Sales Compensation Plans – The Complete Guide

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If you have problems motivating and retaining your top salespeople, you may need to take a closer look at your sales compensation plan. Unfortunately, many organizations continue to use outdated programs, or worse still, compensation plans that do not align with the company’s goals and objectives. Besides motivating your sales force, a good sales compensation plan helps build teamwork, boost sales, increase engagement, and reduce turnover (retention).

Why A Good Sales Compensation Plan Is So Important

A solid sales compensation plan (SCP) is essential on multiple fronts. For one, the compensation plan provides incentives for your sales team members to meet your desired performance outcomes. Ideally, the most productive people reap the biggest rewards, creating a win-win scenario between the company and its sales team.

Secondly, lucrative sales compensation plans make your company more attractive to top talent. Sales are among the most lucrative career fields out there for top performers. Since sales are the lifeline of your business, your sales compensation plans should reflect that.

Naturally, top performers want to work where their skills and efforts are rewarded accordingly. If you’ve had trouble attracting top talent in the past, you might want to compare your SCP to your competitors.

Additionally, successful sales reps and executives are frequently on the lookout for greener pastures. The days of retiring with a gold watch after three or four decades of loyal service at one company are long gone. Top performers want the best deal, and a good sales compensation plan can help guarantee their loyalty.

Again, if you have unnaturally high employee turnover in your sales department, you might want to take a closer look at your sales compensation plan.

Lastly, a good sales compensation plan can help build teamwork. Some compensation plans are team-based, creating the perfect environment for collaboration and synergy. In such a scenario, salespeople are more likely to share best practices and tips since they work towards a shared goal. This can drastically transform your sales department, drumming up more revenue from team members who previously didn’t do well independently.  

A case for sales compensation plans

Consider the case of Oldcastle, a leading provider of infrastructure solutions. The company realized that its field sales roles were spending too much time on estimating and administrative tasks.

After re-evaluating the company’s goal, It was determined that the field team’s efforts would be better spent generating new business. Oldcastle built a new sales compensation program to reflect this reality. The new plan also included a campaign to sell the new plan’s benefits to the sales team. As a result, Oldcastle saw a positive ROI within the first quarter of implementing the new sales compensation plan.

The takeaway from this example is that a well-thought-out sales compensation plan can do a lot more than motivating sales teams and increase profits. The plan can also help align the organization with its core goals and objectives.

Quick Tips to Improve Your Sales Compensation Plan Today

A quick way to improve your sales compensation plan is to use sales performance management software. Xactly is one such tool.

Xactly automates time-consuming and error-prone manual tasks, ensuring that your sales force receives accurate compensation and on time. This software also allows you to build a sales compensation plan from scratch or manage and optimize an existing plan.

Moreover, Xactly allows for collaboration between various departments, including sales ops, finance, and accounting. This collaboration helps to streamline how your organization handles compensation and commission expenses. Xactly boasts 99.9-percent payment accuracy and up to 30-percent less time processing commissions. 

This all-in-one solution also offers additional tools and features, including:

  • Strategic sales planning
  • Sales performance analytics
  • Operational sales management

Good sales performance management software can radically transform the way you process sales and compensation. Aside from these tools, there are more quick tips to help you create and optimize a solid SCP.

#1 – Explore Different Types of Sales Compensation Plans

The best type of compensation plan structure for your business varies based on the types of products or services you are selling and the types of customers you are selling to, among other variables.

Begin by familiarizing yourself with the different types of compensation plans. Evaluate each option’s strengths and weaknesses and picture how each sales plan fits your organization’s goals and structure.

The most common types of sales compensation plans include:

Salary – In this compensation plan, salespeople get a fixed salary. This model works well for account management positions where the employee isn’t bringing in new business. However, this compensation plan may not offer enough motivation to up-sell to customers.

Commission Only – As the name suggests, this compensation plan means that salespeople earn 100% of their pay via commission. This option helps to keep expenses low but can demotivate the sales force. Additionally, this structure tends to attract aggressive salespeople who may hurt your customer relationships.

Salary Plus Commission – This compensation plan includes a fixed base salary and a commission on each sale. The commission is typically a percentage of the sale. This model offers salespeople the security of covering basic living expenses despite volatile market conditions and the occasional dip in sales. You can tailor the salary and commission mix to different sales roles for the best effect.

Draw Against Commission – This is almost like a salary advance. Employees receive a fixed base salary at the beginning of the pay period. The employer then deducts this amount from the commission earned during the pay period and pays the employee the difference. However, if the employee’s sales go below the base salary, they owe the employer the difference. You typically see this structure where the aim is to reward top performers.

Territory Volume – This compensation plan is based on total sales for specific territories. A percentage of the entire territory’s sales are split equally among the sales force in that territory. This option works well for team-based corporate cultures and where sales teams work together well towards a shared goal.

Tiered Commission – This is where the commission percentage increases as you achieve sales quotas. For example, the commission may be three percent for sales up to $20,000 and raises to four percent for sales between $20,001 and $45,000, and so on.

#2 – Involve The Right Team Members

Whether you are developing a sales compensation plan from scratch or reviewing an existing one, get crucial feedback from the right people. Many organization’s incentive plans are created by people who have never been paid on commission. This scenario makes it difficult to develop a comprehensive plan that motivates the sales team.

Instead, get multiple departments together to brainstorm and later review your incentive plan. The team should include sales, admin, finance and accounting, and human resources.

This way, the sales compensation plan is likely to cater to all the different teams and align with the overall organizational goals.

#3 – Tie Compensation to Performance

Essentially, a sales compensation plan is meant to highlight the businesses’ most important objectives and reward the attainment of these objectives. On the surface, it may seem that the sales teams are consistently meeting their quotas. However, on closer inspection, the teams aren’t meeting the organization’s most important goals.

For example, a sales rep may focus their efforts on existing clients who already need your products or service when they should be focusing on acquiring new leads and clients.

Begin by narrowing down which priorities the plan should reward. Priorities may include base retention, growth, profit, or revenue.

Additionally, communicate how you measure success to the sales team and break down how the compensation plan is tied to success metrics. This approach also allows you to track pay to performance correlation for the long haul accurately.

#4 – Determine On-Target Earnings (OTE)

Figure out how much your salespeople will be paid annually, including the base salary and variable pay. This figure should be realistic and definitive if you plan on motivating your employees or attracting new talent.

Start by deciding on a pay mix, the ratio of base salary to commission. Most organizations use a 60/40 ratio of fixed base salary to commission. However, you may need to adjust this ratio to match the role. For example, a 70/30 rate is more appropriate for reps who sell technical products.

Look to the competition to figure out the appropriate pay mix for your specific industry.

While at it, consider how often you are going to provide compensation. As a rule, try to keep this timeframe under 60 days—the less time between activity and compensation, the more motivated the sales team.

#5 – Implement CRM Software to Your Workflow

Spreadsheets are time-consuming, outdated, and are prone to human error. While sales performance management software helps track sales performance and commissions, it is not an effective stand-alone tool. Customer Relationship Software (CRM) integrates the major departments, including sales, marketing, and customer service, on one platform.

Today, companies are working towards aligning their sales and marketing teams to improve productivity. According to a study by Act-On, aligning sales and marketing makes organizations up to 67 percent more effective at closing deals. Other similar studies have shown aligning sales and marketing can have a significant positive impact on customer retention. Whether your sales teams comprises mostly farmers or hunters, there is much to gain from implementing CRM software to your workflow.

Please take a look at our best CRM review here to get a better sense of what this software can do for your organization.

#6 – Consider A Compensation Plan Based On Experience

Think seriously about a compensation plan that is based on experience. Data shows that sales performance peaks at three years with the organization. New sales reps don’t do as well as their more seasoned counterparts for obvious reasons.

An experience-based compensation plan can help to even things out in this regard. For example, new hires may have a higher fixed salary and lower commission. However, this commission increases and the base salary lowers as their experience grows.

This type of structure offers new hires the opportunity to directly influence their OTE and can be a great motivator. Additionally, the experienced-based compensation structure puts less pressure on new reps, allowing them sufficient time and space to focus on habits that drive sales.

#7 – Don’t Put A Cap On Commission

It may be worth removing a cap on commission if you already have one in place. If your compensation plan is results-driven, then there is no need to put a cap on commission. Most salespeople get into this career for the thrill of closing a sale and having control over their income. Also, a cap on commission demotivates your team from working their hardest. 

Long-Term Strategies For Optimizing Your Sales Compensation Plan

Some sales compensation plan strategies will require a longer time to implement. Remember, your sales plan is a work in progress and should change and evolve to match your organization’s dynamic nature.

Create Documentation Packages for Each Eligible Employee

Ideally, you should take this step immediately after designing the compensation plan. The goal here is to ensure that each eligible employee understands the plan in detail. Include the individual’s sales contract in your documentation package. The contract should include the objectives, sales quotas, and the formula you use to calculate the incentives.

The documentation package should also include the plan’s terms and conditions. This document maps out the plan’s details, like what happens when the salesperson leaves for a new company, transfers to a new role, or changes accounts or territory.

Additionally, include a copy of the sales compensation plan tailored to the individual’s job description.

Evaluate Your Compensation Plan Annually

Companies change and evolve, and so should your sales compensation plan. Review the plan at least once a year or more, depending on your business environment. For example, startups occupy a volatile market environment, requiring a keener eye on the sales compensation plan.

Some of the aspects to evaluate include:

  • Comparing the results of the existing plan to your desired business results
  • Return on investment (ROI)
  • Turnover rates
  • The impact of the plan on employee performance and behaviors

Maintain the Balance between Competitive and Too-Lucrative Plans

A good sales compensation plan will help you to attract and retain top sales talent. Always compare your compensation plan to industry standards and continually update it to remain competitive.

Paying too far above the industry average may cause you to overpay for the results your sales team delivers. The same goes for setting quotas that are too easy to attain. Similarly, setting unreasonable quotas or paying too far below the industry average may lead to high turnover.

Monitor the data closely and adjust your plan and quotas as appropriate.

Consider Non-Monetary Rewards

Non-monetary rewards can complement an existing sales plan and introduce a healthy dose of competition. Consider introducing sales contests where winners get non-monetary rewards like free dinners, team parties, and vacation time. These incentives can be just as motivating as the compensation plan.

Besides a dollar figure, many salespeople crave recognition for their efforts. The occasional contest communicates that you recognize and value your team’s efforts.  

Introduce Role-Specific Sales Compensation Plans

As you gather data and monitor and evaluate your sales compensation plan, you will be in a position to tailor the pay mix to specific roles.

For example, roles that primarily deal with managing and growing existing accounts, subscription customers, and products or services with long sales cycles may require a higher base salary and lower commission.

Similarly, jobs where the salesperson splits their time between managing existing accounts and acquiring new accounts or inherits accounts may require a moderate base salary with higher commission.

Finally, roles that mostly focus on selling new accounts or have short sales cycles could benefit most from low base salary with high commission.

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