Often, candidates for top jobs are pressed to convince their would-be employer of how “passionate” they are about the position.
A great sales team has to be built from people who can prove their passion, ambition, and drive, but a great sales team also has to feel that they’re getting paid according to their value. Having an attractive sales compensation plan is essential - not only when adding talent into your team - but also when retaining it.
Create the perfect plan for your sales team. Take into account the different profiles of your team members, your company’s culture and objectives, and the individual wants of your salespeople.
Read on to discover:
- The Basics of Your Sales Compensation Plan
- The Components of Your Sales Compensation Plan
- Ready-made Sales Compensation Frameworks
- Tailoring Your Plan
- Communicating Your Plan
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 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 compensation plan that will aid in the retention of personnel. 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 are your incentives 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 quick?
- 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/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 compensation plans are so influential to company performance, seek input from teams outside of your sales department for a compensation plan than 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 compensation plan needs to be effective and inspirational. Bring in a member of your finance team to help with modeling and to vet cost-effectiveness as well as alignment with company goals.
- HR team: Human resources are 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 of asking 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.
Once you have a firm grasp on how to align your compensation plan with your company’s culture and priorities, you can get down to planning the finer points of your approach to sales compensation.
Whatever your approach is, 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:
All but the most aggressive sales compensation plans will incorporate a base salary, regardless of how creative they get with commission afterward.
Companies will make their salary: commission ratio proportionate to how aggressive they want their sales team to be. Higher salary means more stability with less incentive; lower salary means less stability with more incentive. Which proportion works best depends on the type of company.
Companies seeking high sales volume will likely be aggressive, with less pay determined by salary. 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 turnover.
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 shortly be covering in full.
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.
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 sales level. It’s particularly good for incentivizing even after initial quotas have been reached.
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.
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 that 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?
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, plus you get a clear picture of your resourcing and hiring needs. Sales reps paid only a salary are much less stressed, of course, but unless your team is incredibly easy to motivate, you might find that the lack of tension detracts from their overall performance.
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 motivation 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, 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, providing 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.
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.
Commission-Oriented Sales Compensation Plans
In fact, commission-oriented sales compensation plans deserve a section of their own. The type of commission 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. 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 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 your reps to successfully satisfy their 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 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 where they outperformed expectation.
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 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.
Once you have a basic compensation plan framework, consider these ways in which you can customize your plan to best suit your team and your targets:
- 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 compensation 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 the sales leader.
- Personalize your incentives. We’ve spoken about personalizing incentives to performance, but devote time to the human aspect, too. Take the trouble to find out what our salespeople actually want, and structure your incentives to match where possible; you’re sure to see an upturn in performance.
- Be guided by company culture. Compensation structure needs to align with your company’s broader matrix. If you’re all about hyper-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 actually 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.
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. 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.
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 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 their mind 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.