Blog: Setting up a Solid Sales Compensation Plan

By Bridget McCrea

A sales compensation plan is the cornerstone for any organization that relies on an outside or inside sales force to drive revenues. Not only does it help keep salespeople on the right track toward their own financial goals, but it also ensures a steady stream of new and repeat business for the distributorship itself.

Unfortunately, many sales compensation plans wind up working against the very entities that establish them. Overly focused on tying compensation to specific quotas, companies wind up with unproductive, unmotivated sales teams that produce only when they have to.

“Too many companies look at sales compensation from a single vantage point of, ‘How much do we want our salespeople to earn if they achieve their quotas?'” says Lee B. Salz, a sales management strategist at Sales Architects in Minneapolis. “While earnings are an important and relevant point, they aren’t the only consideration when designing an effective sales compensation plan.”

Here are seven ways to break out of the “quota” trap and develop a comprehensive sales compensation plan that benefits the salesperson, the company, and its customers:

1. Kick it off with a solid sales process. For a compensation plan to be effective, Salz says distributors have to start by developing and documenting a sales process. Most companies ignore this step and instead jump right into writing commission checks as sales are closed. “You can’t reward for behavior if you don’t even know what the desired behaviors are,” says Salz. A better approach is to take a step back and figure out which results deserve those rewards (Prospecting? Closing sales? Servicing existing accounts? All of the above?), and then wrap the sales compensation plan around those key goals.
2. Make your sales process clear-cut and transparent. Consider, for example, exactly what it takes to close a deal from concept to completion. In most cases it starts with an initial contact (often initiated via a prospecting phone call), which in turn results in a proposal. That proposal – which illustrates how the distributorship can help solve a problem that the prospect is having – leads to a face-to-face meeting and, ultimately, a sale. Finally, that single sale may or may not turn into a repeat customer who will require ongoing customer support. Only by looking at the sales process from start to finish can distributors identify the important links in the chain and come up with effective ways to compensate reps for their progress.
3. Match desired activities up with actual results. Business owners are often frustrated with the focus of their salespeople, says Salz, and it is the sales compensation plan that causes this frustration. For example, asking salespeople to focus on selling a new product to current clients, but then compensating them more handsomely for acquiring new clients, is a sure-fire way to cause a disconnect between desired activity and actual results. “Figure out what behaviors deserve the incentives,” Salz suggests, “and then come up with a sales compensation plan that positively reinforces those behaviors.”
4. Stop focusing on yesterday’s news. Traditional commission models incentivize reps to bring in the deals, get their commission checks, do the “happy dance,” and then wait around until their pockets are empty to start working again. This approach often leads to fluctuating sales pipelines, unproductive salespeople, and lower revenues for the company itself. “The sales reports start to look like EKG readouts in this scenario,” Salz says. “The peaks and valleys come when companies focus on yesterday’s news.” Focus instead on the sales behaviors that actually lead to sales, he adds, “and you’ll always have a healthy sales pipeline.”
5. Work backwards from the company’s larger goals. If the expectation is that the salesperson brings in $250,000 in revenue on an average sales size of $50,000, then he or she will need five sales to achieve that goal. If the salesperson typically closes one in four sales, then he or she needs to create 20 proposals in order to achieve the $250,000 annual sales goal. Next, look at how many needs analysis discussions and/or in-person meetings will have to take place to get to the point where 20 proposals are written, and how many prospecting calls it will take to get those meetings set up. Once those parameters are in place, be sure to include decelerators for poor performance and accelerators for the salesperson who exceeds the $250,000 goal. “Drive your salespeople to meet and exceed the plan that’s in place,” says Salz, “or you’ll wind up back at square one, with sales reports full of peaks and valleys.”
6. Create a compensation plan that mimics an equilateral triangle. The sides of the triangle (which must be in proportion) represent the salesperson, the customers, and the distributorship. “If any side is out of proportion, then the law of unintended consequences takes over,” says Salz. Say, for example, a salesperson is tasked with bringing in new deals and then serving as account manager for those deals. “If the sales compensation program is structured in a way that when the contract is signed, the salesperson gets all of the money upfront, there’s no incentive to support the client,” says Salz. As a result, customer service suffers and valuable clients are lost. “If someone is expected to bring in deals and service those accounts,” he explains, “Then there has to be something in the plan that drives that behavior to not only bring in the deal, but also support it.”
7. Smile when you sign that commission check…or go back to square one. “If there isn’t a smile on the executive’s face when he or she signs that commission check, then there’s something wrong with the plan,” says Salz, who refers back to the equilateral triangle reference as proof that all three entities (customer, salesperson, and company) have to be happy with the plan’s results for it to be effective. “If your compensation plan is structured properly, it should tickle you pink to write out that check,” Salz says. “If you are resentful or remorseful in any way, then it’s time to go back to the drawing board.”

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McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at bridgetmc@earthlink.net or visit her website at www.expertghostwriter.net.