more than a billion dollars in commissions. Request a tailored sales commission software demo today and see how we can helo your business.

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