I read a study a few years back that alerted the world to something everyone already knew:
Sales employees are more motivated by compensation than all other employees.
Knock me over with a feather, that’s a shock! Of course, there are other factors that motivate a company’s sales force, but let’s be honest: money drives salespeople. However, a sales employee compensation plan requires more than just a pocketful of cash. Motivating salespeople requires you to look at a multitude of factors to insure you’re motivating them enough to increase sales.
Consider the following 6 factors when developing or reviewing your organization’s sales compensation program:
1. Eligibility
I’m sure you’ve seen it before: every employee who has the faintest involvement in the sales process wants to be included in the sales compensation plan. People assume salespeople make the big bucks, so everyone wants a piece of the pie. And you know something? They’re right: there is a lot of money at stake in the sales process.
Your duty is to remain disciplined with the sales compensation plan: only include jobs with direct customer interaction and influence to persuade customers to purchase products and services.
Note: sales support jobs can be part of an incentive plan, just not the sales plan.
2. Total Cash Compensation
Use credible compensation surveys to determine the target total cash compensation for each level of the sales force. The majority of sales reps are compensated with a combination of base salary and commission, or base salary plus incentive bonus. If your organization is like most, you should target total cash compensation at the median of the market to be competitive.
3. Base Salary/Variable Pay Mix
The unique role of each sales job will assist you in identifying the appropriate mix of pay. For example:
- Sales positions prospecting new business tend to have a lower base salary and a higher variable pay percentage (e.g., 70% base/30% commission).
- Positions focused on customer retention and growth have a higher base and smaller percentage of incentive compensation (e.g., 85% base/15% incentive).
4. Performance Metrics
To give the salesperson a clear message of what type of performance is expected of them, use no more than three performance metrics. Good examples include:
- Revenue
- Sales volume
- Profit
- Market share
- Product mix
- Margin
- Retention
- Customer input
A few sales administration objectives, such as submitting timely sales reports, forecasts, or expenses, can help balance out these performance objectives.
5. Quotas
This is where many sales plans fall into a slump. With the help of your finance department, set quotas based on sales forecasts for the entire year. Use credible data so these quotas are challenging yet attainable. If there’s a downturn in business, don’t be tempted to lower the sales quotas: find other ways to change the plan, such as adjusting thresholds to keep the sales force motivated.
6. Payout Timing
The most common payout period is quarterly. Monthly and annual payout periods are also popular, but in the end, payout timing usually depends on the length of your sales cycle. Shorter sales cycles use a monthly payout period while longer cycles utilize an annual payout model.
Sales compensation plans need to motivate the sales force to higher levels of performance through sound plan design, competitive total cash compensation, the appropriate mix of pay, clear performance measures, and attainable quotas. If you consider the 6 factors of sales compensation, you’ll have happy salespeople. And happy salespeople means a healthy company.
I’d like to hear your opinion on sales compensation plans. Feel free to comment below to share your thoughts.
Note: If you enjoyed this article, check out my new bestselling HR book Pay Matters: The Art and Science of Employee Compensation.