Designing sales compensation plans
What does the best sales commission plan look like? What should be included in a sales commission plan to maximize team performance and incentivize employees? The answer may surprise you.
In today's competitive marketplace, a well-designed commission plan can make the difference between success and failure. In this blog post we will share with you a couple of ideas to help design sales compensation plans that motivate your sales team!
Step 1 : Establish clear targets and goals to design your plan
The number one objective of a sales commission plan is to align company business goals with sales rep behavior.
What are your company's goals? Do you want reps to win new logos or expand their portfolio with upsells, take over a market or sell into a new country, sell a new product your company just released? Do you need cash and want your sales reps to close multi-year deals with upfront payments?
If you don't know the answer to this question, take a step back and reevaluate what your company really wants.
Here are a couple examples of company objectives with their underlying transcription into a sales compensation plan:
- Increase revenue: Grow average deal size and Annual Contract Value (ACV) for both existing and new customers;
- Move upmarket: Increase the portion of revenue coming from large deals;
- Secure long term revenue: Lock in future ARR with long-term, multi-year contracts
- Customer satisfaction: Decrease the churn rate of existing customers
Also, consider gathering feedback goals across the organization. Creating a commission plan that aligns salespeople with the company's goals requires the work of several departments: c-level executives, Human Resource, Finance, sales leaders and revenue operations.
Determine the right performance metrics
It's a common misconception that "sales is all about closing." In reality, most jobs in the sales field require a lot of different skills. There are many aspects to consider when you're evaluating your team and determining what metrics will be best for them moving forward.
- What areas do my reps need to work on?
- Can these areas be tracked with a single metric?
- How will we measure improvement?
- Which statistics matter most for my industry/marketing strategy?
There are a few goal-setting methods and frameworks you can use.
- SMART framework, which stands for Specific, Measurable, Achievable, Relevant, and Timely.
- PACT framework, which stands for Purposeful, Actionable, Continuous, and Trackable
Consider a couple of other important aspects when choosing performance metrics, like:
- Are they relevant for the business?
- Can we put in place a system to measure these metrics on an ongoing basis and track progress over time?
- How will we communicate these metrics back to employees? How often should we do it (e.g. in real time, daily, monthly, etc..)?
Design compensation plans
You now have clear business goals and know which metrics will help you achieve them. The next step is to design the right sales commission plan.
Here are five important areas you need to consider:
- Plan design: What are the mechanisms for designing the best commissioning plan?
- Data engineering: How do you gather the data needed to calculate sales commissions into one single source of truth?
- Plan modelling: How do you translate a sales commission plan into math formulas and models?
- Communication: How do you communicate the plan across the organization (see one article we wrote about this: Sales compensation: The 6 components of strong communication).
- Finance: How do I fund sales commission plans?
One quick note: To understand which incentives would be most valuable, consider sending out a survey to the sales floor. Also, Human Resources can help you better tune in on employees' underlying motivations and design incentives that will make their jobs easier while also motivating them even more!
Evaluate and revise your plan
The implementation of a commissioning plan is a process that must be constantly re-evaluated.
Again, Human Resources can help you make sure the sales reps are truly motivated by their commission plan.
We wrote an article about it (Are your sales truly motivated by their compensation?), together with a survey you can send your team, with questions like:
- Does your incentives (variable) motivate you to over achieve your targets?
- How challenging or achievable are your quotas?
- Was the sales compensation plan clearly communicated?
- How easy it is to track and understand the commissions earned per month (quarter/year)
- Overall, how would you rate your current sales compensation plan?
There are also a number of external factors that may cause you to change your commission plan? You might have to deal with unforeseen events, like booms and busts (see our article Six tactics to adjust sales commission plans and incentives during difficult times). There are several ways to adjust commission plans for short-term market changes (e.g. guaranteed compensations, recoverable draws, etc..).
Finally, sales commission plans objectives are to align company business goals with sales rep behavior. Commissioning plans must therefore be updated whenever there is a major change in the company’s strategy, or when the business goals are updated.
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