Team of executives building an effective sales compensation plan

5 Keys to an Effective Sales Compensation Plan

January 10, 2023 Olivia MacDonald  
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An effective sales compensation plan will incentivize sales professionals to reach their goals by outlining their earning potential during the deals they close.

Compensate your teams fairly. Pay top performers more while ensuring poor performers don't find ways to manipulate the system and offer competitive pay.

Also, consider the financial wellness of your organization. Incentive compensation management requires planning. Let's discuss some ways to develop your compensation plan for your sales professionals but first, consider a few questions that will help you create your plan.

💡Key Takeaways:     

  • Sales compensation plans are essential factors in motivating your sales reps. Design a plan that aligns with your organization's values and industry standards—along with a few perks.
  • Around 61% of sales professionals feel underappreciated and believe that the companies they have worked for didn't create a clear path to advancement. Each is due to poor compensation plans.
  • To develop an effective sales compensation plan, you need a team who can manage it and a plan that benefits the reps (and the company) and rewards top performers well.

Key Questions To Ask When Developing a Sales Compensation Plan 

A sales compensation plan is an essential factor in motivating your sales teams. Design one that aligns with your organization's values and industry standards (we recommend adding a few perks your competitors aren't.)

When developing your plan, consider what will help you keep your top talent happy and motivate those still learning to improve their skills. Here are some questions to consider when developing your compensation plan:

  • What behaviors do you want the sales compensation plan to encourage?
  • What are your organization's performance standards?
  • What is the right compensation based on specific demographics?
  • What objectives of the job role do you want to highlight?
  • What compensation aligns with your sales professional engagement strategy?

How To Create An Effective Sales Compensation Plan

Nearly 61% of sales professionals feel underappreciated. In a survey published by Pipe Drive, sales reps also stated that around 42% of companies they have worked for did not create a clear career path for them to advance.
Infographic of how organizations' compensation plans get the desired behavior from their reps

                   Source: Sales Xceleration 

With labor shortages plaguing companies across every industry, you can no longer take the value sales reps bring to your organization for granted.

Creating effective sales compensation plans is essential to your sales professional engagement strategy. That can mean the difference between superior retention and high attrition of talent. Here are some key strategies for building an effective compensation plan:

1. Establish a Sales Compensation Plan Design Team

Developing or updating a sales compensation plan should include getting input and support organization-wide, especially those at the highest levels. Form a sales compensation design team that involves C-suite executives and representatives from the sales, human resources and finance teams. They can provide insight into how the organization's plan aligns with goals and the impact of the sales professionals on business success.

2. Create a Win-Win Compensation Plan

Typically, sales compensation plans only benefit one party—the organization. A sales compensation plan should be a win-win for both the company and the sales reps who work for them.

To do this, you will need a well-crafted plan with compensation tied to no less than two of the following three key factors: 

  • Company sales performance
  • Departmental performance
  • Individual sales performance

If your plan ties the salesperson's compensation solely to performance, the business could perform poorly, but the sales professional will still get paid well. In addition, if your organization achieves its sales target, each sales professional will profit from achieving the company's overall goal. 

Most companies typically specify which portion of employee compensation relates to the impact they can have on departmental and business sales objectives. Imagine an environment where every sales team member has concerns for common goals.  

3. Focus on Balance and Achievability

Companies offer various types of compensation plans. Design the plan that works best for your organization. It should be easy to understand, have achievable elements and fit each sales position whenever possible. If your teams have to work too hard to hit a quota and get a commission, you should expect high turnover and low morale.

4. Make the Plan Easy To Administer and Understand

That old acronym K.I.S.S.—keep it simple, silly—applies to effective sales compensation plans. They must be easy for your management teams to implement and for your sales teams to understand. If your compensation plan involves a lot of tracking (especially if they have to do it manually), sales teams may spend more time figuring out their compensation than earning it.

5. Make Sure To Reward Top Performers

Reward top performers with extra compensation. You can offer additional incentives if they achieve 100% of their sales quotas along with all plan requirements. We have outlined the reasons why:

  • They did as you asked: When sales professionals achieve 100% of their sales quota, offering additional compensation above the standard commissions makes workers feel valued and want to work harder in the future. Incentivize them to be the highest earner in the company.
  • They stop "sandbagging" deals: Sales professionals will continue to close deals even at the end of the year. Reps who get escalated commissions and bonuses above their sales quota work harder. Do not limit their earning potential. They will not limit their work.  
  • You attract better talent: Organizations that offer escalators and bonuses at and beyond 100% of the quota attract great salespeople. If sales professionals are not focusing on potential earnings by meeting 100% of their quota and above, you do not want them.

Example of Vena's incentive compensation management platform.

           Source: Incentive Compensation Management Software - Vena 

Automate Your Sales Compensation Plan With Vena Solutions

Get a central database, Excel templates and workflow automation with Vena's Incentive Compensation Management (ICM) solution all on one platform. Benefit from efficient and transparent sales compensation plans and improve payment accuracy, visibility and sales performance.

Manage your entire compensation process, automate compensation calculations and spend less time auditing. Use the insights from our ICM solution to develop your sales compensation plan.

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Excel at Sales Compensation Planning

Let your sales teams know that you value them while also ensuring the financial wellness of your organization with Vena Incentive Compensation Planning Software.

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