Sales Compensation

Reviewing your company’s sales compensation plan is part of our Getting in Step with your company and sales team. Getting in Step is when we learn about you and how your business operates, specifically in sales. Making changes to a compensation plan is nothing we take lightly. Most often, no urgent changes are required, but if there are, we don’t want to make those changes until we are clear about what we expect of the sales reps. We usually wait until we understand the sales role well to align job descriptions and tighten the sales process. 

A typical sales compensation strategy uses a sales compensation plan filled with “perceived” incentives as a sales performance driver instead of a sales manager. The hope is that the money will provide enough motivation and incentive so that accountability and responsibility won’t become an issue. It’s not a great approach, as most people are not driven by money or added pressure.

Study after study has proven that most people, including salespeople, are not motivated by money more than they are by doing a job well. The Hoffeld Group’s The Science of Motivating Salespeople is a great resource on the subject.

When we begin sales compensation planning, we’re often asked what is best: a good base salary or mostly commission. The answer is yes, for the right company and product or service being sold. Nothing is wrong with a high salary, no salary, or a salary commission. Still, the best design will align with the job description and goal expectations and be fair and profitable to the company and salesperson. We ensure the compensation plan is fair and equitable, instilling a sense of security and confidence while providing a risk and reward factor to drive added effort. If you want to scale by adding salespeople, you’ll want the same compensation plan for all sales team members. Salaries can vary depending on experience, but the plan structure should be the same.

When you hire us as your sales managers, you entrust us with managing attitude, activity, conversations, and performance. Our fractional sales manager will instill a sense of responsibility and accountability in each salesperson and the sales team. This focus on responsibility and accountability is the foundation for improved performance, and then sales compensation planning becomes an effort to reward quality work more than a carrot. 

Suppose you’d like to look deeper into our overall approach to sales compensation planning and what you need in place to structure sales compensation. In that case, you can review our article “You’re Paying Your Salespeople How Much?” It will walk you through defining your sales compensation strategy so you’ll plan sales compensation to be profitable for the company and sales team. It will provide examples of compensation plans for sales teams and address commission plan tiers.

Is The Sales Compensation Plan Fair?

Before digging into the fine details of the compensation plan, we run it by the fair acceptable test. During the first week of working with you, we ask the salespeople to provide feedback on the sales culture. We don’t ask for compensation directly, but it’ll come up if an issue arises. If we do not hear anything, it’s safe to assume the salespeople sense fairness. We then compare it to our experience with similar roles; if it’s close, that box is also checked. Lastly, do you, the owner, feel the company is realizing a fair profit for what the sales team is producing after-sales compensation is paid? Without fire alarms, we’ll dig deeper as our process continues. If we hear things, we’ll look at this earlier. 

Sales Compensation Plan Considerations

After clarifying and aging job descriptions, goals, expectations, and the sales process, we’ll examine compensation adjustments closely to see if they can improve performance while maintaining a win-win for the salesperson and the company. Below are the factors we consider when structuring sales compensation. 

Total On Target Earnings (OTE): Instead of picking a commission percentage out of the sky that might motivate a sales rep or base they’ll be happy with, we start with what a salesperson’s total annual earnings should be when they hit the target determined by the company. From there, we can break that total into small elements of the sales compensation structure. 

Job Factors Change Each Sales Role and Earnings: Each sales role will have different responsibilities and duties. Some key areas we asses that relate as to how we will structure the sales plan are:

• What responsibility does the salesperson have with generating the leads? 
• What percentage of the lead are they accountable for finding? 
• What duties do they have with post-sales service or new client onboarding if needed?
• What level of industry experience is required to be successful? 
• What level of selling experience is required to be successful? 
• How long is the sales cycle?
• How many opportunities are worked simultaneously?

Sales Compensation Structure: When we understand the job factors and the OTE and have accurate job descriptions, we can recommend a blend of salary, commission, and bonus that is fair and profitable to all. Remember that whoever takes on more risk (the salesperson or the company) in a compensation plan upfront should realize a greater return with over achievement. When we are hired to manage your sales team, we monitor activity and performance and make corrections sooner than later. Your investment in sales management can minimize your risk when offering more salary to attract better reps and realize a more substantial profit on the back end with over-achievement. Check out this section of Risk and Reward in a sales plan. It will cover using salary commission blends to stay within your sales compensation budget.

Optional Perks and Benefits: If you are competing for better talent or trying to recruit someone, another way to round out a compensation plan is through perks and benefits. Here are a few areas you can consider.

• A car or mileage reimbursement
• Cell phone and service with enough data to keep them productive on the road
• Computer, tablet, and data service
• Expense account for client entertainment (you can control this with pre-approval or budget)
• Memberships in trade, social, and recreational clubs and associations
• Health benefits
• PTO (sick, vacation, and personal time off)

Drawbacks of Residual Earnings

Sometimes, we’ll encounter plans that include residual earnings for subscription-based services. This is an area you want to be very careful with. If the salesperson is not required to continue renewals, their job is done, and some other department’s job is ongoing. Residual programs can be set up right, but staying away is often best. The biggest drawback in a residual program is when residuals become large enough to allow a salesperson to let their foot off the gas, which happens with most. The second drawback is that other departments resent someone getting paid for the work and the effort they put into keeping the customer.