How to Find the Right Sales Compensation Plan for Your Sales Team

The Basics of Your Sales Compensation Plan #

We can’t get into the details of a sales compensation model before we’ve covered the basics. There are best practices when it comes to compensation that any company should seek to include at the base of their sales compensation plan.

• Ensure compensation is aligned with sale roles. Your sales organization’s foundation is salespeople (account executives, sales representatives, SDRs, etc.), but you also need to think about sales leadership (sales managers, enablement professionals) when planning your compensation.
• Compensation should reflect a company’s culture. This is vital when creating a compensation plan. How internally competitive are your incentives (i.e., the difference in incentives offered to the lowest-performing sales rep compared with those offered to the highest)? How competitive is your incentive compensation compared with the norm in your industry? Does your company reward stability and consistency, or does it show preference to those who get big wins quickly?
• Keep your plans aligned. We’ve spoken about the importance of top-down alignment throughout your company when it comes to sales enablement. So consider your company’s wider targets when you’re creating a compensation plan, and ensure that it is optimized to push your team directly toward those targets. These can include the following:
  • Investor goals: The returns/value increases your investors want to see at the end of the next sales period
  • Target revenue: The numbers you want your sales team to be reaching in terms of pure revenue
  • Development calendar: The products you’re selling and the way launches affect your team’s sales approach
• Seek input from outside the bubble. Your incentive plan needs to be effective and inspirational to keep a top-performing sales organization motivated. To do so, seek input from teams outside of your sales department for a compensation plan that can provide incentives across the entire organization. These can include financial operatives (to vet cost-effectiveness), HR personnel (to introduce benchmarking, etc.), and even outside voices.
• Think long term/short term: COVID-19 has fundamentally changed our approaches to incentive compensation because it’s changed many companies’ financial position. Whichever compensation package you ultimately select, consider whether you may be better positioned to provide them on a long- or short-term basis.

Once you have a firm grasp on how to align your compensation plan with your company’s culture and business goals, you can get down to planning the finer points of your approach to sales compensation.

The Components of Your Sales Compensation Plan #

Whatever your approach, knowledge of the individual building blocks of SaaS sales compensation and how they fit together is important. Any functioning sales compensation model will be made up of a combination of the following:

Salary #

All but the most aggressive sales compensation plans will incorporate base pay, regardless of how creative they get with commission plans afterward.

Companies will make the ratio between base salary and sales commission proportionate to how aggressive they want their sales team to be. A higher base salary means more stability with less incentive; a lower base salary means less stability with more incentive. Which proportion works best depends on your sales goals and the type and trajectory of your company.

Companies seeking high sales volumes and profit margins will likely be aggressive, with less base pay and more OTE (on-target earnings). Companies looking for higher-quality, lower-volume sales may choose to devote a great proportion of compensation to salary, resulting in less variable pay. This is also likely to result in lower employee turnover.

Commission #

The practice of sales is closely associated with commission. It’s the most common form of incentive compensation, and the principle is simple: for their hard work on a sale, your sales reps are rewarded with a portion of the profit gained. Sales compensation plans are oriented around different types of commission, which we’ll shortly be covering in full.

The commission rates you offer will depend on a number of factors.

These can include:

• the culture of your company and sales approach;
• the difficulty of sales;
• the autonomy you’ll be requiring of your reps, in terms of sourcing as well as closing leads; and
• the duties reps may have beyond pure selling.

Accelerators #

Salary and commission form the broad framework of a sales compensation plan. This wider framework will determine the fundamental success of your plan. However, smaller programs taking place within your plan can do vital additional work in incentivizing desired behaviors among your sales team.

For example, if you find you need a particularly strong quarter to close out the year on target, you may choose to apply an accelerator during that quarter. This practice, also known as “quarter stuffing,” involves introducing new incentives into a single period. The idea is that the condensed incentives will stimulate growth as sales reps strive to achieve a new level of sales performance.

In a conventional market climate, it’s particularly good to incentivize even after initial quotas have been reached. Under today’s conditions, it can be good for capitalizing on a sudden rush of viable new business opportunities.

Decelerators #

Alternatively, because volume isn’t everything, you may want to introduce a measure to ensure that products are receiving sufficient focus from the sales force. Introducing a decelerator means that, until they reach their quota, your team will focus on the products given priority.

A decelerator might seem like an unorthodox or even counterproductive sales incentive. In fact, it spreads the selling focus around your portfolio instead of having all your team vying to exceed quota on one product. It can be highly effective if sales leadership needs to switch focus to one particular type of new business. Sales managers may find this increasingly necessary during the post-COVID market recovery, since familiar sectors may be less buy-ready and more price-sensitive than they used to be. Using a decelerator has also been found to be far better for maintaining team incentives compared with using caps.

Payment #

When and how you pay your sales team is an easy-to-overlook but important consideration when planning your compensation. A salesperson’s focus can waiver if they’re worried about last week’s OTE that they didn’t receive. This can be critical in such uncertain times.

Consider the state of your tech stack, and formulate the right approach. Do you pay incentives immediately upon the completion of a sale? Upon receipt? Upon e-signing?

Ready-made Sales Compensation Plan Examples #

There are a number of standardized sales compensation plans most oriented primarily around salary or commission—that you may find will slot right in with your company’s culture and targets.

Salary-Oriented Sales Compensation Plans #

Salary Only: All compensation is agreed on ahead of time. Because top performers are often driven by sales incentives, a salary-only plan will remove the motivation for your reps to go above and beyond. Their only incentive is to meet a basic target; extra effort will not be rewarded. It can, however, be a good temporary recourse for a company (and a sales team) feeling the strain of the post-COVID-19 economy.

The other principal upshot of this compensation approach is that calculating your sales expenses is simplified, and you get a clear picture of your resourcing and hiring needs. Sales reps who are paid a salary are much less stressed, of course, and that may allow them to perform in a more decisively positive manner in the key months to come.

Salary Plus Bonus: In this plan, salary is augmented by a bonus when preset sales targets are met. This can be an ideal combination of predictability and motivation. Moreover, it’s the kind of motivator you can plan for. Agreeing on bonus amounts ahead of time and making forecasts of the number of bonuses you’re likely to have to pay out will provide an accurate idea of your expenses.

Salary plus bonus is more balanced than the commission model, but for sales compensation that lights a fire under your team while still keeping your expense planning manageable, salary plus bonus is effective.

Salary Plus Commission: This is the most common sales compensation plan: a secure income and the promise of a cut from every deal closed, providing further incentive to sell. It’s somewhat harder to plan for expenses with this approach than it is with the bonus plan, but it gives you greater scope to hire and retain competitive, motivated salespeople.

Salary plus commission can’t be assessed in terms of its effectiveness just like that. There’s a tremendous variety of commission types across the industry, all of which differ, and any of which can be incorporated into your commission plan.

Commission-Oriented Sales Compensation Plans #

In fact, commission-oriented sales compensation plans deserve a section of their own. The type of commission that’s best for your compensation planning depends on your company’s overall aims and the type of selling your sales team will be doing.

Commission Only: This plan involves doing away with your team’s salary entirely. It is a hypothetically risk-free but unpredictable plan and means you’ll be paying sales reps solely relative to the sales they make. That means if they bring in $0 in a month, they get $0 for the month. If they bring in $50,000, they’ll be entitled to a larger cut of that than they would expect from salary plus commission.

It means your company loses little from poor sales performance, but it also makes it impossible to accurately forecast expenses. This is especially true if a lean month should be followed by multiple six-figure deals with all salespeople taking payout on 45% commission. A commission-only plan also presents the opposite motivational problem for your team. Since your reps know they may not pay their bills without making sales, they’re more likely to chase high-volume, low-value deals that are likely to close. The stress from such extreme variable pay can cause other performance issues. It’s a plan only for exceptionally hardy, experienced sales teams.

Absolute and Relative Commissions: Absolute commission and relative commission both include a baseline salary package.

Absolute commission uses specific targets or milestones, such as an allotment of commission per new customer or per upsell on an existing customer. Relative commission, on the other hand, uses a sales quota or predetermined target based on earnings or sales volume to motivate your team members.

Absolute commission can be an effective targeting method if you’re trying to drive new business growth (if you’ve seen a lot of post-COVID-19 churn, for instance). It can also be good if you are aiming for an increase in upsells (vital in such a turbulent environment, given the strategic importance of contract value). Alternatively, if you’re trying to shift higher-value products to increase profit margins, relative commission will be more effective.

Straight-Line Commission: Straight-line commission requires that your reps successfully satisfy their sales quotas.

On a straight-line plan, a salesperson is paid commission based on how close they get to their quota. A rep who sells 50% of their quota will be paid 50% of their commission; a rep who sells 200% of their quota will be paid 200%. Like absolute and relative commissions, this is paid in addition to a salary.

Straight-line commission is good when compensating a sales team formed of different personalities or professional profiles. Sales reps who have a tough month dealing with the post-COVID-19 sales cycle will be saved the discouragement of having what they do bring in taken away. Meanwhile, high-flying members of the team will be able to reap all the rewards for a month when they outperformed expectations.

Straight-line commission can be a good option for a relatively stable company post-COVID-19. It allows you to maximize sales incentives while keeping payout in a zone that (your new business assures) you can afford.

Profit-Based Commission: Commission is about motivating your sales team, but a compensation plan also has to be engineered to help the company as a whole reach its business goals. To that end, and given that post-COVID-19 business goals sometimes just mean survival, profit-based commission can be a useful option. In addition to a salary, a profit-based plan offers a commission that is based on profit rather than on sales. This quells reps’ desire to offer discounts and pursue low-margin sales to close a lot of deals quickly.

Like straight-line commission, commission based on profit discourages discounting and encourages high-margin sales. Plus, it can be tailored to pushing your best and most valuable products, which, emerging wisdom suggests, is the way to go when gunning for post-COVID-19 growth. More valuable products might be harder to sell, but if your sales team knows they’ll be making a share of the profits, their motivation won’t suffer.

Tailoring Your Plan #

Once you have a basic compensation framework, consider these ways in which you can customize your plan to best suit your team and your targets:

• Adjust your compensation based on the performance of individual sales reps. It’s the obvious step: tailor your compensation based on how many sales each salesperson is responsible for. The first attribute of a successful sales comp plan is responsiveness. Reward those who are performing, and encourage your team to coach those who are having a tough time. Ask yourself the following questions:
  • • Are you adjusting in response to the reps who are really performing?
    • How are you responding to those who aren’t? Coaching is the responsibility of the team, not just sales leadership.
    • Are we attacking the post-COVID sales cycle in a sensible and effective manner?
• Personalize your incentives. We’ve spoken about personalizing incentives to performance, but devote time to the human aspect, too. Make an effort to find out how your sales reps are feeling during the present uncertainty. No one can sell if they’re preoccupied with more elemental worries, like family security or physical and mental health.
• Be guided by company culture. Compensation structure needs to align with your company’s broader matrix. If you’re all about aggressive selling, then your team will probably be more amenable to a 50/50 split between salary and commission. Otherwise, stacking more in favor of salary with a lower percentage relegated to commission is sensible, especially if you’re selling high-value products that don’t close as easily.
• As well as rewards, grade motivating incentives based on your team members’ individual roles and profiles. You’re bound to have a mix of roles in the salesroom, and there’s no point giving both new and experienced salespeople the same sales targets. There are a lot of commission structures to choose from, so get creative.
• Use your tech stack. The most crucial currency to sales reps isn’t money — it’s time. Embrace the role of your tech stack when tailoring your sales compensation plan. Salespeople can waste valuable time attending to menial aspects of the sales process, such as calculating the commission they’ve just made in order to log it or in order to see their distance from a target. A well-run tech stack can automate time-wasting processes.

Communicating Your Plan #

A great sales compensation plan is vital, but it’s useless if it’s not evident and understood by your sales team and beyond.

Changes to your compensation plan can be perceived as reducing employee stability or lowering pay outright. That’s not a miscommunication you want to allow, and especially not now. Make it clear why you’ve gone with the chosen plan, how everyone fits in, and how they stand to gain by going all-in on it.

Ensure that you articulate objectives well, that pay-performance relationships are clear, and that each team member is aware of how the plan aims to satisfy company goals. Helping team members understand their own personal place in these company-wide schemes can be great for banding teams together and boosting performances during tough times.

It might seem obvious, but use contracts. Once you’ve settled on your terms of compensation, make sure they’re committed to, in writing, by sales team personnel, and by executives. This will provide clarity for all parties and will allow your sales team to establish trust in your system, freeing them to focus on meeting their targets.

Finally: Be dynamic! Monitor the progress your team is making, observe whether/how incentives are driving the behaviors you wish to see, adjust where necessary, and be as keen to listen to your sales team’s concerns after the plan has been established as you were when personalizing their incentives.

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