5 Steps to an Effective Sales Compensation Plan
Properly compensate your sales teams with these key strategies.
Time to read: 6 minutes
Senior Director of Strategic Services, Xactly Corporation
The new year usually signals new sales compensation plans for many companies. To provide the right incentives for growth and success, you must think strategically in your sales compensation planning and aim to inspire and empower sales teams to outperform the competition. You must also carefully model and scope the financial impact to the organization for the proposed plan and anticipate how reps will game the plan to ensure alignment with corporate goals.
Sales compensation model creation can be a complex process, from ideation to implementation, to management. To help ease the stress of compensation planning season, we’ve broken down incentive planning into five simple steps.
Step 1: Building your compensation planning team
The truth of the matter is that your sales compensation plan touches several departments in your company in addition to sales. Knowing this, you should include key players from each team so your final plan provides incentive compensation across the entire organization.
Start building your team with four key players in mind:
- Sales (senior representative, VP, director, and so on): Sales leadership is connected to overarching company goals and sales team performance capabilities. Sales representatives will keep market expectations in mind and understand the impact of the compensation plan on recruiting and retaining the best sales talent.
- Finance: Finance will be concerned with the cost of the plan and be responsible for the plan modeling and cost assessment, while pushing for results and strategic alignment with corporate goals
- HR: Human Resources often owns the overall compensation strategy and philosophy for the company. It will also bring benchmarking and market pay data to the conversation, as well as current employment, regulatory, and fairness issues. HR will be concerned with job roles and levels to help facilitate a career path within sales and corporate engagement.
- Outside experts (consulting, strategic services): Have sales “gut check” the feasibility of your proposed plan internally, and consider bringing in plan design expert consultants to provide an unbiased opinion, best practices, industry knowledge, and big data insights.
- Marketing (senior representative): It is no secret that success lies in closely aligned sales and marketing teams. A marketing representative can share upcoming product releases and other announcements that may affect future sales flow.
- Compensation analysts: Compensation analysts can provide input into ease of setup and maintenance of a proposed plan. While these features don’t necessarily drive plan design, the idea of complexity and automation potential is important to keep top of mind.
- Legal: The sales compensation plan is a legal agreement between the company and its employees and as such, should undergo a legal review before it is shared with the sales force.
Step 2: The ABCs of the sales compensation model
A: Align with Sales Roles
There are no one-size-fits-all sales compensation strategy. Rather, remember that different incentive plans are required for each sales role, and each plan should be tailored to the individual roles’ parts in the sales process.
Consider the following: Should sales reps tasked with bringing in top-line revenue and new logos be paid the same as relationship managers helping facilitate a transactional renewal? No, these two sales roles at the same company should have vastly different pay mixes, plan components, and mechanics.
B: Base on Company Culture and Philosophy
- Compared to the market, how do you want to pay sales reps? (25th percentile? 50th percentile? 90th percentile?) Fair market pay has tremendous impact on attracting, motivating, and retaining top talent, and the switching costs for reps to move to your competitor is very low. Companies have the opportunity to create a competitive moat around their sales force with an appropriate market pay strategy based on industry, job role, and geography.
- How do you want to differentiate pay between low- and high-performing reps? Starve the bottom to fund the top is a common and effective design strategy. The trick is to make sure you are rewarding the top performers throughout the year, and at the same time, not overpaying for performance.
C: Construct to Drive the Right Sales Behaviors
Step 3: Pay mix and payout structures
On-target earnings, or OTE, is base salary plus potential variable pay. Pay mix is the ratio of base salary to variable pay at target. More aggressive mixes implement 50/50 or 60/40 ratios, while less aggressive companies aim for 80/20 or 90/10 ratios. You should base your pay mix on each rep’s type of selling, length of sales cycle, and amount of transactions.
For rule of thumb, base your pay mix aggressiveness on the following:
- More aggressive: jobs with more influence on purchasing decisions
- Less aggressive: reps with longer sales cycles and those with strategic or consultative roles
- Mid aggressive: managers with wider sets of responsibilities
Quota Versus Bonus
Step 4: Balancing plan components and weights
One of the most important parts of your sales compensation plan is components and weights. Ideally your plan should be easy to understand, objective in nature to drive proper sales behaviors, and give sales teams a set of achievable components.
Your incentives should also be tailored to each sales role and its part in the sales process. Base the majority of your variable pay on individual achievement. This helps avoid sales reps being held accountable for things they cannot control. Use team goals and bonuses as accelerators to individual behavior.
Step 5: Communicating and monitoring your plan
- The belief that changing plans will lower sales reps’ pay
- Employees’ general wariness of actions management considers “for the better”
The best way to communicate your plan starts with transparency. Your plan should be communicated from the highest level of sales management, such as the VP of sales or chief sales officer. Focus on the differences between the new and old plans, more specifically sales reps’ benefits and how they can maximize their earning potential.
The ultimate goal is to implement a plan that is easily understood by sales teams. Once implemented, your plan should be monitored to see if mid-year adjustments are needed. Tools for gathering information and tracking how your compensation plan is performing can prove very helpful. If you notice there is room for improvement, ask yourself:
- Are the sales objectives clear, and does everyone understand how the plan works?
- Is there a clear relationship between pay and performance, or are there individual outliers?
- Are incentives encouraging behaviors the way they should be, or are there unintended consequences?
- Are we on track to reach our company goals, both top-line and from the cost of sales compensation?
Implementing a sales compensation strategy
“A strong compensation plan should be aligned with company goals, simple to understand and communicate, and give sales reps and managers target objectives to work toward.”
Senior Director of Strategic Services, Xactly Corporation