Designing a sales compensation plan that works

Designing an effective sales compensation plan is one of the most effective weapons you have as a sales manager/business owner. Yet, it’s one of the hardest and frustrating things to get right. In this post, I’ll share the successes (and many failures) of designing a sales compensation plan at RIGHTSLEEVE that now gets results.

Designing Compensation Plans to Align with Business Objectives

Start by doing the analysis of what levers you are looking to move and what objectives you want to accomplish. Examples of levers and how to impact them with compensation:

1. Top line growth
– sales thresholds — offer increased commission sharing beyond certain sales thresholds or increased support

2. Bottom line growth
– margin floors and margin thresholds — no commission below the margin floor, increased commission share as the margin increases
– intent to walk away from bad business
– teach the team about the 1% – the impact on the bottom line of increasing margin by 1%

3. Segment Growth and Segment Shifting
– what are your most profitable customer segments and how do you incent selling to those vs. least profitable
– make the team aware of what it costs to service the least profitable segment
– give them the ability and tools to say no to those customers

4. Cost Reduction / Vendor Consolidation
– share in the rebates to incent the team to use preferred vendors
– negotiate spec samples and marketing dollars to reward for supporting preferreds
– also helps them sell more profitably if channeling spend results in lower prices = higher margin

Communicate the objectives you are trying to accomplish as a business, as the more the team knows, the more they will be on board!

Sales Compensation Models and Sales Roles

What kind of business are you trying to build?

1. A group of lone wolves
– commissioned sales people who are independent contractors
– pros – allows you to scale quickly, low risk
– cons – no accountability, value does not accrue to the business, hard to make money as by the time you have paid a 50/50 split of commission and subtracted overhead there is not that much profit left

2. A band of merry men/women
– base + commission structure, team of employees
– pros: clients are owned by the business so value accrues to the business, predictability in forecasting as you are able to set goals and hold the team accountable
– cons: upfront cost, investment in training and development

Do the math of what will work for your business model
-start with how much profit you want to make (as a % of revenue)
-add how much overhead you have or will need (as a % of revenue)
-look at the average margin you sell at and subtract the overhead and profit requirement – what’s left to give in compensation?
-how much do you need a sales person to sell to break even on them and where are they actually profitable?

Hunters vs. Farmers

It’s a lot harder to be a hunter as you have to bring in business from scratch versus those who are being fed leads through marketing or by the owner. Make sure you align the compensation with the role. If you have put someone in a hunter role, set them up for success to focus on that – don’t expect them to process orders as this takes away from their ability to bring in new business.

How/When to use Incentives and Stretch Incentives/Kickers

Establish the level of sales for a rep above which everything is gravy. You can afford to pay out more at this stage as the rep has covered their cost and you have made a profit. For example, our commission model jumps significantly beyond $750K and then again beyond $1MM. Other incentives to consider:
– giving a cash bonus for a rep to hit a goal is a major motivator
– giving an even larger cash bonus for them to hit a stretch goal is an even bigger motivator
– in designing incentives and stretch incentives, be sure to look at what matters to your team: some people prefer a day off or a gift card to cash, do what is meaningful to them

 

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