Creating Fair & Effective Sales Compensation Plans

by | Dec 30, 2022

Did you know that the average salespeople turnover is 35%? This is 23% higher than the overall average for all industries. That is a surprisingly high number, demonstrating how difficult it is to attract and retain top sales talent. This is where an effective sales compensation plan with competitive on-target earnings (OTE), fair quotas, and ongoing transparency comes into play.

Competitive and effective sales incentives and compensation plans are critical for keeping the salesforce engaged and retaining top sales talent. Employees who believe they are valued are more likely to work harder and stay longer, which saves your organization valuable time and money spent on recruitment and other administrative overheads due to high employee turnover. Sales incentives are an important part of showing your sales employees that they will be rewarded for their work and appreciated for the time they devote to their jobs.

TINYpulse research found that 43% of people would leave their current jobs for a 10% raise elsewhere. Meanwhile, according to Boston Consulting Group research, the happiest employees feel appreciated.

But what exactly is a sales compensation plan, and how do you create a fair & successful sales compensation plan? In this blog post, we’ll go over these questions in greater depth and show you how to encourage your salespeople to perform effectively while preventing you from losing the best talent.

What is Sales Compensation?

Before going deeper into these, it’s important to know what sales compensation is. Sales compensation is the variable component you will pay your sales reps per year over and above their base salary, depending on their performance.

Depending on desired payment frequency, it’s an incentive for certain outcomes, a reward for specific behaviors, and the acknowledgment of a job well done.

A competitive sales compensation plan should motivate high performance or your sales reps to meet or exceed their sales quotas. It’s just that every organization differs and has different goals and needs depending on its growth strategy and competitive landscape.

How to create a timely & successful sales compensation plan?

Identify your company goals & objectives

Your sales compensation plan should be aligned with your company’s strategic objective and expectations from each role. The performance measure should be closely aligned with the desired actions. Setting the right performance targets will help salespeople visualize the expected behavior and take action accordingly.

These objectives could include the following:

  • Boosting sales of specific products.
  • Increasing the market share of the product.
  • Alignment with the company’s performance.
  • Increasing the revenue of your company.
  • Coordination amongst different roles.

Based on these objectives, you’ll know what performance metrics to use to guide the sales force.

Determine your pay goal

Any compensation plan should begin with an examination of what the market is paying. This will vary depending on your industry, role, and the complexity of the selling process. There are benchmarking studies that can give you an idea of the average sales rep salary in your area and industry. In addition, you can also get access to the right pay mix based on the industry and role.

  • Include every role

Individual incentive plans must be developed for each role, such as KAMs, MSLs, Sales Managers, etc. The goal should clearly outline On-Target-Earnings (OTE), portfolio definition, payment frequency, plan period details, performance measurement for each product, and any associated payment qualifiers.

  • Set your quotas and goals

Setting fair sales targets or clearly defining desired performance levels is critical for the success of any sales compensation plan. Avoid setting unattainable goals as they result in demotivation of the sales force and significant underperformance. Similarly, setting easier goals results in windfall gains for the sales force, while the organization does not get commensurate results. According to research, you should set sales targets that 60% of your representatives can meet or exceed. This will ensure that your salespeople are more motivated to go above and beyond the desired expectations.

Alternatively, you could use an activity-based sales model instead. Sales incentives can be tied to the number of activities completed rather than the number of sales made. And it can, at times, produce surprisingly positive results.

  • Communicate your sales compensation plan with sales reps

You may encounter resistance if you spend less time explaining how new sales compensation plans work. It is important to identify the right communication channels and develop support avenues for effective communication of your sales compensation plan.

It is generally a good idea to develop focus groups and vet the changes to the sales compensation plan during the evaluation process. Early involvement of the sales leadership and other stakeholders helps with an early buy-in of the changes after rollout. If possible, involve senior management to help align sales compensation plans with strategic business objectives. In addition, create documentation and what-if-calculators to enable a better understanding of the sales compensation plan.

The Advantages of Having a Sales Compensation Plan – 

  1. Improves the engagement and motivation of the sales force
  2. Enables a better understanding of expectations
  3. Allows for better coordination among different roles
  4. Better sales outcomes and ROI

Want to create an effective & fair sales compensation plan?

You must maximize your sales force potential and support your sales team to generate more sales and be successful. A sales compensation plan can be an important lever to optimize the performance of your salespeople. However, creating a sales compensation plan can take time, and you must consider several factors to be effective.