7 months ago
February 21, 2017

How to Set up an Effective Sales Compensation Plan

When it comes to creating your sales compensation plan, there’s no one best approach, but these steps can help guide your decision making. Read on.

Rhys Metler

How_to_Set_up_an_Effective_Sales_Compensation_Plan

Creating an effective sales compensation plan is critically important. But it isn’t an easy thing to do and there’s no one-size-fits-all approach. Some companies offer only salary, others salary and commission, and some blend in incentives and special bonuses as well.

If your sales compensation plan is too costly, it’ll dip into your profits and hurt your bottom line. But if it’s too cheap, you won’t be able to attract or retain top talent, either. Finding the perfect middle is required to get the best of all worlds. Ideally, your sales compensation plan should be crafted in a way that’s good for your business but also good for your sales people.

The important thing is to put thought into its creation, ask yourself the right questions, and calculate the right numbers in order to ensure that it’s a strategic plan. Use these tips to guide your decision making.

Match Your Company’s Specific Goals

Your sales compensation plan should be linked to your overall business goals as well as your sales goals. Consider your objectives: do you want to gain new business? Do you want to increase your average size order? Do you want to add margin? Maybe you want to open a vertical market. The more you understand about your company’s realistic but specific needs, the better you’ll be able to design a compensation plan that is tailored to them.

Consider Your Staffing Goals

Consider your staffing goals as well. Are you looking to hire and retain long-term sales people who will be able to maintain strong relationships with clients? Or is a rapid turnover acceptable in your business? If you want to hire and retain people for the long term, you’re going to need to dish out more cash. The top sales professionals won’t work for peanuts. Remember that you get what you pay for.

You can certainly reduce your selling costs in order to enhance your profits by capping your compensation budget, but this will also come with the high cost of turnover.

Keep Cost of Sales (CoS) in Mind

If you want to attract and retain the best sales people in order to build a strong sales team, you need to make sure you can actually afford it. This is done by calculating your cost of sales. For the simplest ratio, take a sales person’s salary and commissions earned at 100% of quota along with any bonus opportunities you want to offer, and divide the number you get by the revenue that the sales person will need to obtain. It is possible? Realistic?

Know Your Options

Unlike other departments, there are many options for you to choose from when setting up your sales compensation plan. Organizations use a wide variety of plans, based on their goals and finances. Some focus on base salary, others on commission. But most include accelerators that increase commission rates when target levels are achieved.

Perhaps you want to focus on profit-based commission—the rates increase as the margin levels increase, whether based on monthly average, margin generation, or invoices. You could also choose to compensate on revenue or quota—in this case, the sales person’s compensation is based on volume or quota achieved. There’s also a third option of balanced compensation, which is based on margin and revenue, as well as a third component, such as the attainment of quota. Or finally, you can offer team bonuses on top of salary, which would go to all team members when sales goals are achieved per quarter.

Creating a sales compensation plan that works effectively both for your company and for your sales people is hard work. But if you take a strategic approach, you can craft an effective plan that improves sales performance, attracts and retains top sales people, and helps you achieve your corporate goals.

 

Rhys Metler

Rhys is a tenacious, top performing Senior Sales Recruiter with 11+ 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 two daughters, BBQing on a hot summer day, tropical vacations and cottaging.