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How to Create a Good Sales Compensation Plan

 

Published by : Paul E. Lafleur

Sales compensation - Prima Resource

 

A sales compensation plan must be carefully rolled out after an elaborate analysis and evaluation of your market reality, your company objectives and most importantly what motivates your sales team.

 

Let’s look at the different factors to consider.

How does industry affect compensation?

Ultimately, industry and your company’s maturity play a huge role in the effectiveness of a good compensation plan. Are you in a growth industry or a mature industry? If you are in a growth industry and you set out to increase your sales by 20% year over year, you’ll need your reps to be motivated to hit these objectives. Your compensation plan must be adjusted accordingly.

 

A 100% salary-based plan will certainly not be as effective as a base + commission plan.

 

Though many compensation models exist, here are some commonly used examples:

  • Salary + Pool, Bonus: Larger base salary with a bonus when the company or office as a group attains the goal. Hence no bonus on individual performance. These are ideal for complex sales situations in which you need to have a team behind you. For example, you have 10 reps in a certain market, and so you pool their efforts together and give them a commission based on the overall results of the office.
  • Commission: Commission only sales compensation plans are exactly what they sound like—you pay your salespeople for the sales they bring in and nothing else. This type of plan works well with high growth markets that require strong hunter skills.
  • Salary + Commission: Salary plus commission compensation plans can have either a larger base or smaller base depending on the market, prospects, company objectives, and most importantly what motivates the sales team. They are the most common form of compensation and should be carefully balanced to achieve the most from your team.
  • Draw Against Commission: This is a full commission plan with a guaranteed draw against the commission. At the beginning of each month or quarter, the employee is advanced a specific amount (predetermined draw). This draw is then deducted from the commission at the end of each month or quarter. This plan can be very effective when introducing new salespeople into a full commission plan to ease the early burden of a longer sales cycle

 

Additional compensation that can be added to any or all of the above plans:

  • Accelerator: An accelerator will incentivise your top performers by adding a commission % or a fixed bonus to help motivate your sales team members to surpass their yearly quota. Very effective to keep top performers motivated.
  • SPIF (Sales Performance Incentive Fund): SPIFs are incentives that encourage a salesperson and are often used by employers to introduce new products to the market or to increase sales within a specific period. The incentive may be a cash bonus or a prize (Cadillac or Steak Knives are strongly suggested).

Common mistakes made by employers with their compensation plans

To be very clear, the first thing you need to do is look at your team.

 

For example, your account managers have managed accounts for ten years, and you suddenly require them to acquire many new clients. You figure commission will be enough to motivate them to reach these new objectives.

 

However, you can’t throw a commission at them without having properly taken the time to evaluate their competencies or their sales DNA.

 

Another issue can arise when launching a new product. Your reps have been meeting objectives by selling the old product and are now having difficulty meeting old targets with the new product.

 

Evaluating your team now becomes very important. Are they consultative enough by asking the right questions? Are you providing the right incentive to motivate them? In this case, using a SPIF would be to your best advantage.

 

Also, look to compensate both a salesperson's results and their effort.

 

The idea is to make a clear and simple plan to avoid your reps wasting time trying to figure out what amount to bring in to make commission, for example. You don’t want to complexify and overwhelm your salespeople with over-elaborated plans.

 

To avoid these mistakes, ask yourself some questions about your current compensation plan:

  • Does your plan attract and retain top salespeople?
  • Is your compensation plan aligned with the company’s strategies?
  • Does your plan make your salespeople want more?
  • Does your plan allow you to adapt to the changes in the motivation of your salespeople?
  • Finally, does your compensation plan help you sustain steady growth?

How motivation affects the effectiveness of compensation

Your best bet concerning compensation is to develop different plans and allow your reps to choose. You’ll have reps who are big risk takers and others who appreciate more stability. Each will require different incentives to drive them.

 

The effectiveness of your plan depends on every individual’s situation and their type of motivation. With careful analysis, you must determine if a person is intrinsically, altruistically, or extrinsically motivated. The results of this analysis will help create compensation plans that will bring in the expected results and objectives.

Conclusion

The “one-size-fits-all” approach to compensation has its limits and curbs performance. Compensation plans should be customized to fit the individual.

 

Compensation, if well understood, can impact whether you can motivate, retain, and recruit your sales force.

 

How to recruit great salespeople

Paul E. Lafleur

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THE SCIENCE OF SALES

The blog the science of sale is dedicated to business leaders and sales leaders who are looking for the best practices to build, recruit, coach, train, evaluate, motivate and remunerate their sales teams and improve sales performance.

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