8 years ago
February 18, 2016

How to Design a Sales Compensation Plan for Your Business

If you’re creating a sales compensation plan for the first time or revamping an old one, use these tips to ensure your plan is effective. Read on.

Rhys Metler


If you’re an entrepreneur with a start-up, you’ll need to create a sales compensation plan before you start recruiting sales people. And if you have an established business, you might consider revamping or overhauling your current sales compensation plan if it isn’t working effectively.

Creating a sales compensation plan is a critical but difficult undertaking. Your plan needs to serve as strong motivation for your sales reps, help you recruit, hire, and retain the top sales professionals, and reward your top team members, while making sure not to devastate your bottom line.

When it comes to creating a sales compensation plan, you have to be strategic. There are many ways to compensate your sales people, and you need to consider some key issues to help ensure a smooth planning process and an effective plan.

Consider the Results You’re Looking For

The point of your sales compensation plan is to motivate your sales people to reach certain goals. You want to see results. The question is: What results are you looking for? Though it might seem like a simple question, the answer might be more difficult to come up with than expected.

Remember that the kind of results your team strives for must be under the sales person’s control. You want to choose results that are most critical to producing sustained growth in profitable revenue. Perhaps you want to focus on existing customer growth or new business development. Do you want your current customers to buy more? Or do you want to find completely new clients? What should you be rewarding?

Keep It Simple

What good is a sales compensation plan if your sales people can’t understand it? It won’t be very motivating. Your calculations for commission or bonuses should be easy to add up. Sales people should be able to set their own goals based on simple calculations that will allow them to get closer to achieving the compensation you’ve set.

Figure Out Your Compensation Mix

Most sales organizations offer a mix of compensation for their sales teams. They offer a base salary plus incentive compensation, such as commission or sales bonuses. You need to find a healthy mix, as it will affect the type of sales person you attract and the motivation that results from it.

If your sales people will be devoting the majority of their time to driving sales, then the incentive percentage should be higher. But if your sales people will be devoting a lot of time to non-selling responsibilities, like customer service and support or administration, then the base salary should be higher as the sales they make won’t be as high. And keep your sales cycle in mind. If your sales cycle is lengthy and complex, taking several months on average to make a big sale, then you need to offer enough base salary to support your sales people financially while they’re waiting for the sale to close.

Decide on Performance Measures

How will you determine when commissions or bonuses should be paid? It could be paid out monthly or per quarter based on revenue made or quota attained. It could be paid based on specific milestones being achieved, or it could be paid based on profitability. Figure out what makes sense for your company.

Review and Modify

All compensation plans have a shelf life, and the average sales compensation plan’s shelf life is approximately three years for well-established companies and one year for start-ups or fast-growing companies. Don’t expect the compensation plan you create today to be effective for the rest of your company’s life. Review it regularly to assure its alignment with your changing objectives and to assure its effectiveness.

The key to designing a compensation plan for your sales team is to align it to your company’s goals, find the right mix, keep it simple, and choose motivating performance measures. And remember to review and modify your plan regularly.


Rhys Metler

Rhys is a tenacious, top performing Senior Sales Recruiter with 15+ years of focused experience in the Digital Media, Mobile, Software, Technology and B2B verticals. He has a successful track record of headhunting top performing sales candidates for some of the most exciting brands in North America. He is a Certified Recruitment Specialist (CRS) and has expert experience in prospecting new business, client retention/renewals and managing top performing sales and recruitment teams. Rhys enjoys spending quality time with his wife, son, and daughters, BBQing on a hot summer day and tropical vacations.