Designing Your Sales Compensation Plan

Posted by David Wallace on October 28, 2009

As discussed in “Sales Compensation Plan – Goals” (10/22/09), your sales compensation plan needs to be based on achieving specific goals – corporate, personal and sales team retention.  To design your plan, you will incorporate compensation elements such as quotas, awards, bonuses and commission payments that motivate your sales personnel to achieve the plan’s goals.

Each member of your sales team plays a specific role in the sales cycle.  Within your sales team, you may have a wide variety of functions, including:  new account reps (hunters), account managers (farmers), inside sales, field sales, large account reps, small-medium business (SMB) reps, lead generators, lead qualifiers, closers, technical sales support reps, channel reps, channel partners, manufacturer’s reps, etc.  The compensation plan for each sales team member should drive the behavior and results you need from that position.

Let’s look at how to design your compensation plan to achieve specific corporate goals.

Increase Revenue

If your company seeks to drive revenue, you may offer field sales reps a highly leveraged commission structure with payments only on incremental revenue generated. This type of plan motivates the reps to grow the revenue base each year.

Expand Market Share

If your company’s goal is to expand market share, the plan should have provisions to compensate your sales reps for winning new accounts and growing revenue.  This might be done with a new account bonus and higher first-year commission rates for new customer accounts.  When combined with commissions paid for incremental revenue from existing accounts, your sales force should drive increases in market share.

New Accounts

If new business is your priority, you may dedicate part of your sales team to focus only on new business.  For these reps, you pay commissions only on revenue generated from new accounts.  New business should command a higher commission rate than existing business because it’s very important to your company’s growth plus it’s more difficult to win new business.

Key Accounts

Many companies focus significant sales resources on developing or expanding their largest or most important customers.  These key accounts often account for up to 80% of a company’s overall revenue.  Given their value, companies assign dedicated sales reps or teams to ensure they provide sufficient attention to key account decision makers and influencers.  To motivate key account managers to provide excellent service and develop revenue from existing accounts, you may elect to compensate them via a higher base salary and commission payments based on revenue generated from sales to their key accounts.  Higher base salaries encourage field sales reps to spend more time on account management issues and less time driving new business.

Account Management & Customer Service

Some companies assign account management and customer service responsibilities to an inside sales force. This is often the case with established customers that are not key accounts.  Inside sales representatives need a different set of incentives.  You may choose a base salary supplemented with commission payments based on revenue generated from established accounts.  You can also pay discretionary bonuses or awards for outstanding achievements, pay commissions on achievement of sales milestones, or simply give salary raises based on performance reviews and accomplishment of agreed upon territory goals.

Rewarding Sales Process Activities

The inside sales team can also be paid to identify and qualify sales opportunities.  I worked with one company that paid fixed dollar commissions for calls that resulted in a conversation of substance with a decision maker or decision influencer.  The inside sales team was also paid increasingly higher amounts for advancing the sales process.  Commissions were payable for:  opportunities identified, field sales appointments made, requests for proposals received and proposals generated.  No commissions were tied to specific revenue generated.  Each payment reflected the increased value of the sales process step taken by the inside sales rep to move the customer closer to doing business with the company.

New Product Introduction

If your company’s goal is to successfully introduce a new product or service, reps might have a specific quota or a higher commission rate for sales of the new product.

Winning Back Lost Customers

If your goal is to win back lost customers, your compensation plan might pay 150% commission for six months on revenue generated from previously lost customers.  Another tactic is to pay a “bounty” for competitive win-backs.  For instance, for every former customer lost to a competitor that returns, you might pay a $500 bonus in addition to regular commissions.

Clear, Easy to Understand, Easy to Administer

When you create your sales compensation plan, design it with a clear understanding of what you want to accomplish.  Use specific incentives targeted at specific sales team functions to drive the behaviors that will produce results.  Read and re-read your plan before implementing it.  Make sure it is easily understood by your sales representatives.  They should know what behaviors and results you expect from them.  More importantly, they should easily understand how they earn commissions.  Finally, make your plan easy to administer.  You need to be able to track performance, progress towards goals and commissionable events.  At the end of each commission period, whether it’s weekly, monthly, quarterly or annually, you must pay sales commissions in a timely fashion.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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