How to create an effective sales compensation plan

The best sales compensation plan strongly motivates your sales team and has the potential to turn your business into an overnight success.

There is no single recipe for creating an effective sales compensation plan. What works for one company won’t necessarily work for another. Even if both firms are from the same industry and sell similar products, they may require very different sales compensation plans.

Sales plans of any type need to be adjusted and tailored to your company. But choosing which type to follow can be tricky, as there is a lot of controversy on the best way to compensate sales teams.

Read on for a quick guide on the most efficient sales compensation plans, and how to determine which will work for you and your company.

Commission-based compensation plans

Developing a compensation plan mainly revolves around the best way to motivate sales agents to make more sales. Some believe that the best compensation plans are those based on commission. Their argument bases upon the belief that commissions made by salespeople directly correlate with their efforts; the more they sell, the more they make. And what better motivator to work harder than an increase in your paycheck?

However, there are some drawbacks to a commission based compensation plan. New hires would be reluctant to work under such a system as it will take them a while to build a customer base large enough to make a reasonable amount. Many companies work this out by offering a base salary of 10- to 40% of total compensation. The effectiveness of this will depend on the type of product, the sales cycle and the standard in the industry.

Another option is to maintain a base salary until your new employee is trained and has established a sufficient customer base. It will allow them to pay their monthly expenses while building up a clientele.

Whatever compensation plan you choose, it’s best you choose one where commissions make up the biggest part of compensation. Usually, commissions comprised of 65-85%of total compensation, especially for entry level sales positions, is a good offer.

If your sales team has an impact on the pricing, then consider tying margin expectations to the commissions. You don’t want to incentivize your sales team solely on closing the deal and getting their commission if the pricing is half of the average margin.

Be aware of when you pay the commission. Are they paid upon signed contract, invoice, product delivery or customer payment? This will vary depending on industry standard, client payment terms and various types of unique issues to your product. If you are paying on an invoice and you have a high cancellation rate, you will want to reconsider your commission guidelines.

Tiered-commission sales compensation plans

Compensation plans categorize rates of commission based on a number of sales. It gets adjusted according to how well employees respond to each stage.

An example of a tiered commission plan would be where the commission increases with every $100,000 in sales. For the first $100,000 in sales, sales agents would make 5% commission; for the next $100,000 in sales, the rate increases to 8%; for a further $100,000 in sales, the commission increases to 10%, and so on.

This type of compensation plan rewards and motivates top performers.

Bonus Plans

Typically at the end of the year, salespeople are rewarded with bonuses for meeting or exceeding sales goals. Most bonus plans can also be tiered and possibly accumulated. It’s always best to keep bonus plans simple to avoid misrepresentation and confusion. When the text and calculations are too complicated, sales teams don’t understand and misinterpret it as no compensation, driving down their motivation and consequently sales.

Sales contests

Another way to motivate sales teams is through sales incentives or contests. They are usually used to achieve short-term sales goals and are not always monetary. In some companies, employees are rewarded with a trip or gift with a value high enough to catch attention. Keep the rules and parameters clear. Make the contest period a reasonable amount of time, so the end of the competition is not too far in the future. Annual contests can be less motivating than quarterly.

Reviewing sales compensation plans

An effective sales plan is one that is continuously monitored. Because of their complexity and contingency of a dynamic situation, they should be evaluated at least every year. One strategy that is successful at one company might not be as effective at another.

The key to remember in developing a compensation plan is that it should be well-defined and have sufficient compensation to motivate the sales force to work hard to make the next sale.

How much should you pay your sales agent?

One guide is that sale commissions average around 5% of their total sales, but it can vary depending on the industry. Commissions can depend on sales or gross profit. If you go ahead with commissions based on sales, you should not give your salespeople control over pricing. They can significantly lower the price to attract higher sales, making more commission but lowering total profit.

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