Feb 8, 2021 | Brad Wilson, SPHR, GPHR, SPHRi, HRCI Director of Business Development and Partnerships
Creating Fair Sales Compensation Plans
Taking on new clients and increasing your customer base powers your company’s success. The Pareto principle would predict that 20% of your sales team will trigger growth by generating 80% of your revenue. But what about the other 80% of your team?
If you want to optimize your entire sales function, you have to motivate your team through fair and realistic financial incentives. “A properly incentivized compensation plan can affect your business,” said Scot Sorenson, senior advisor, Strategic Sales Results, in our Jan. 21, 2021, installment of the Alchemizing HR webinar series. But developing sales compensation plans that are both fair and effective can be tricky.
Here’s how to implement Sorenson’s five components of a successful compensation plan at your organization.
Find the Win-Win
Connect individual sales team members to the larger company. “When everyone’s working towards that same goal, your messaging, coordination and energy is all in the same direction,” Sorenson says. Tie variable compensation to at least two of these factors:
- Individual performance (should be weighted highest)
- Departmental performance
- Company performance
To decide on departmental and company variables, determine how much of an impact each individual can have on those areas of performance. Consider the culture you’re trying to create and how each element of variable pay sends a message about institutional priorities.
Financial incentives should drive your sales team in the direction you want to go. If you want to push a new product, for instance, offer a higher commission on sales of that product. Step back and look at your plan from the team’s perspective. Are there loopholes they can exploit?
Have the plan implemented as early as possible in the fiscal year, and don’t make any changes once everyone has agreed to it (except in crisis situations, like the pandemic). Align your compensation plan in lockstep with your company goals. Focus on big-picture performance results, and incentivize those.
Write Comprehensible Plans
Don’t leave your team guessing about how they’ll be compensated. “An easy compensation plan to understand is absolutely paramount to success,” Sorenson says. Host a meeting shortly after distributing the plan. If you’re fielding lots of questions by the end, you might need to simplify your plan. Team members should be able to mentally calculate their commissions under your sales compensation plan.
Strike the Right Balance
A base salary in sales should allow team members to cover essential costs but still leave them motivated to excel. Commissions and bonuses should kick in with the first sale. Keep it simple: Start with 50 percent salary and 50 percent commission.
Begin with a $50,000 base pay, for instance, and set the commission for filling the entire annual sales quota at an equal $50,000. A 70/30 plan might not motivate effectively, while a 30/70 plan overworks employees and could result in high turnover. You have to find the balance between maintaining a comfort level and motivating performance.
Reward Top Performers
Effective sales compensation plans pay people well for meeting expectations and very well for exceeding them. Your top performers are going to look at your plan and find a way to exceed it. You need to reward that drive. Doing so increases retention, incentivizes others to do better and supports recruiting tactics. Avoid putting a cap on commission: Don’t punish top performers for bringing in more business.
Watch the recording for recertification credit.