Constructing a Sales Compensation Plan That Works

Maybe it because a new year has begun, but I’ve had numerous questions lately about sales compensation plans and how to construct them. It certainly seems to be a hot topic. I even facilitated a panel discussion on the subject at the SedonaOffice Users Conference this week.

What I hear being asked by business and sales leaders is, “How do I construct a compensation plan that will cause my salespeople to sell gobs of stuff, generating a whole bunch of profit for the company without us having to do anything else? Oh, and without us paying them too much for the effort either?” Wouldn’t we all love to find that solution?!

Getting It Wrong Before and Right Now

Frequently, they’re asking because they believe they previously paid individual salespeople too much for the output they were producing. This led to frustration and anger on the part of management, even causing them to go nuclear with drastic measures like cutting the salesperson’s base pay dramatically or worse, firing them.

It’s important to remember this: Simply constructing the “perfect” compensation plan is no guarantee that the individuals will actually perform.

It Starts with Hiring

You must first recruit individuals that are motivated by the upside potential their sales position might provide. And it isn’t enough to just ask the candidates about it. Almost universally, they are going express comfort with a variable compensation plan. That’s what they think that is what you want to hear!

The key isn’t whether or not they are comfortable with their compensation plan. Instead, the potential hire has to know and understand how much money they NEED to make – not just how much they want to make (we probably all would be happy to make as much money as we can).

So, you want to find out if they are willing to do the necessary hard work, the unglamorous part of sales, that will enable them to sell more and meet their needs. When things aren’t going well, will they trudge through and stay focused, or will they give up?

Good Management Too

One other consideration is that much of a salesperson’s unwillingness to do the necessary things to succeed is not because they are willfully disobedient or unmotivated by their compensation. It is more likely that they have doubt in their skill and ability to produce the desired results, so they are hesitant to jump in. Maybe they haven’t been shown the path to success. That is a manager’s job – to help the individual get from Point A to Point B – to help make it real for the individual salesperson so they see what is possible if they do the right things. Maybe then they won’t be uncertain about the outcome.

Will the Juice be Worth the Squeeze?

I had a favorite boss who would use that phrase and I love it for this situation. To know if it will be worth it to the salesperson, we need to get into the head of the individual. What really matters to them? What is going to cause them to work hard to produce new business?

Some people are completely motivated by money and a heavily commissioned-base comp plan is great for them. But what about the majority that is not just incentivised by money, but is motivated by other things?

Compensation Plan Building Blocks

To construct a great plan for your situation, consider these components:

  • What do you want them to do? In other words, what behaviors do you want? Be sure to share your knowledge with your salespeople. Tell them why the plan is set up the way it is. What behaviors you are trying to incent. Let them know the plan will be in place for now but is subject to change in the future, either because it isn’t producing the type of results you want or because business situations change.
  • Who is on your team and whom do you want to attract? Consider what makes the top producers on the team top producers. Is it because they have the plum accounts and have been around the longest? Or are they top producers because they work tirelessly to generate new business with new customers? These are the folks you want to reward and duplicate. Get to know them and what are they working for, and find more. Also, make sure a new compensation plan doesn’t freak them out. Get personal with key top producers and work on your calculations to determine how you might phase a new plan in for them while creating a plan for new hires.
  • Consider salesperson ROI and the time it will take.  We recommend striving for a 3X to 5X ROI on what your salespeople cost you. Plenty of plans are ill-conceived because they are based on what the salesperson wants, not based on sound financial principles. For example, if you need to attract a salesperson from a competitor or other industry, but there is a ramp up time until they can realistically produce adequate revenue, then you may need to pay a “stipend” during the initial time period of employment, a higher base salary for a time period, or even guarantee a commission. Whatever you call it, the outcome is the same. They get paid a higher amount for a set period of time, then settle into a compensation level that meets your ROI.

The Right Plan Makes All the Difference

We have a case study that demonstrates just how much of a difference the right sales compensation plan can make. You can download it here

Whatever compensation plan you set up, keep in mind that at its core, the plan should incent the behavior you seek, should attract the kind of people you want and should provide an appropriate ROI to the company. Also, as you develop your plan, remember the benefits of non-monetary motivation and how important effective management of the individuals can contribute to its success. Just creating a comp plan and setting salespeople free to pursue it, is not a recipe for consistently high performance.