How to Build the Right Sales Compensation Plan for Your Business

December 8, 2017 Jordan Rinaldo

For many business owners, building the right sales compensation plan is a challenge. While you know you want to encourage your sales reps to reach their goals, knowing how exactly to compensate them for their efforts can be a grey area.

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For the most part, the process boils down to finding the appropriate balance between base pay and commission while having a clear understanding of your business’goals, payout formulas, and how you’ll measure success.

Because compensation plans can have an enormous impact on your sales team, your bottom line, and the growth of your business, knowing how to build the right plan is important. Keep reading to gain a better understanding of what to include in your compensation plan, how to choose the right pay formula, and how to flawlessly implement your plan.

Setting up a Sales Compensation Plan

If done correctly, a sales compensation plan will have a huge impact on your company’s future success. For this reason, your plan should be strategic and custom made for your business—there is no cookie-cutter format for a great sales compensation plan. However, there are a few key factors that should be considered as you build and implement your sales incentive program:

Your Strategy
Sharing the business strategy and what you’re trying to achieve helps your sales managers motivate and communicate goals effectively with your sales team. Without having an understanding of your business’ direction, it’s easy for people to get lost or distracted along the way, leading to lower sales and a confused team.

How Performance Is Being Measured
If you expect your sales reps to work toward a goal, there has to be a way for their work and performance to be measured. Highlight specific benchmarks and objectives that will help guide your reps. When everyone knows how close they are to success, they’ll work that much harder to reach the top.

Your Payout Formula
For your sales team, this aspect of the plan is what matters most—it spells out exactly what’s in it for them. The payout formula highlights how, when, and what they will be paid for their efforts. Whether it’s a commission for sales, the base pay, or a one-time bonus, all of your payout plans should be showcased here.

The Resolution Plan
With a new sales compensation plan comes a handful of questions, concerns, and conflicts. You need to be prepared. Have detailed instructions on how you plan on handling any questions or concerns that may arise. This helps get everything out in the open andhelpsyou implement your new compensation plan more seamlessly.

It’s important to note that every business is different. While the layout of your compensation plan should follow this structure (or something similar), the contents of the plan will be different for everyone—that’s what makes it effective.

Creating Meaningful Goals and Performance Objectives

In order to create sales goals and performance objectives that have meaning, it’s vital you have a clear understanding of your business goals. While these goals may change from time to time, they should be able to effortlessly fit into your compensation plan and change as your business grows and evolves.

For instance, you may want your salesforce to focus on a new product. If this is the case, there should likely be higher compensation for new product sales and something lower for your existing products. Perhaps you’re looking to gain new leads, in which case new leads would have higher compensation than sales from an existing client. 

Regardless of the situation, your sales reps need to have a clear understanding of what currently defines “successful selling” and what they can do on an individual level to reach those goals. If they have to guess at what needs to be done in order to succeed, it becomes a much more complicated process.

The Options for Sales Compensation Formulas

According to a survey done in 2008 by WorldatWork, a mix between base pay and variable pay were the most common forms of sales compensation. In fact, 18 percent of respondents used a mix of 80-percent salary to 20-percent commission. However, there are a few different sales compensation formulas to consider and each one fits differently for different businesses: 

Straight Salary
This is exactly what you’d expect—paying your sales team an annual salary and nothing else. While this does help you attract new talent with the promise of consistent pay, it doesn’t push your sales team to work as hard as possible. You may find your salesforce becoming lazy because there’s no incentive for them to workharder or reachgoals. 

Salary Plus Commission
As one of the most common compensation plans, this method combines a base salary with a percentage of commission. While this can be a bit more complex for payroll, it gives your sales team an incentive to work toward, offers employees the possibility to make more, and,in turn,increases your bottom line. 

Commission Only
Considered one of the “boldest” compensation plans, commission only is just that—employees receive a commission on the sales they make and nothing else. This method does tend to attract bolder sales people who know they can make a good income if they work hard. However, it also creates aggression and high competition levels within the sales team. It also leads to higher rates of burnout and stress, as sales reps know they rely 100 percent on their own performance to make money.

Profit Margin/Revenue
This sales compensation plan rewards sales reps based on how the company is performing as a whole. While this does encourage company loyalty and is great for start-ups, typically, your incentives have to be longterm in nature, such as stock shares. 

In order to decide which compensation model is best for your business, it’s important to understand the role of your sales team (how much influence it has), the kind of selling you’re engaging in (pushing new products or old, aggressive selling or soft selling), and the sales cycle of your business (seasonal, product lifestyle). Once you understand these key business characteristics, making the decision is much easier and more effective.

Work with Experts Who Know Best

If you’re still not sure which sales compensation plan is best for your business or how to begin implementing things, don’t worry. Working with sales consultants is the best way to ensure you make the right decision for your business and your sales team.

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