Setting up a sales compensation plan
One of the biggest management challenges for a growing business is compensating salespeople effectively. How do you figure out a compensation plan that will encourage them both to land new accounts and to continue to upsell existing customers?
The solution often lies in finding the right balance between base pay and commission. But there are other questions to consider:
- Will a commissions‑only model work for your business?
- How do you set parameters for performance?
- How do you measure that performance?
If you find these issues daunting at first, don’t worry – you’re not alone. But setting up the right sales incentive programme can have an enormous impact on the bottom line and future growth of your business. Executing a well-designed sales compensation plan can help you create a high performance sales culture where individual goals are aligned with those of the organisation. Furthermore, building a reputation for recognising and rewarding good performance accurately will help you attract and retain top sales talent.
In short, a good compensation plan is a major key to success for any business that has a sales force. It will get your salespeople aligned with your business goals, and motivate them to implement your marketing strategy.
Given the impact that sales compensation plans can have on growth, businesses should take a strategic approach to designing their incentive plans. The key drivers of successful sales incentive programmes and the ways in which you can optimise them are complex subjects, and plan specifics can vary widely. Nevertheless, there are a few key factors that you should consider when designing and administering your sales incentive programme.
Writing the sales compensation plan
Your compensation plan should be documented and distributed to your 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. Define the business’s 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 your salespeople to focus.
- Payout formula. This is perhaps the most essential component: it tells your staff what’s in it for them. The payout formula specifies how staff will be paid, in terms of straight compensation and/or commission on sales.
- Governance. Describe how you will resolve any questions or conflicts that may arise and are not covered in the plan.
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. You need to spell out the way those issues are going to be handled – for example, by a committee or through the chain of command.
Develop meaningful sales goals and performance objectives
Most sales managers want to design sales compensation plans that pay for performance. However, they often hold inconsistent and conflicting views about just what successful selling performance means. Meeting quarterly sales quotas can be one measure of performance, 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, but you may question whether sales to an established account deserve to be rewarded with the same vigour as sales in a new market. The answer may well depend on your business objectives. If you want your sales force to focus on a new product, don’t reward the sale of a legacy product at the same level as the sale of the new product. Similarly, if you want to focus on landing new accounts, you may choose to not compensate increased sales to existing customers at the same rate of commission.
Tying individual performance parameters to a company’s broader growth objectives is critical to the success of any sales incentive programme. You must clearly identify sales-related actions and behaviours that support those broader objectives. Then you can design a sales incentive programme that motivates your salespeople appropriately and rewards them for behaviour and actions that comply with your 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.
My next article in this series will cover sales compensation formulas.
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Terry Irwin is the founder and CEO of TCii Strategic and Management Consultants. Born and brought up in Wales, he studied Economics and Marketing at university, followed by an MBA.
Before setting up TCii, Terry spent over 20 years in the corporate world with GSK and Henkel, managing consumer goods and services businesses, living...