During an era dubbed The Great Resignation, designing effective compensation plans for your sales team is more important than ever. Not only can an appropriate compensation plan win over new talent for your organization, but it can also help to retain quality sales employees, which helps maintain a healthy culture and even saves you money in the long run. This article explores why compensation plans are important and shares four ways to develop a great plan customized to your organization.
Why Design Compelling Compensation Plans?
- Attracting Talent: Attracting quality talent is difficult to achieve, especially in the current market where over four million people voluntarily quit their jobs to pursue other endeavors. Offering competitive compensation upfront will help to give you an edge in attracting and interviewing top candidates.
- Maintaining Talent: If your competitor is offering higher pay with better benefits and incentives, your best employees can be lured away at a rapid pace. Compelling compensation is one of many ways to keep your employees engaged in your company.
- Developing a Strong Company Culture: While other factors play into a positive work environment, clear, effective, and fair compensation certainly affects your company’s level of positive energy and motivation.
- Increasing Employee Productivity: According to leading economists, employees perform better when paid an “efficiency wage.” Essentially, this means that if employees are properly compensated for the effort they put into their job, they will be more productive, ultimately adding more value to your organization.
Develop the Best Sales Compensation Plan for Your Organization
Whether you are altering your existing compensation plan or building your plans from scratch, ask yourself the following questions as you look to design a plan that works best for your company.
1. What are your Sales Margins?
Understanding your margins will help you to develop a sustainable compensation plan. What level of bonus or commission payout will your P&L be able to absorb while maintaining profitability? A service business or a SAAS business will have dramatically different margins than a hardware or publishing business. Will you consider higher commissions on certain products or services versus others?
You may consider compensating your sales team based on profitability. In this compensation format, your sales reps make more money based on the gross margin of a sale, so the higher the gross margin, the higher their commission. This may be the most relevant form of compensation as it will encourage your employees to prioritize the most profitable sales versus those that require the least effort. However, if your company pursues sales volume for market share, this strategy may not be as relevant or successful. In this case, keeping your bonus plan simple by paying the same commission on all sales will encourage a salesperson to drive growth at every opportunity.
2. What Behaviors Do You Want to Encourage from Sales Reps?
Do you want to motivate them to secure net-new business as you enter new geographies or target a completely new group of customers? Or is customer retention and expansion the key priority to stave off fierce competition? Or will your salesperson be required to grow both new and existing clients? Answers to these questions will allow you to decide on the type of compensation plan and the specifics of its structure.
Most importantly, will the plan be base salary plus commission or a commission-only plan? Perhaps you need your sales reps to attack the market ferociously for new customers, and in return, you offer commission only. However, this may not fit your culture and could deprioritize account retention activity, making a plan that offers a healthy base and targeted bonus incentives more sustainable.
3. Do your Sales Reps Have to Achieve a Quota?
Setting a quota per salesperson that will result in achieving the total sales plan is critical. Will the quota be based on all sales or only net new business? Will a minimum threshold need to be achieved, say 50% of quota before a commission payout occurs? Paying out from the first dollar sold encourages daily activity while thresholds incentivize total volume efforts. This can also be managed by the actual timing of the payouts, which can be as frequent as biweekly or as long as quarterly or even annually.
Another element of utilizing a quota relates to making the compensation plan capped or uncapped. While a capped sales bonus plan may seem to help contain costs and increase profitability in a high-growth environment, most companies are moving to uncapped commissions. Gaining market share means capturing all healthy growth opportunities, and an uncapped commission plan encourages sales employees to drive through and beat their plans. Many companies encourage this behavior by offering accelerators (e.g., progressively higher % commissions) on results above quota attainment.
4. What unique factors need to be considered for your successful sales comp structure?
The factors above are foundational, but a successful sales incentive will consider these factors as well:
A more holistic approach to the compensation structure. In addition to revenue-related performance, bonuses can be offered for achieving important organizational health measures like customer satisfaction scores and employee NPS (for people managers) or sales efficiency measures like retention and conversion percentages.
Incentives for other “non-sales” departments to benefit from sales success. Can total revenue metrics be considered for all employees on an annual bonus plan? Are there ways to tie a customer, product, or geographic-specific sales success to incentives for sales enablement or marketing employees who influenced the results?
Bridge for new sales employees. New sales representatives may be demotivated if commissions take months to materialize. A promising candidate may not be willing to leave their current company if they give up a sizable bonus payout. A “bridge plan” is sometimes necessary to encourage your new employee to sign their offer and motivate this salesperson in the first few months of work. Bridge incentives can include prepaid commission and other mechanisms.
Get Personalized Help with Your Compensation Plan
Exploring all of the caveats of compensation plans is difficult and time-consuming. However, designing well-planned compensation is more important than ever in the existing job market. The experts at The Renaissance Network (TRN) have over 25 years of experience developing compensation plans in the Education and Technology markets. TRN understands that each organization has its own unique business model. As a partner, TRN works with you to provide a customized recruitment strategy to yield and retain the best talent.
Feel free to contact us and find out why TRN is considered the Education Talent Expert.