In our work with sales teams and managers, sales compensation is often a hot topic.
A key responsibility for sales managers is to provide input to and manage a good sales compensation plan. A clear plan that motivates desired behaviors is an indicator of strong sales management skills.
Here are 10 commandments for sales compensation.
1. Keep it the same.
Keep the base commission rate the same for everyone, knowing that people will inevitably compare notes about their plans. This will minimize resentment.
2. Be individual.
Tailor the standard plans on an individual basis. It sounds like I just reversed myself, right? Not really.
The individual plan is referred to as an MBO, which stands for Management by Objectives. This allows you to “tweak” the plan for targeted performance. Classic examples for MBOs include opening new accounts, selling a new product, or even generating a specific number of leads for new opportunities. You can set a bonus amount for hitting each target. I recommend setting MBOs on a quarterly basis.
Some MBOs are “triggered” only if the company or region as a whole hits a specific target in either revenue and/or profit.
3. Make it simple!
Complex sales commission plans are a sure way to get your salespeople hot under the collar. The last thing they want to do is spend hours calculating and crosschecking formulas and conditions, especially if the payout is on a Friday at 5pm!
4. Always have riders, never have a cap!
Incent people to exceed their quotas and reward them for it. For instance, I’ve seen 1% extra in commission if the amount sold is at 120% of quota. At 150% of quota another 1% is paid.
You can also say anything above 200% of quota is paid at an extra 2.5% and leave it at that.
You’ll need to decide whether to pay overrides on all sales or on the sales above each increment over quota.
What I don’t recommend is saying something like no additional commission is paid beyond 300% of quota. Do you really want to tell your salespeople to stop selling?
5. Decide to pay on revenue or profit.
The general rule of thumb is that if the salesperson controls the value of the deal sold, then pay on profit. I also suggest that if the deal is sold at a profit below your desired threshold, then a supervisor has to approve it before the deal is quoted to the buyer.
The most common percentages I’ve seen are 3% of revenue or 10% of margin, where margin is usually expected to be at 30%.
6. Pay when the customer pays.
If you have great cash flow and can afford to front your salespeople the commissions once they invoice a deal, then you won’t get an argument from me. On the other hand, it can get very dicey and significantly impact your cash flow if you are paying up front, especially if you have a growing sales team.
I also like the idea of the salesperson being incented to help collections receive what is owed. They can often use their relationship with the customer to help move things along more smoothly.
7. Consider exceptions.
How are questions or conflicts going to be resolved if a situation occurs for which there is no compensation policy? For example if two reps sell into the same account or if a client who has not done business with the company for a while is sold by another rep and the prior rep wants to claim a commission for developing the original relationship, who gets what?
Heading off as many as possible scenarios that are going to cause conflicts is always a good way to maintain a healthy selling culture.
8. Determine compensation for new and tenured salespeople.
Set realistic quotas and expectations of what a new salesperson who’s ramping up for the first three to six months is likely to earn in their first year. By year two, they should be hitting their stride and have higher earning potential for both the company and themselves.
This can be a great use for MBOs. MBOs for a new salesperson might be more targeted to activity, while tenured members of the team are evaluated on results.
9. Create a sales compensation team.
Don’t leave the designing of a compensation plan in the hands of one person. Create a team made up of the sales manager, a representative of human resources, someone from the finance department, like the CFO or controller, and someone from sales administration or operations. Perhaps even include a senior salesperson that can act as a litmus test since they are directly impacted by the plan. Make sure that if you do bring in someone from sales that there isn’t a conflict of interest and they remain objective.
10. Bonus on values.
Pay bonuses on intangibles that include adherence to core company values. This might include paying an annual bonus to a salesperson that furthered the wellness of the sales culture at the company.
A good friend of CFS, Kathryn Swintek, Managing Partner at a well-regarded investor firm called Golden Seeds that funds high-potential women-owned businesses, said to me last week, “I recently attended a panel discussion on mindfulness at NYU. The retired CEO of a major private equity firm told the audience that when he was at the firm, bonuses were paid to his staff on the basis of a few criteria, including whether someone was able to check their ego and work well with others. It was in fact the first thing he mentioned.”
One way you can measure this is to conduct a 360-degree evaluation so peers and supervisors can answer a simple survey on each individual person. If the results are above a desired threshold, then the person is eligible for a bonus. If the results are poor, then you may have uncovered an issue that not only doesn’t merit awarding a bonus, but also identifies a bigger problem for you to address.
This post is part of Charles’s ongoing series on sales management skills.
- Sales Management Skills – Are You a Pygmalion or a Golem?
- 10 Commandments of Sales Compensation
- Upcoming topics include hiring, goal processing, pipeline management, selling as a team, and owning the Sales PlayBook.
What’s your experience with sales compensation? Share your thoughts, feedback, and stories in the comments!