How to Design a Sales Compensation Plan That Drives Performance

Sales compensation and commission plans are a big factor when candidates consider joining a new company. Money isn’t everything, but it is a driving factor for salespeople.

As a sales leader, you need to design a sales compensation plan that aligns sales activity and quota to revenue goals. Your sales team needs to know what their quota is and what metrics they need to execute in order to achieve it.

Remember, salespeople are driven to perform when they are financially compensated for their hard work. They need to know how they make money.

In order to motivate your sales reps and drive performance, your sales compensation plan has to outline what is expected of them.

Here are 7 things you need to factor into your sales compensation plan:

1. One Size Does Not Fit All

Your sales compensation plans will vary based on the level of the role as well as the sales model.

When someone asks how they should design a sales compensation plan…there isn’t ONE answer. Your sales compensation plan will be unique to your sales model, products, and services. You need to know what stage of growth you are at, and the type of salesperson you need.

You need to understand 2 important things when designing a sales compensation plan that works:

1. How do you acquire customers?

2. How do you retain customers?

These are important questions to answer when it comes to compensating your sales team from a new business and an accounts renewal standpoint.

2. Average Deal Size and Cost of Sale

If you don’t know your average deal size, then you will struggle to develop a commission structure. You need to know the average deal size for your product or service and the cost of the sale…what percentage is the payout? If your average deal is $20k, how do you plan to pay out everyone involved in the deal from sales development rep to the account executive or sales engineer who was involved in closing the deal?

*It’s also important to note that you should keep your compensation plans as simple and clear as possible.

3. Average Sales Cycle

Another important factor to consider is average sales cycle…when do your deals close and when do you pay out on those deals?

One of the main causes of employee turnover is a broken sales compensation plan. Your average deal size may be a contributing factor to a short or long sales cycle. Your sales reps want to know when they will be paid on deals they closed.

If your sales size is large and your sales cycle is several months, your sales reps need to know when they will receive their commissions.

4. Setting an Attainable Quota

This is a big one. When you map out revenue goals, the quota should be aligned with those goals. They should also be measurable and attainable. It doesn’t mean that every sales rep will be 100% or over, but the quota needs to be realistic to motivate your sales reps. If every rep cannot hit quota or get close, it will de-motivate the team, and ultimate affect revenue growth.

{Related Article: How to Hire Salespeople: 8 Rules You Need to Follow}

5. Base Salary and Commission Structure

No sales professional should be in the industry for the base compensation alone. Their commissions should be their motivator. That being said, a base salary is usually recommended to support your sales reps, especially in their first year at a new company.

A common trend among base and commission compensation structure is 50/50, meaning if an Inside Sales Rep’s base salary is $60k, then they should expect to see an OTE of $120k.

*Something to consider: do you cap your sales reps commission earnings?

{Related Article: Is Your Sales Organization Ready to Scale? 4 Steps to Enable Sales Performance}

6. Added Bonus (Kickers, Spiffs, President’s Club)

If you want to further incentivize your sales team to perform, consider including some different bonuses into their compensation plan. To create some healthy team competition to drive performance, hold monthly spiffs rewarding your top performers. These can include gift cards, an extra day off, or a new gadget.

When your sales team is exceeding their monthly and quarterly numbers, do you have accelerators? Does their percentage to pay out slightly increase?

Do you reward your top sales performers who were 120+% of quota with President’s Club, an all-inclusive and paid for vacation trip?

These are just a few ideas to drive your sales team and results.

7. Pay-to-Play

A big mistake is to assume that everyone wants your job. It’s a job seeker’s market. Candidates have options and are selectively searching for the right fit. Understand that money isn’t everything, but it is something, not only when attracting top sales performers but also retaining them.

Be able to afford the caliber of sales talent you need. Your different sales roles will have different salary requirements. Have flexibility around compensation and let sales reps how they can grow their income at your company.