How to Set Up a Sales Compensation Plan

The sales team play a pivotal role in ensuring healthy cash flow and hedging against customer churn. If you’re in a business with many competitors, the difference between a motivated sales team and an unmotivated one can significantly impact your company’s ability to become the market leader. 

A study by Gallup found that organizations with engaged, motivated employees reported 21% higher profitability. Compensation is unequivocally a factor in an employee’s engagement and motivation. Thus, business leaders should be thoughtful about how they structure compensation for their sales teams.

Businesses can get creative on how they motivate their sales teams. However, the building blocks of successful sales compensation plans are generally the same and involve two components -- Base Salary + Variable Compensation.

Engaged, motivated employees reported 21% higher profitability at organizations

Base Salary

Although your sales reps may be competitive and highly-motivated, they’re likely to feel reassured and loyal to a business that offers them the financial security of a healthy base salary. 

A base salary also allows lesser known brands to stay competitive when recruiting top talent. If compensation were solely based on volume of deals, sales professionals would likely always try to work for the biggest brand in the category where volume of deals is likely to be highest.

Variable Compensation

Variable compensation is what really allows businesses to motivate their sales teams to go above and beyond. There are most commonly two types of variable compensation -- commission and quotas.

Commission

Commission is straightforward and easy for sales reps to understand. A percentage of a final sale or deal is awarded to the sales rep that closed the deal. Percentages can vary across products such that sales reps are incentivized to sell products with higher profit margins.

Benefits of commission

• Simple, easy to track, and offers a direct incentive for success.
• Incentivizes sales of new products; or products in new markets.
• Low administration costs.
• Makes sense for fast, transactional selling.

Drawbacks of commission

• Sales performance can be inconsistent and difficult to predict.
• It isn’t a sophisticated tool for influencing sales activities.
• Does not encourage long-term account building.
• Selling is transactional and commoditized.
• Territories can be unbalanced in terms of earning opportunities.
  

Quotas

A quota is a time-based sales target for an individual sales rep or a team. Quotas can be measured monthly, quarterly, or annually and based on revenue, total sales volume, or percentage-based growth. Your sales rep or team might receive a flat figure, or a percentage of their total revenue as a reward for hitting their target.

Quotas are a bit more complex but can give management teams a much more fine-tuned way of promoting certain sales team behaviors. One of CaptivateIQ’s goals is to remove the complexity around quota-based sales compensation plans and provide more visibility to sales reps such that they continue to feel motivated and engaged despite the complexity.

Benefits of quotas

• It's a more sophisticated system for shaping sales behaviors.
• Account management and long-term sales activities can be rewarded effectively.
• Quotas can encourage collaborative, team-based selling activities.
• Complex and mismatched sales territories can be handled more fairly.
• Overall sales performance should be easier to predict

Drawbacks of quotas

• Lack of urgency and pressure for reps, especially if a target becomes impossible.
• They can seem complex and confusing.
• Sales reps can feel distanced from their goals and rewards.
  

Let's Recap

Using the above building blocks as a guide, spend time with your business leaders and sales team to draft a few possible compensation plans that make sense for your team. 

When drafting a compensation plan, ask yourself these 3 key questions:

1. Does my plan incentivize high performance across the team?
2. Does my plan ensure that reps will be financially secure even if they have a tough month or quarter? (A baseline level of guaranteed stability will ensure that reps are focused on exceeding expectations rather than worrying about making rent.)
3. Does my plan encourage deals that are aligned with the long-term strategy of the firm?
   

If you’re interested in learning how CaptivateIQ can improve the dynamics of your sales team, we'd love to help.