8 Steps to Developing an Effective Sales Compensation Plan

It’s no secret that sales compensation plays an important role in the success of your company. With that in mind, it makes sense to develop an effective sales compensation plan that will motivate your sales team and attract new talent as well. While that seems like an easy enough task on its face, finding the right plan involves many steps and can be quite complex at times. Here are eight steps to help you develop an effective sales compensation plan your team will love, and that will work for your business as well.

Step 1: Assess the sales process

Successful salespeople are worth their weight in gold. An organization with a strong sales team can expect significant growth, but as every company knows, you need to have the right strategies in place to bring success home. Developing a sales compensation plan is one of the most important things that a company should do for its team members. Before creating the plan, it’s necessary to first assess how your current sales process functions. Do you rely heavily on cold calling or do most deals come about through networking? How does your process work and what does it look like?

Step 2: Determine Ideal Activity Level

What is the desired activity level in the sales process? Will your plan work with a low-touch approach, requiring salespeople to call their customers once every six months, or a high-touch approach that involves speaking with customers at least weekly? If you have hourly employees, such as retail workers or airport representatives, will they be able to reach the desired level of contact with each customer during an eight-hour day? You should also consider how customer behavior may impact the activity levels required in your plan. For example, if customers increasingly expect daily updates on available inventory and are accustomed to one-hour delivery windows, your call centers would need more agents on staff than before.

Developing a Sales Compensation Plan sounds intimidating but with this handy 8 step guide it doesn’t have to be!

Step 3: Calculate Performance Thresholds

To figure out performance thresholds for the sales force, compare your desired total goal against the number of agents in the company. For instance, if you have 50 agents and you want to hit $10 million in revenue, then each agent would need to generate $200,000 per year. To calculate how much money each agent needs to make individually, divide the target amount by 50 – that means agents need to generate $4k each per year ($10M/50). The next step is calculating how much money agents need make individually on their personal quota so they are at their performance threshold.

Step 4: Determine Performance Targets Based on Objectives and Processes

Deciding on a performance target for your sales team will help you determine how much it will cost the company to reward individual or group goals. Performance targets are set using metrics that meet your business objectives and process requirements, as well as industry standards.

First off, figure out what type of performance metric you want to use: qualitative, quantitative, or both. Qualitative metrics include awards such as Manager’s Choice Awards and Goal Awards. These are usually chosen when you want the most motivated person rather than the best performer of the year. Some examples of quantitatively-based awards include profits from one sale or quotas reached within a predetermined time frame.

Step 5: Establish the Linkage Between Sales Objectives, Activities, Results, and Rewards

Many organizations struggle with linking sales objectives, activities, results, and rewards because they don’t recognize that a difference in these items can create significantly different outcomes.

Therefore, a very important thing to keep in mind is that rewards are not solely money based–they should also include other financial incentives (bonus/incentives) and non-financial incentives such as medals or certificates for outstanding achievement. Rewarding outstanding performance with what the individual values most will make them much more invested in their performance.

The final result of your linkage between sales objectives, activities, results, and rewards should be a clear connection so that salespeople know how their goals affect the bonuses they may receive.

Step 6: Measure Results

In step 8 of developing your sales compensation plan, make sure that it is aligned with your corporate strategy. Make sure that all initiatives are clearly defined and will be supported. If the plan needs a new executive sponsor or a clarification on certain levels of achievement or sales opportunities, it should happen before moving on. You can also take time during this stage to assess how many tiers in your sales force (if you have one) are really needed based on expectations and future growth projections, so you don’t include too many or not enough managers in your next-generation staffing model. This alignment will help ensure a sustainable plan that will continue to grow even after the initial implementation is complete.

Step 7: Tie Incentives to Goals with If, Then Clauses

One way to create incentives is through a commission-only structure, which is often implemented in such a manner that employees are either paid no base salary or a very low base salary in exchange for receiving commissions. For instance, the agreement might be as follows: If you sell X units per month, then your payment will be Y dollars. In the event that you do not sell X units per month, then your payment will be Z dollars where Z < Y. Another example of this type of clause would include something like this: if you maintain a sales quota of 50% over the next year, then I’ll give you $2k bonus; if you don’t meet this goal, then I’ll only give you $1k.

Step 8: Ensure Alignment with Corporate Strategy

Finally, as the organization finalizes its desired goals and strategies, it is important that the plans align with them. If there are gaps or inconsistencies, make the changes now so that this strategy can be implemented with full support from the organization. It is also important to consider how compensation fits in with other strategic initiatives and whether they will influence results. For example, if a company decides to focus on growth through new products then they may need to create more product-focused sales positions than customer-focused ones.