The 7 Characteristics of Highly Effective Sales Compensation Plans

What makes a sales compensation plan different from other compensation strategies? What characteristics attract and retain sales talent, reward salespeople for winning and keeping customers, and control the cost of sales? 

A Sales Compensation Plan is a special compensation structure designed to reward the sales professional for acquiring new customers, as well as retaining and growing current business. The plan is aligned with the organization’s strategic goals and its ‘go to market strategy’ to deliver products and services. These plans have a greater amount of variable pay or ‘pay at risk’ where higher pay is achievable for sales excellence when goals and quotas are exceeded.

Why Do You Need a Sales Compensation Plan?

Sales compensation strategies communicate to the sales rep where to focus their efforts to grow and maintain their book of business in alignment with the business plan. It is a comprehensive guide on how the sales rep can make money if they meet or exceed their goals. Reps need to view the plan as realistic, attainable, and will recognize and reward individuals whose results go beyond expectations.

How Do Sales Compensation Plans Work?

Sales compensation plans have a portion of pay at risk for Target Total Cash Compensation (TTCC). Good sales professionals have a high tolerance for risk and pay variations. They expect to meet their quotas, thus earning their TTCC. If the plan is well designed with the right mix of base pay, commissions, and bonuses, they recognize (and enjoy) the potential for a high income and accompanying rewards for above average performance. 

These seven characteristics have risen to the top as key ingredients of an effective sales compensation plan designed to build sales and achieve organizational goals.

1. It is aligned with the Business Plan.

Sales Compensation is the Enabler of the Business Plan. The compensation plan is the caboose, not the engine. Good management should drive sales success, and the compensation plan should provide support in driving the right sales behaviors. Sales compensation should never be used in place of good management practices. Compensation issues are often symptoms of other problems, and it is the easiest, most tangible thing to look at if sales are not reaching their goals. Frequent challenge questions include: Do we have the right job designs? Do we have the right people? Is the compensation plan driving the right behaviors? Are the quotas obtainable, too easy, or too hard?

2. It is simple to understand.

The mechanics of your Sales Comp Plan should fit on the back of a business card, or follow the ‘Elevator Speech’ method, meaning you should be able to describe your plan to another person while taking a short elevator ride. To keep your sales rep focused on obtaining results, you should have no more than three measures that are totally influenced by the sales rep. This keeps the rep aligned on the primary elements that need to be obtained with the sale and to meet organizational goals. For example, a rep should not be measured on profitability if they have no control over the pricing and margin. If you have over three measures, it becomes a ‘vending machine’ plan, and the rep will choose those measures they can easily sell and ignore those that are most important for the organization.

3. Each distinct sales role has its own plan.

Sales reps who obtain new customers (‘Hunters’), and those who retain and grow current customers (‘Farmers’), should have different plans. Incentive Mix, the ratio of base pay and incentive, is used to reflect the degree of influence the sales rep has over the customer to make the buy decision. Closing a sale with a new customer requires more persuasion than upselling a current customer. Here the ‘Hunter’ role usually receives a 50/50 mix of Salary/Incentive that has the potential for more pay on the upside. A ‘Farmer’ who is responsible for retaining and cross selling current customers will have a mix of 70/30. This reflects a lower degree of influence for the sale thus a lower upside potential.

4. Quotas and goals are realistic and obtainable.

Quotas are a monthly or quarterly sales target, typically for revenue dollars or product volume. To set a realistic quota, look at the sales rep’s current and historical performance. What percentage of your reps hit their quota consistently? Less than 60 percent means the quota is too high – or too hard to obtain. On the other side, 100 percent quota attainment suggests your quota could be too easy. Try to identify the intersection where ambition meets the achievable. Fair and realistic quotas will drive business success and your keep reps motivated. Unfair and/or unrealistic quotas result in defeat and negativity, which feeds sales rep turnover.

5. Top performers are rewarded.

In addition to meeting quota, there should be an additional reward, or a higher upside, for those that exceed their goals. You should expect 60 to 75% of your sales reps to meet quotas. The top 10% who exceed their quotas should receive top pay. These are known as 2X or 3X plans – where the rep can make two to three times their Target Incentive – reps who exceed their quota and are in the 90^th percentile in sales revenue. 

6. It is clear how incentives are calculated and paid.

The sales rep should clearly understand the mechanics of the plan and how they can make money. A common tool is the ‘sales calculator’ which allows reps to see quickly and easily what their pay would be from their sales activity. Sales plan documentation should also clearly state at what point the commission is considered ‘earned’ and paid. This often varies from state to state. To stay in compliance, it is critical to track state regulations for the place of operation, especially when it comes to terminated sales reps and payout of earned incentives.

7. The plan is monitored and adjusted as the market changes.

Sales plan results and quotas should be monitored throughout the plan year. Should you amend the plan in the middle of a plan year? Best practice is “No Tweaking Allowed” on the current plan. If your plan is not working as designed, a complete strategic overhaul may be in order.

Designing an effective Sales Compensation Plan can make the difference between high retention rates and unhealthy turnover for sales reps, and has a direct, measurable impact on achieving organizational goals. Are these seven characteristics in your Sales Compensation Plan design?