You have a new sales role on your team. Maybe it’s your company’s first foray into Inside sales, or maybe you just approved a requisition for a new channel manager role, or maybe you’ve just hired your first salesperson.
Even if your business has a seasoned sales team in place, if you have a new role, you’ll need to learn how to develop a sales compensation plan for that role.
9 Steps to Putting Together a Sales Plan
To set the compensation up correctly from the start, let’s review nine important steps for creating the right sales plan for you and your team.
1. Document the key characteristics of the role
Sales compensation is role-based compensation, so it will be important to understand what the person in the role is expected to do, as well as the skills and experience he/she needs. These role characteristics will help you match the role correctly to market data and determine the appropriate total compensation level.
2. Establish target cash compensation (TCC)
In addition to external compensation survey data, you should also consider the pay levels of similar roles in your business, the pay levels of the person’s managers and subordinates if applicable, and the pay level required to attract outside talent to the role.
3. Determine pay mix
The primary determinant of pay mix is the degree to which the salespeople in the role cause the results on which they are measured, independent of the brand, the breadth of the product offering, the pricing, the product features, etc. The more direct influence the salesperson has on the sales results, the more risk (and upside) is appropriate in the plan.
Pay mix examples:
- For a new salesperson with a great deal of personal influence over sales results, the pay mix may be 50/50. This equates to 50% of TCC in the base at the midpoint and 50% in the incentive at the target.
- For an inbound inside salesperson who has little control over the incoming calls, the pay mix may be more like 80/20.
- For most sales roles, the range of appropriate pay mix is from 50/50 to 80/20.
A few considerations on pay mix based sales compensations plans:
- Pay mixes that have more than 50% of compensation at target in the incentive, such as 40/60, may result in aggressive and short-term sales behaviors and limited ability to coach and manage the salesperson.
- Pay mixes more base-rich than 80/20 rarely provide enough risk and upside to effectively focus behavior and drive results.
4. Select incentive measures
Select one to three incentive measures of sales contribution that reflect the top priorities of the role. Ideally, they are financial measures that may be tracked in your existing systems. Sales plans should always have a volume measure such as revenue, margin dollars, units sold, or bookings.
Sales compensation plans should also usually include a measure of sales quality since not all sales dollars are equally valuable to the business. For example, profit margin percent, new account sales, or sales of important new offerings might matter more than simply gross sales.
Sometimes it is appropriate to include a measure that rewards collaboration such as team results. In the case of long-cycle sales roles, a sales milestone objectives measure may be used.
Remember that the measures are there to help focus the sales effort, so fewer is better, as long as the key accountabilities of the job are covered.
5. Weight the sales compensation measures
Each sales compensation measure is assigned a weight so that they add up to 100%. The weights should reflect the relative time that management would like to see spent on each measure.
For example, if a salesperson has one measure for total revenue and another for new account revenue, and if the intention is for the salesperson to spend about two days per week in pursuit of new accounts, then a weighting of 60% on total revenue and 40% on new account revenue would be appropriate.
6. Determine the compensation payout rates
For each measure, first assign a goal or quota for what performance is expected. The goal should be a challenge, but one that is attainable by a salesperson in the role who is doing a solid job. The “base rate” for the plan is then calculated as the target incentive divided by the goal value.
For example, if a salesperson has a $40,000 target incentive for a revenue goal of $800,000, then the base commission rate would be $40,000 / $800,000 = 5%.
The sales compensation plan may be communicated as a commission (percentage of what is sold), or as a goal-based incentive. That same plan could be paid as $400 for each 1% of the goal achieved so that at 100% of goal the salesperson has earned 100 percentage points x $400 = $40,000.
Most early-stage businesses tend to use sales commission plans where the payout for each sale is clear. More mature businesses may move to a goal-based incentive with a stronger emphasis on goal attainment, and potentially with different combinations of target incentives and goal amounts from one person to the next, even in the same role.
7. Adjust the rate with sales accelerators and decelerators
To reduce payouts for underperformance, consider the use of thresholds. A threshold is a level of performance below which no compensation is earned or where a decelerator comes into play.
An example of a decelerator for below goal performance would be:
- Pay 80% of the base rate calculated above up to 50% of goal
- Pay 120% of the base rate from 50% to 100% of goal.
To motivate goal attainment, accelerate the payout over the goal. Typical over-goal sales accelerators range from 150% to 400% of the base rate. Calibrate your acceleration to offer two to three times the target incentive for truly outstanding or excellence performance. Also, consider decelerating the rate over excellence to protect against runaway payouts due to questionable goals or windfall sales.
8. Test the new sales plans
Do some calculations to check the payouts across the full range of likely outcomes, and make sure the results seem fair to both the salesperson and the business. Adjust acceleration and deceleration as needed to correct problems revealed by the testing.
9. Communicate clearly
Document the plans clearly and provide solid examples, so each salesperson understands the sales compensation plans and finds them motivating.
Be sure to leverage that teachable moment when the compensation plans are communicated to discuss the salesperson’s earning goals and the opportunities in the territory or assignment that will enable that person to meet these goals.
Maximize the motivational value of the plans throughout the year with great reporting, coaching (if performance flags) and celebration of successes.
Develop a Sales Compensation Plan With Expert Help
Do you feel like you need expert help to develop the right sales compensation plans for your organization? We offer sales plan design and consulting with options ranging from light-touch advisory engagements for smaller organizations or more straightforward challenges, to full-service consulting projects scaled to assist with the plans of very large complex sales organizations.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.