How to Build the Right Sales Compensation Plan For 2021

What is a Sales Compensation Plan? #

A sales compensation plan is your business’ incentive-and-reward strategy, designed to get the best performance possible out of your sales reps. Most (but not all) sales compensation plans begin with a baseline salary. From there, you can get creative about bringing in different commission structures designed to drive your reps towards the wider company sales goals you need to fulfill.

How To Create A 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 comp plan:

• Ensure that compensation is aligned with sales roles. Your sales team’s foundation is salespeople, but there are also managers and sales leaders to think about when planning your compensation.
• Compensation should reflect a company’s culture. This is vital when creating a comp plan that will aid in the retention of personnel. When planning your compensation package, your sales managers should be able to answer the following questions:
  • What sales behaviors are we trying to incentivize? Does it make more sense (relative to our overall sales goals) to go for high-volume, lower-quality sales or low-volume, higher-quality sales?
  • How internally competitive are our incentives (i.e., the difference in incentives offered to the lowest-performing sales rep compared with those offered to the highest)?
  • How competitive are our incentives compared with the norm in our industry?
  • What metrics are we basing our compensation on? Should we reward stability and consistency, or should we offer the biggest prize 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 your compensation plan is optimized to push your team directly toward those targets. These can include the following:
  • Investor goals: The returns or 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. Because sales comp plans are so influential to company performance, seek input from teams outside of your sales organization for a compensation plan that can provide incentive across the entire organization. In addition to representatives from the sales team itself, look to include the following:
  • Members of the Finance Team: Your sales comp plan needs to be effective and inspirational. However, it also needs to be affordable for your company. Bring in a member of your finance team to help with modeling. They can help you forecast your predicted commission payout for the next sales cycle/quarter/year to make sure that your cash flows will be able to cover the extra amount.
  • HR Team: Human resources is your surest link to company culture and may well be tasked with administrating the final plan. They can bring any regulatory issues to your awareness, introduce benchmarking and market pay data, and show you how best to personalize your compensation strategy to match your salespeople’s individual profiles (more on that later).
  • Outside Voices: Don’t be afraid to ask for advice from outside your company. You never know what fresh opinions, information on best practices, or industry knowledge a consultant can bring to your plan.
• Be ready to adjust. These are unprecedented times. If your cash flows are slimmer than before, if there are fewer prospects coming in than before, if commission rates have to be slashed, be straight with your sales team about it. If you had an old, popular sales compensation plan that’s no longer viable, be upfront about it, and create a short-term alternative. This will allow you to experiment with alternative methods of keeping your team motivated while keeping everyone compensated.

Once you have a firm grasp on how to align your compensation plan, both with your company’s culture and with its short- and long-term priorities, 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 to compensation, 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 comp plan will incorporate a base salary, regardless of how creative they then get with on-target earnings (OTE) and other aspects of their commission plan.

Companies will make their salary: commission ratio proportionate to how aggressive they want their sales team to be. Higher base pay means more stability with less incentive; lower base pay means less stability with more incentive. Which proportion works best depends on the type of company and whether the current circumstances find you in a stronger or weaker position when it comes to your runway (startups are advised to measure their own runway with care).

Companies seeking high sales volume will likely be aggressive, with less pay determined by salary and higher variable pay. Companies looking for higher-quality, lower-volume sales may choose to use a great proportion of compensation devoted to salary. This is also likely to result in lower employee churn.

Commission #

Commission is the method of incentive most associated with the practice of sales, and the principle is simple: For their hard work on a sale, your sales rep is rewarded with a portion of the profit gained. Sales compensation plans are oriented around different types of commission, which we’ll cover in full shortly.

The amount of overall compensation accounted for by commission 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 comp 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 sales level. It’s particularly good for incentivizing even after initial quotas have been reached.

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.

It spreads the selling focus around your portfolio instead of having all your team vying to exceed quota on one product. Using a decelerator has also been found to be far better for maintaining team incentive 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 commission they didn’t receive, and their time can easily be wasted by having to calculate their own commission.

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?

Sales Compensation Examples #

There are a number of standardized sales compensation models, most of them 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 sales team performance is often driven by 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.

The principle 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. For companies that need to stabilize or that want to put more emphasis on hiring, this can be a sensible option. Sales reps paid only a salary are much less stressed, of course.

However, unless your team is incredibly easy to motivate, you might find that the lack of tension detracts from their overall performance. You may also find your top performers leaving for a sales organization that can promise them a payout that’s more reflective of their performance levels.

Salary Plus Bonus: In this plan, a higher base salary is augmented by a bonus when preset sales targets are met. This can be an ideal combination of stability and motivation. Moreover, it’s the kind of sales incentive plan you can strategize 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, it’s 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. The promise of a larger payout provides further incentive to sell. It’s somewhat harder to plan for expenses than with the bonus plan, but this approach gives you greater scope to hire and retain competitive, motivated salespeople. It’s a particularly good option for companies with a lot of post-COVID-19 cash runway that want to really take the reins off their reps.

Salary plus sales 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.

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 sell $0 in a month, they get $0 for the month. If they sell $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 low-performing reps, but it also makes it impossible to accurately forecast expenses (especially if a lean month is followed by multiple six-figure deals with all salespeople taking a 45% commission).

In addition, it 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 can cause other performance issues — not a good sign when more reps than ever are battling burnout. It’s a plan for only exceptionally hardy, experienced sales teams, and, frankly, it’s an ill-advised option during these already uncertain times.

Absolute and Relative Commissions: Both absolute commission and relative commission 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 quota or predetermined target based on earnings or sales volume to motivate your team members.

If you are trying to drive customer growth or are aiming for an exponential increase in upsells, then absolute commission can effectively help your reps target their selling. If you’re trying to shift higher-value products to create net higher overall earnings, relative commission will be more effective.

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

On a straight-line plan, commission rate is totally consistent. A salesperson will be 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 will be saved the discouragement of having what they do bring in taken away, while high-flying members of the team will be able to reap all the rewards for a month in which they outperformed expectation.

Profit-Based Commission: Commission is notionally about motivating your sales team, but a comp plan also has to be engineered to help the company as a whole reach its targets. To that end, 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 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. They 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.

Tailor Your Plan #

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

Reward retention #

Do not reserve all of your variable compensation for reps acquiring new business. In the post-COVID-19 period, maintaining existing customer relationships is vital. Anything other than a minimal churn rate can prove disastrous to your bottom line. If your sales reps double as account executives, then set aside separate incentive compensation for reps able to secure upsells on existing clients.

Adjust your compensation based on individual sales rep performance #

It’s the obvious step: Tailor your compensation based on how many sales each salesperson is responsible for. The first attribute of a successful comp plan is responsiveness; reward high-performing sales talent, and encourage your team to coach those who are having a tough time.

Ask yourself the following questions:

• “Are we adjusting in response to the reps who are really performing?”
• “How are we responding to those who aren’t?”

Remember, coaching is the responsibility of the team, not just the sales leader.

Personalize your incentives #

We’ve spoken about personalizing incentives to performance, but devote time to the human aspect, too. High turnover of sales reps can be disastrous to a sales organization in times like these. Take the trouble to find out what your salespeople want, and structure your incentives to match where possible.

Are your reps after higher on-target earnings for closing deals with higher contract value? Do they want more vacation days per closed-won deal? Do your best to make it happen. You’re sure to see an upturn in performance and a reduction in burnout.

Be guided by company culture #

Compensation structure needs to align with your company’s broader culture. If you’re all about hyper-aggressive selling, then your team will probably be more amenable to a 50/50 split between base pay and variable pay. Otherwise, stacking more in favor of salary with a lower percentage given over to commission is sensible, especially if you’re selling high-value products that don’t close as easily.

Remember: These are unstable times. At the moment, even the most tigerish reps are likely to appreciate a more dependable pay structure based on a higher base salary.

Grade motivating incentives based on your team members’ individual roles and profiles #

You’re bound to have a mix of sales roles in your organization, and there’s no point in 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 target. A well-run tech stack can automate time-wasting processes and is a key pillar of sales enablement.

Communicate Your Plan #

Whatever changes you’re making to your compensation plan in 2021, communicate them. Make it clear why you’ve gone with the chosen plan, how everyone fits in, and how they stand to gain by buying in.

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, even if reps have had to swallow reduced commission rates or lowered salaries.

Use contracts. Once you’ve settled on your terms of compensation, make sure they’re committed to, in writing, by both sales team personnel and executives. This will provide clarity for all parties and 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 and how incentives are driving the behaviors you wish to see. Are you seeing unexpected sales spikes? Dial that commission rate up. Not seeing the results expected? Make the time to listen to your sales team’s concerns. A united, empathetic sales organization is, in many ways, the most reassuring compensation of all.