Sales Compensation Plans 101

I recently got called for the ever-dreaded jury duty. In going through this process, I realized the only real incentive to complete this inconvenient task, is either a sense of duty as a citizen or the threat of being charged with a misdemeanor for failing to appear. The $10 a day definitely isn’t even enough to cover your lunch these days. 

But that got me thinking about the importance of incentives, if they strike the right chord, you’d be overjoyed at the outcomes they can produce. A well-structured comp plan will keep your teams challenged and performing their best, without the need to drop your gavel and proclaim, “ORDER!” 

Sales compensation plans provide the structure needed to incentivise sales activities and pay sales employees for their work. A typical sales comp plan includes base salary and commissions, and it may incorporate additional elements such as bonuses and non-cash incentives. The plan lays out the earning potential for each sales role in an organization, explaining exactly how they can earn commissions and how much they can expect to earn from any given sales activity.

A well-structured sales comp plan:

• Motivates sales reps to do the work that matters most
• Generates greater revenue
• Provides an equitable playing field
• Boosts morale and employee satisfaction
• Increases retention rates

But a poorly structured plan can have the opposite effect. It incentivizes the wrong activities that fail to generate revenue, and can make it difficult for some roles to hit their quotas. This constant friction harms morale and increases turnover.

Performio has worked with thousands of organizations on their sales compensation plans, giving us unique insights into what makes a good sales compensation plan—and where it can go wrong. In this article, we’ll walk you through everything you need to know to ensure that your sales compensation plan is as effective as possible.

The importance of sales compensation plans

According to World at Work’s 2021 Incentive Pay Practices study, 51% of privately held companies and 94% of publicly traded companies use long-term incentives (LTI), while 93% of percent of private companies and 99% of public companies use short term incentives (STI), with many of those companies using both LTI and STI.

Why? Incentive compensation provides a lever to drive performance. The sales comp plan ensures that sales reps aren’t just going through the motions to get a predefined paycheck, but are actually motivated to make sales, as the amount of commissions they can earn is directly tied to their performance.

A formally written sales compensation plan provides:

• Discipline and rigor in terms of program design, implementation, and measuring the plan’s effectiveness.
• A useful communication tool to explain how the sales compensation process works within the sales team and across business divisions.
• A method to reward sales conversions and motivate “over and above” behavior.

But as important as sales comp plans may be, they also carry risks if not managed properly.

The pitfalls of sales compensation plans

Commissions and incentives are often the largest variable expense for sales-driven organizations, which means that they can waste a lot of money very quickly if set up incorrectly. It’s therefore of crucial importance to develop a sales comp plan carefully before moving to implementation.

Common pitfalls include:

• Selecting measures that can’t be supported by existing systems
• Designing overly complicated schemes
• A lack of clarity in plan documentation
• Poor target setting
• Poor communication
• No robust process for making modifications to the plan
• No reporting tools for reviewing plan effectiveness
• Failing to account for the different internal and external factors that motivate employees
• Failing to identify or address sales performance issues

Ultimately, failure to establish the correct foundations for a sales compensation plan leads to incentives that are confusing, don’t motivate the sales team, harm morale, and waste funds.

How to create and manage an effective sales compensation plan

An effective sales comp plan should motivate each sales role to do their best, allowing them all to work together toward common goals that best serve your organization’s needs. Here’s how to make that happen.

Understand your sales roles

An effective sales compensation plan starts with understanding 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 and fulfill the same role for the organization.

While sales roles can have different job titles, these are the six key sales roles most businesses use to acquire and retain customers:

• 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: Responsible for selling products remotely via phone, email, or online channels, 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.

Businesses may also include combinations and hybrids of these roles. For example, an internal salesperson can be responsible for customer acquisition and customer retention.

You need to be clear on the various sales roles in the organization because you will likely need to design a commission plan for each role (or at least a commission plan with variations across each role). For example, your Sales Manager might not be on the commission plan, but might instead be on an executive remuneration package or company bonus.

Once you’ve defined the sales roles at your company, it can be helpful to chart them as a sales compensation matrix. This can be a useful communication tool, particularly for organizations with a large sales team (more than 100 salespeople).

Here’s an example:

Determine your pay mix and quotas

A sales compensation plan consists of two main parts, which are collectively known as the pay mix:

• Base pay: A fixed salary paid regardless of performance
• Incentive pay: Variable commissions paid contingent on performance

The pay mix determines the risk level for sales reps, so it’s important to get it right. Too much variable pay will increase risk, potentially harming morale and performance if the stakes are too high. But too much base salary can demotivate sales reps by reducing the incentive for them to meet their targets.

Quotas go hand in hand with the pay mix and play a similar role in driving sales performance. Ideally, quotas should motivate sales reps to do their best work. But if a quota is too high, reps may become discouraged and burnt out from their inability to reach it. And if a quota is too low, reps may become complacent, completing their quota early and then slacking off for the remainder of the pay period.

Finding the right balance for all of these elements can involve some trial and error. Look to industry standards and past performance (if applicable) for the best starting point, and then refine your plan over time.

Track progress and make adjustments as needed

Your work doesn’t end once the basics of your sales comp plan are in place. In order to ensure that the plan is as effective as possible, you’ll need to track your team’s progress and make adjustments to the sales comp plan over time.

To do this well, you’ll need the right software solution. Performio’s Incentive Compensation Management (ICM) software gives you everything you need to monitor and improve your team’s performance.

For example, you’ll be able to see how far along each sales rep is toward meeting their quotas, and you’ll know the moment they reach them. If your team is consistently hitting their quotas well ahead of time, that’s a likely indicator that the quotas may be too low, and you should raise them. On the other hand, if the team consistently struggles or fails to reach their quotas, then they may be set too high, and you should lower them.

However, if your team isn’t on track toward meeting their quotas, you’ll want to know as soon as possible. The quicker you know, the quicker you’ll be able to course correct, rather than trying to figure out what went wrong after the fact. That’s why it’s important to have real-time access to live sales data—which Performio provides in our intuitive dashboards.

Additionally, Performio allows individual sales reps to track their own progress, letting them know whether they’re on course to meet their quotas and giving them a chance to catch up if they fall behind. It also shows them exactly what they can expect to earn based on the sales they’ve made. This gives sales reps the best chance to make the most out of your sales comp plan.

As you proceed, it’s important to remain flexible, stay attuned to your team’s performance, listen to their feedback, and be ready to pivot as necessary.

Drive sales performance with Performio

An effective sales compensation plan allows you to motivate your sales reps, increase their performance, and make more sales. But developing an effective sales compensation plan can be challenging.

That’s why Performio developed easy-to-use sales commission software. Your sales reps will receive timely reports and leader-board rankings, keeping them motivated and performing at their best.

Our software is so straightforward that your sales reps won’t need any additional training to use it. And you’ll never again have to worry about processing late or incorrect compensation payments.

Performio has saved more than 500,000 administrative hours and calculated more than a billion dollars in commissions for our clients.

Ready to see what Performio can do for your business? Request a demo today.