The 4 Keys to Successful Sales Compensation Plans

Posted by David Wallace on November 28, 2023

One hundred dollar bills fanned out.There are four keys to a successful sales compensation plan:

  1. Tie sales compensation to company goals
  2. Make the plan easy to understand
  3. Make the plan easy to administer
  4. Show the sales reps a path to success.

1. Tie to Company Goals

Pay sales commissions on more than just revenue or margin. While these may be important, limiting incentives to only these two performance indicators will likely work against your company’s interest in certain situations. Paying on revenue or margin encourages your sales reps to go after only big deals (elephant hunting), easy deals (low-hanging fruit) or familiar deals (comfort zone). They are not likely to work on closing new customers, opening new markets, selling new products or investing in relationships with longer sell cycles (even though they may have greater margins).

Instead, build your incentive plans so they motivate your sales team to help your company achieve its goals. Goals may include growing the customer base, penetrating new markets (geographic, industry or applications), or launching new products. The key is to make sure your sales reps and the company are working together to achieve the company’s strategic goals, both long-term and short-term.

2. Easy to Understand

Your sales representatives must be able to quickly see how they can make money, earn a living. Make your incentive plan easy to understand. I tend to employ the “rule of three.” The rule of three identifies three areas in which you will pay the sales rep. They may be, as an example, overall revenue or margin, new customers, and product mix. Then, the rule of three may set three payment levels within each of these areas – % payout up to quota target, higher percentage over quota, and even higher percentage for achievement over 110% or 125% of quota.

If you fine-tune your plan to the extent that there are interdependencies and intricacies that determine how much commission is paid so that every sale is perfectly aligned with management’s goals, your sales reps will likely disregard the commission plan  and “hope for the best.” This is demotivating and works against your company’s interests. Keep it simple, easy to understand.

3. Easy to Administer

Build your sales incentive plan so that it’s easy to administer. Whenever possible, use data in your commissions calculations that your systems routinely track. Avoid having to review each sale individually to confirm that it meets your commissions criteria. Also, design your plan so that nearly all the sales transactions are routine in commissions calculations. Limit the number of transactions that require management review, arbitration or unique splits across sales reps.

Your goal is to pay commissions quickly, easily, and accurately. Make your commission process transparent to the sales reps so they don’t waste time tracking their commissions with their own “shadow accounting” system.

4. Clear Path to Success

Show your sales reps how they can achieve success. I like to provide my sales teams with commissions modeling tools. These tools enable the sales representatives to enter their own assumptions and see how much they can earn. Assumptions may include number of sales closed, size of transactions, number of new customers, and mix of products sold. By allowing the sales reps to enter their own assumptions, they can make changes and see how the changes will affect their income. Further, over the course of the year, sales reps can use the tool to measure their progress based on year-to-date performance and expected activity for the balance of the year.

Sales representatives with a clear view of how they can succeed are better motivated to leverage the sales compensation plan to achieve their goals for success.

Wallace Management Group

Wallace Management Group has developed custom sales compensation plans for a variety of companies to fit their needs. We’ve developed plans for companies in the manufacturing, distribution, financial services, business services, and security systems industries to name a few. We’d like to work with you to put plans in place that motivate your sales team to achieve your company’s goals.

Contact us at (203) 856-9400 or to discuss how we can work with you to develop an effective sales compensation plan for 2024.