Design an intelligent compensation plan where everyone makes money and drives sales rep performance.
I can’t wait to go to work today to make the company money!” said no sales rep… ever.
So why do so many companies structure and promote their compensation plan as if salespeople felt that way? Instead, use these principles to guide you as you construct your compensation plan. Not only will your company make money, but also your sales reps will be energized to achieve greater sales and personal income.
1. Establish the Goal
The goal of a compensation plan is to create an incentive, which maximizes a return on investment for both the company and the sales rep. Optimally, the this should result in sales goal attainment, retained customers, and intact margins.
Guiding principles:
- The company must make money first (just don’t preach it to your reps since they’re in it for themselves)
- The company must achieve a predetermined ROI for each sales rep (ie. 7x salary, 10x income, etc.)
- Salespeople must maintain margins (this prevents excessive discounting)
- Incentivize where you want your sales reps to go – offer higher commissions or bonuses for selling new products/services, entering into new markets, acquiring new accounts in new verticals, exceeding sales quotas, etc.
2. Implement the Formula
There are an infinite number of comp plan formulas. The key to crafting a solid compensation plan should be based upon the work required to be successful and the impact on the company. Start with the basics – gross sales and margins that a salesperson needs to deliver on a consistent basis to be profitable for your company. After that, work backwards to calculate their commission plan.
Here are a few simple B2B sales comp plan formulas:
- Hunter [prospecting] = smaller salary + higher commissions
- Example: $35K base salary + $50K commission = $85K total income
- Farmer [account retention] = medium salary + smaller commission
- Example: $50K base salary + $15K commission = $60K total income
- Major Account [large account acquisition] = high salary + high commissions
- Example: $70K base salary + $100K commission = $170K total income
Once you have the initial formula set, you can add bonuses for special programs or new product rollouts. You can also create a tiered plan by increasing commissions as sales reps exceed quota levels.
3. Define the Job
Compensation must equal the level of effort required to earn it. For example, if your company’s brand recognition is high, the easier it is to acquire new business for the sales rep. Since the difficulty level is low, then you can have a lower commission since the company has invested heavily in creating a well-known brand. The same goes for companies with strong marketing and lead generation efforts.
Factors that can influence the compensation plan
- Level of experience required
- Length of sales cycle
- Level of sales support
- Size of sale
- Size of margin
- Financial impact to the company
- Expenses required to achieve sales goals
4. Hire the Talent
The key to finding talent that aligns with your sales job and compensation plan is assessing their core motivators. Specifically, the higher the commissions, the higher the economic driver required. Use an in-depth sales assessment to help you identify your candidate’s motivation for commissionable dollars.
Factors to consider:
- Find salespeople whose economic driver is equal to the commission plan you’ve put into place
- Proceed with caution when changing comp plans – you could easily violate your salespeople’s motivators and affect their drive, performance and employment
- Never cap the income – unlimited potential speaks volumes to a strong economically driven sales rep
Therefore, formulating a compensation plan must be a carefully crafted formula. Don’t base it exclusively on financials, but also on business conditions and human psychology. Commissions are designed to satisfy certain drivers that move salespeople to strive for greater sales and income for themselves. If your compensation plan is constructed properly, you can focus it exclusively on the sales rep. In the end, if they are successful your company will be too.