3 Things to Consider When Setting Up a Sales Compensation Plan

Proper compensation of a company’s workforce is critical in any business, especially for those who have a sales team that brings in new customers and nurtures relationships existing ones. Creating a sound sales compensation plan is vital to continuous business growth because it keeps your salespeople motivated in addition to encouraging the best performers to stay on.

It’s a tough balancing act — you want to incentivize good performance to maintain high-quality service, but at the same time, you can’t expend the majority of your resources on incentives or cause resentment among the team if you’re on an open pay policy. The following are some points that can help you develop the best sales compensation plan for your business.

Create Benchmarks for Performance Evaluation

Make sure that your key performance indicators are crystal clear and provide no room for misunderstanding. If you want to have a sales compensation plan that “pays for performance,” then your sales team should understand what “performance” means.

For example, what should a “conversion” amount to? Does conversion happen when someone responds to an advertisement to call your hotline and inquire, or should an actual purchase be made? In this scenario, perhaps you can set “soft conversions” and “hard conversions” as different KPIs with different performance ratings. Sales quotas, while easily understood per se, may also be an issue. For example, one member of the team has more may have more customers buying because of discounted offers, while another has fewer customers but sold products or services at full price.

You may also want to dive into the more qualitative aspects of selling — personality, teamwork, and adaptability, for example — which affects customer and workplace relationships, and ultimately, your business.

It is important that you outline your business objectives and design your compensation plan around it. Are you focusing on selling a new product, getting new clients, or simply meeting a monthly revenue target? From there, you may reward efforts and actions that lead to the achievement of your objectives.

Automation Using Specialized Tools

The age of technology is upon us — and with the right tools, you can now automate your compensation management process. Critical to maintaining your sales team’s drive is accuracy and transparency, which a computerized system can help provide. There are even programs that have integrated dashboards for improved and almost instantaneous communication between field personnel and management.

Through an automated system, you also eliminate errors and streamline business practices. You can also customize different incentive programs based on different performance indicators, which helps you better track achievements that relate to your company’s goals.

Another benefit of an automated system is that you can view any data you want — salary, quotas, transactions, bonus plans, and more — and make adjustments after evaluations or whenever necessary.

Your Sales Formula

Whether you go manual or automated, your sales formula will determine the actual compensation for your team. Will you go for 100 percent commission-based pay or will your sales team receive a permanent amount of salary regardless of how much they’ve sold? A mix between a fixed salary and commission pay is the more popular structure. The most common are 80-20, 70-30, and 60-40, with the lower percentage being the commission.

Determining your sales formula hinges on several factors. These include the actual role of the sales person (do they collaborate with other members of your workforce or do they straight up sell products?) and the kind of products you sell (selling cars is very different from selling magazine ads).

There’s also the matter of choosing a fixed or a tiered commission plan. A fixed commission plan, as the name suggests, assigns a specific amount of commission—say five percent—as long as a quota is met. A tiered plan allows for a bigger percentage if a salesperson goes over quota. The tiered commission plan has a bigger potential of getting your “moneymakers” to stay on for longer.

Just remember to list down all potential elements that may affect a salesperson’s performance before you apply your sales formula.

A carefully crafted sales compensation plan can keep your sales force motivated and dedicated to your team. These considerations can help you design an ideal plan that will help you consistently do well and achieve your business objectives. .


Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.