PART 3 OF 4
Compensating salespeople the right way does more than reward your sales team—it motivates them to perform at their best while aligning their success with your company’s goals. However, designing an effective plan is a balancing act. It needs to be clear, fair, and motivating without encouraging behaviors that harm your business.
Here’s how to structure a compensation plan that drives results.
Why Compensation Plans Matter
A strong compensation plan:
- Attracts Top Talent: Competitive pay structures help you recruit the best.
- Incentivizes Performance: Clear goals tied to rewards encourage consistent effort.
- Drives Retention: Fair, motivating plans keep your team engaged and loyal.
Poorly designed plans, on the other hand, can lead to frustration, reduced performance, and high turnover.
Key Elements of a Sales Compensation Plan
1. Start With a High Base, Low Commission for New Hires
When compensating salespeople, prioritize stability with a high base salary paired with a lower commission as they ramp up. A high base salary paired with a lower commission ensures they feel supported while they learn the ropes.
Once they’re established, shift to a lower base with higher commission to reward performance.
2. Choose the Right Commission Model
Your commission structure should align with your sales cycle and business model. Common options include:
- Standard Commission: A fixed percentage of every sale. Ideal for straightforward sales processes.
- Residual Commission: Ongoing payments for recurring revenue, like subscriptions. Motivates long-term client retention.
- Tiered Commission: Higher rates as salespeople exceed quotas, encouraging top performers.
- Bonuses: Lump-sum rewards for hitting specific goals, such as closing a large deal or exceeding monthly targets.
Example:
A SaaS company might use residual commissions to incentivize salespeople to close long-term contracts and maintain client satisfaction.
3. Align Pay With Company Goals
Your compensation plan should incentivize behaviors that drive business success. For example:
- If you want to grow market share, reward closing new accounts.
- If you’re focused on retention, prioritize residual commissions or bonuses tied to client renewals.
Avoid plans that encourage short-term thinking, such as pushing low-quality leads just to hit quotas.
Avoiding “Elephant Blinders”
“Elephant blinders” occur when salespeople focus solely on landing massive deals at the expense of smaller, consistent wins. While big deals are exciting, relying on them can create instability.
How to Prevent This:
- Offer tiered incentives for a mix of deal sizes.
- Set quotas that balance new business acquisition with upselling or cross-selling existing clients.
Example:
A tech firm required sales reps to close at least five smaller deals per quarter to qualify for bonuses, ensuring they didn’t neglect smaller opportunities while pursuing enterprise accounts.
Creating a Clear and Transparent Plan
Salespeople thrive on clarity. A confusing or overly complex plan can lead to frustration and disengagement.
- Keep It Simple: Use straightforward formulas for calculating commissions and bonuses.
- Communicate Clearly: Share the plan in writing, and ensure every team member understands how it works.
- Be Transparent About Changes: If you adjust the plan, explain why and how it benefits both the team and the company.
Evaluating and Adjusting Your Plan
No compensation plan is perfect from day one. When compensating salespeople, regularly review and adjust it to ensure it’s working for both your sales team and your business.
What to Monitor:
- Performance Metrics: Are your salespeople hitting targets and staying motivated?
- Feedback: Ask your team if the plan feels fair and achievable.
- Business Results: Ensure the plan supports your company’s long-term goals, not just short-term wins.
Common Pitfalls to Avoid
- Overcomplicating the Plan: Simplicity is key—complex formulas confuse your team and reduce motivation.
- Ignoring Ramp-Up Time: New hires need time to learn the ropes. High-pressure, commission-heavy plans can lead to burnout.
- Focusing Solely on Quotas: Reward quality as well as quantity to encourage sustainable growth.