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Sales Compensation Plans Basics

It’s the remuneration process businesses use to pay the sales team. Done right, sales commissions a great motivator ensues. Done wrong, it’s a disaster

Performio has worked in-depth with companies on their sales compensation plan for the last 10 years.

During this time, we have gained a great deal of insight and knowledge on what makes a good sales compensation plan and we've also seen Sales Compensation Gone Wrong.

Challenges For Sales Compensation Managers

We’ve met with many Sales Compensation Managers over the years and they’ve told us the problems they face. Here are some of the common pain points we will seek to address:

  • Commissions are a big cost, how do I justify them?
  • What reporting do I need to communicate the sales compensation plan?
  • How do I communicate with the audience clearly, in a timely manner and in a way that resonates?
  • What documentation is required with rules on who can do what, terms & conditions?
  • What happens to sales compensation plans when salespeople are on leave?
  • How can I take away the grunt work?
  • What are the core principles around designing sales compensation plans?
  • How do I evaluate my sales compensation plan?
  • How do I automate payments when different sales roles are on different payment plans?
  • How do I brand and position a sales compensation program?

What Is Sales Compensation?

Sales compensation is the remuneration process a business uses to pay its sales team, which usually involves two components:

  • Fixed salary - paid regardless of performance
  • Variable salary, or incentive - paid contingent on performance. A sales compensation plan is exclusively for the sales team.

It is not offered to employees who don’t have a sales role. A sales compensation plans exclude other forms of remuneration that salespeople may be eligible for such as:

  • Company bonus
  • Non-sales behavior employee recognition programs

According to the survey “50 Total Rewards Programs and Practices: A survey of what is in use today” by World at Work, more than 50 percent of companies surveyed offer commissions. Why? It provides a lever to drive performance.

  Use by Size of Organization (Number of Employees)
  n Overall Use 1 to 499
(n=213)
500 to 2,499
(n=364)
2,500 to 9,999
(n=352)
10,000 to 39,999
(n=274)
40,000 to more
(n=155)
Commissions 1,365 52% 42% 47% 56% 52% 63%
Individual Performance-Based Incentives 1,342 65% 53% 60% 62% 69% 73%
Retention Bonuses 1,345 59% 27% 50% 63% 70% 76%
Hiring Bonuses 1,354 74% 46% 72% 76% 79% 86%
Profit Sharing (no retirement) 1,331 21% 16% 18% 20% 21% 25%
Stock Options/Grants 1,350 41% 16% 29% 46% 49% 64%
Restricted Stock 1,328 41% 13% 28% 44% 49% 72%
Employee Stock Ownership Plans (ESOP) 1,336 21% 7% 13% 23% 22% 45%

Why Have A Sales Compensation Plan?

Commissions and incentives are often the largest variable expense for sales-driven organizations. Sales compensation does not sit neatly in one business division: HR, Finance, and Sales are all involved in the process. A formally written sales compensation plan provides:

  • Discipline and rigor in terms of program design, implementation and the measurement of the plan’s effectiveness.
  • A useful communication tool to explain how the sales compensation process works, within the sales team and across business divisions.

What Can Go Wrong?

Almost every company fails to recognize the importance of setting the plan foundations before moving into the design and implementation phase. Without clear agreement on the purpose and principles that underpin the compensation strategy, execution issues will arise.

Common pitfalls include:

  1. Selecting measures that can’t be supported by existing systems
  2. Designing overly complicated schemes
  3. A lack of clarity in plan documentation
  4. Poor target setting
  5. Poor communication
  6. No robust process for making modifications to the plan
  7. No reporting tools for reviewing plan effectiveness.

Ultimately, failure to establish the correct sales compensation plan foundations leads to an incentive that is confusing and doesn’t motivate the sales team.

Pros Cons
Rewards sales conversions Can contribute to a 'win at all costs' culture
Company only pays for results Cab cause division amongst teams
Motivates 'over and above' behavior Employees are motivated by different internal & external factors
  Does not identify or address sales performance issues
  A lag in the time to process sales data can mean compensation is paid a long time after the sale is made

Understanding sales roles

To create an effective sales compensation plan first you have to understand the key sales roles in your organization. A sales “role” refers to a group of salespeople who are responsible for delivering the same sales result for the business, typically either customer acquisition or customer retention. For example, you could have two separate job titles, such as New Business Executive and Sales Executive but both jobs focus on generating new business. Therefore, they fulfill the same role for the organization.

While sales roles can have different job titles, there are six key sales roles to acquire and retain customers in most businesses.

  • Account Manager - responsible for retaining business, sometimes referred to as the “farmer” role.
  • New Business Executive - responsible for acquiring new business, sometimes referred to as the “hunter” role.
  • Sales Engineer - responsible for providing technical support to the sales team.
  • Inside Sales/Telesales - telephone-based sales, usually with a focus on customer acquisition.
  • Sales Manager (Level 1) - responsible for managing the front-line sales team.
  • Senior Sales Manager (Level 2) - responsible for overall management of the sales team. Typically does not have front-line salespeople as direct reports.

Of course, there can be combinations and hybrids. For example, an internal salesperson can be responsible for customer acquisition and customer retention.

To design an effective sales compensation plan, you need to be clear on the various sales roles in the organization because it is likely you will need to design a commission plan for each role (or at least a commission plan with variations across each role). You need to adapt your sales compensation plan to how sales roles are structured in your business. For example, your Sales Manager might not be on the commission plan, they might be on an executive remuneration package/company bonus. You need to make allowances for your organization.

Note: We have focused on pay for performance for employees only. We have deliberately excluded external sales channels such as resellers such as Territory or Channel Manager because they do not directly manage sales with customers.

Start With Your Sales Role Matrix

Step 1: Write Down The Sales Roles In Your Organization

Write down sales roles at your company.

Step 2: Build Your Sales Compensation Matrix

Once you have defined the roles, you can start to build your sales compensation matrix. This is simply a table describing the various attributes.

The Sales Compensation Matrix will become a useful communication tool, particularly for organizations with a large sales team (more than 100 salespeople).

Role Head Count Desired Sales Behaviors KPIs Job Description
New Business Executive   New account acquisition New accounts signed, new prospect meetings  
Account Manager   Account retention Monthly billings  
Sales Engineer   Technical support    
Telesales   Outbound new business calls Leads generated  
Sales Manager Lv 1   Maximize performance of team    
Senior Sales   Direct and lead sales    
Sales Manager Lv 2   Team behaviors    
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