“How should we pay our sales people?”
That’s what’s on the mind of sales leaders and sales managers.
After all, sales force compensation represents the single largest marketing investment for many companies.
The average company spends 10%--and some industries spend as much as 40%-- of their total sales revenues on sales force costs. In total, the US economy is estimated to spend $800 billion on sales-forces, almost three times the amount spent on advertising.*
Not to mention, it's been long-established that compensation is the most important reward used to motivate salespeople.
So why do 45% of U.S. companies have workforces that don’t understand their compensation plans?** In one survey, only 28% of companies surveyed felt most employees understood the compensation philosophy.***
That’s no good.
But getting a handle on sales force compensation doesn’t have to be difficult.
What if you could motivate your sales reps, reach your organizational goals, and improve performance? That’s entirely possible. But you have to see the big picture, not just the pieces of the puzzle.
Keep reading to learn what a well-designed sales force compensation plan can do for your company.
Why is sales force compensation on everybody's mind?
Business leaders have lots of challenges.
Chief among them is figuring out the optimal way to compensate their sales forces.
“What's the ideal compensation incentive plan for our salespeople?”
“How should splits be handled?”
“Should we pay draws?”
“How differently should we design international compensation plans?”
It’s enough to give you a headache just thinking about it. The interesting thing is that all of these nagging questions can be addressed by fine tuning your sales force compensation plan.
So, if your current plan doesn't maximize the sales your team is making don’t worry. With some insights and a little work you can easily turn things around.
Many sales leaders know (on some level) that they can impact their sales strategy with sales compensation. But they're not putting that knowledge to use. They aren't harnessing the power of their sales force compensation plan.
For example, some companies don't tie sales compensation to the overall strategic sales plan of their organization. Big mistake.
Once you know what to look out for when designing a sales compensation plan, you’ll be better equipped to answer the age-old question:
“What's the ideal compensation incentive plan for our salespeople?”
The answer is important because if you compensate your salespeople fairly, you'll energize your team. But if you pay too much, you'll end up throwing away money by turning your reps into slackers who can coast along making fewer sales. On the other hand, if you skimp on compensation, you'll push your best salespeople right out the door. So how much is enough, too much or too little? How do you begin to determine the perfect mix of salary, commissions and bonuses to pay your salespeople?
We’ll get to that soon.
In the meantime, know that your sales comp plan is a large cost that should be managed as efficiently as possible. That’s why you need compensation plans that work for the company and the sales force.
It may be time to examine your sales compensation plan. Here are things the right comp plan can help you accomplish:
- boost the productivity & performance of your sales force
- attract & retain talented sales reps
- achieve your business objectives by getting the company, sales reps and the sales team on the same page.
However, it's not always that simple.
Sales force compensation plans can be daunting
How salespeople are paid has an immense effect on their performance.
What’s more, your sales force compensation plan is probably the largest single expense item on your P&L statement. In the US, sales force costs average about 10% of sales revenue.
It’s no surprise that sales compensation is a topic on the mind of business leadership.
If you’re responsible for crafting a sales compensation plan, you have a lot of choices to make. Setting target pay, selecting the right performance thresholds, establishing quotas, determining the mix and upside opportunity, and constructing the right formula are just a few items you need to consider.
But all too often, the issue gets boiled down to “All you have to do to keep your sales rock stars and rainmakers motivated is implement the right comp plan.”
Riiiight. Like it’s that easy.
So how do you plan sales compensation the right way? Trust me, there is no perfect answer to that question. Before you can successfully design and implement a compensation plan, you have to know a few things.
As a rule of thumb, you should start with your revenue goals and objectives and work backward. You should also consider factors like:
- the company's strategic goals
- the sales strategy
- the type of business and the stage of growth the company is in.
For more information on creating a sales compensation plan check out this information from Harvard Business Review on how to compensate and motivate salespeople.
image credit: HBR.org
I strongly believe that most sales compensation plans aren’t optimized to get the best results. That’s a shame because with a bit of effort companies could improve sales performance by tweaking their sales comp plan.
The fact is...
A good sales compensation plan can be your most powerful tool
"Whether you're a CEO or a VP of sales, the sales compensation plan is probably the most powerful tool in your tool chest." ~Mark Roberge, author of The Sales Acceleration Formula: Using Data, Technology, and Inbound Selling to go from $0 to $100 Million
A well designed compensation plan can be a powerful asset, focusing the sales force, attracting good sales people, and making management's job easier. In fact, the right compensation plan motivates salespeople not only to sell more but to act in ways that support your business' overall strategy. According to Dave Kerpen, Founder & CEO of Likeable Local and NY Times Best-Selling Author & Speaker, "The sales compensation plan is the most under-appreciated tool in the CEO’s toolkit."
Let these seven tips guide you:
- Focus on driving sales strategy with compensation: Your comp plan should incentivize your sales team to achieve the company's goals. When your sales compensation is tied your sales team's ability to reach specific objectives and targets, everyone will be motivated to do the kinds of revenue-driving activities that get results.
- Sales compensation should motivate the various sales roles: Every sales team has a performance curve. In other words, each sales force is made up of laggards, stars and average sales reps. In most sales organizations, the greatest potential area of improvement lies in motivating the sales reps in the middle of the curve. In any case, research suggests that salespeople on the different points of the curve are motivated by different facets of the comp plan.
image credit: HBR.org
- Don't cap your reps' earnings: The desire to cut costs is understandable. But being stingy with sales compensation is bad for business. A recent study on the impact of capping salespeople’s pay found when companies stop paying commissions once reps reach a quota ceiling, the salespeople consistently held sales under the ceiling. By eliminating the cap plan, one company in the study increased revenue by 9%.
- Be smart with bonuses: Studies show that bonuses do increase sales productivity. Data also shows that quarterly bonuses increase productivity more than annual bonuses do. According to Harvard Business School, "frequent quarterly bonuses tied to high demand end-of-quarter months serve as pacers to keep the sales force on track to achieve their annual sales quotas."
- Keep it simple: For a comp plan to work, your sales force has to understand it. When 45% of U.S. companies have workforces that don’t understand their compensation plans, it's clear there is a problem. Communicate with your sales force. Share information on the compensation plan and make sure everyone undrestands exactly what is expected of them.
- Don’t forget about communication & implementation: It’s important to get input form the people affected by the compensation plan. If you're rolling out a new sales comp plan, it is critical that your sales force sales knows what's going on. It's tough to increase sales productivity when your sales team is confused about how they get paid.
- Remember that several components in the sales process drive sales effectiveness: Compensation is only one piece of an effective sales management system. Don’t ignore the other aspects of managing performance and motivating a sales force. It’s not just about compensation. Before you tinker with your comp plan make sure your problem isn’t something else.
Optimizing your sales force compensation plan will help you get better business results whether you are in Sales, Finance or Human Resources.
How are you using your sales compensation plan to grow sales? Join the conversation by tweeting @HireVueCoach
image credit: Anthony Sills
* SOURCE: Steenburgh, Thomas, and Michael Ahearne. 'Motivating Salespeople: What Really Works'. Harvard Business Review. N.p., 2012.
**SOURCE: Meschke, Jay. '5 Ways To Improve Your Sales Incentive Compensation Plan - AMA Playbook'. AMA Playbook (American Management Association). N.p., 2015.
***SOURCE: Worldatwork.org,. 'Compensation Programs And Practices (Survey) July 2014'. N.p., 2015.