jason atchley
CREATING A SALES COMPENSATION PLAN
June 15, 2015
Effective compensation can motivate salespeople substantially. Everything from bonuses to noncash rewards can boost productivity across the sales team.
Finding a balance between raises in commission as well as base pay can help motivate employees to successfully turn leads into customers and upsell products and services to existing clients, according to Inc. However, operating on a commission-only system may be another great way to encourage employees to outperform quotas.
Before developing and implementing a sales compensation plan, know what components to include.
"A balance between commission as well as base pay can help motivate employees."
Know what kinds of compensation drives sales productivity
Recognizing and appreciating the work of salespeople helps keep the best employees around.
Recognizing and appreciating the work of salespeople helps keep the best employees around.
"It's probably one of the fundamental keys for success for a business, provided they have a sales force – which would apply to vast majority of businesses," said Jim Stoeckmann, senior practice leader for sales compensation at WorldatWork, according to Inc. "Going to market is really a fundamental part of planning your business. The compensation plan is how you operationalize the sales force, get them aligned with the business goals, and get them motivated and driven to implement your go-to-market strategy."
According to the Harvard Business Review, a sales compensation plan is one of the most influential tools a business can use. Using different methods may be more impactful among certain employees.
After analyzing the performance of employees who were awarded based on their customer retention rate, Mark Roberge, a contributing author to HBR, indicated the rate of customer turnover decreased 70 percent within six months. Offering a monetary incentive relative to the performance of salespeople helped drive customer retention.
Consider asking for feedback from employees to develop a suitable compensation plan.
"If customer retention is historically an issue, cutting down on turnover is a valuable goal."
Creating a sales compensation plan
The four primary elements to consider when writing out a successful sales compensation plan include a strategy, ability to measure performance, formula for payout and governance.
The four primary elements to consider when writing out a successful sales compensation plan include a strategy, ability to measure performance, formula for payout and governance.
The sales strategy should indicate what the business wants to achieve. Similar to the example documented by HBR, if customer retention is historically an issue, cutting down on consumer turnover is a valuable goal. Entrepreneurship.org noted additional goals a company may be interested in meeting include developing a new customer base and growing revenue.
Providing a way to measure performance and setting benchmarks to track progress in meeting business objectives is another essential part to a sales compensation plan. When Roberge worked to decrease the turnover rate, he notified each person what his or her churn rate was and its relation to the sales team's average. Letting members of the team know what is above and below average provides critical feedback and illustrates a potential goal.
When setting goals for salespeople, a business must ensure the objectives will be true reflections of solid performance.
"Meeting quarterly sales quotas can be one measure of performance," noted Scott Shimamoto, the principle in charge of incentive compensation for ZS Associates. "But what if those quotas are met by selling products at a deep discount?"
Measuring productivity accurately will drive the most impactful sales activity and increase revenue. This is a substantial factor to consider when creating a sales compensation plan.
A business should decide what counts as a measure of performance. This decision should reflect wich goals are most important, and all employees should know what metrics are tracked to determine compensation.
A payout formula provides incentives for employees. In Roberge's circumstance, he stack-ranked the sales team and categorized them by performance. The top-performing quartile was awarded $4 for every $1 of revenue gathered due to a returning customer. Each group that performed at a lower level earned less. Incentive compensation management software can help managers easily track this data and even motivate salespeople by providing insight to their performance.
Additionally, HBR noted natural social pressure is implemented when employees are grouped by performance. Recognizing the best salespeople places additional pressure on the performance of other employees and can encourage increased sales productivity across the team.
When developing a compensation plan, a business must decide how questions and conflicts regarding compensation will be addressed.
"There are going to be things that come up during the course of the year that are not covered or are a matter of interpretation," noted Stoeckmann, according to Inc. "You need to spell out the way those are going to be resolved. It may be a committee or a chain of command.".
Getting the plan going
After creating a strong sales compensation plan, you should wait to initiate the start of this at an ideal moment. The first quarter of the new year is a good time to start fresh and encourage employees to create goals.
After creating a strong sales compensation plan, you should wait to initiate the start of this at an ideal moment. The first quarter of the new year is a good time to start fresh and encourage employees to create goals.
Before implementation, a business should also ensure they have the proper team assembled to meet the needs of a new sales compensation plan.
"You want to have the sales leadership set the perimeters up front," noted Stoeckmann.
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