sales compensation plans

Sales Compensation Plans: How to Avoid the Most Common Mistakes

By Monika Götzmann

Creating the right sales compensation plan is a vital part of talent management and can have a significant impact on sales performance and business results. After all, putting the right compensation model in place can serve to maximize employee motivation and productivity, as well as overall company profitability.

Of course, conversely, implementing the wrong sales compensation plan can have a detrimental effect on morale, effort levels and results, so it is important to design the plan carefully. In this article, we take a closer look at some of the most common mistakes that are made with sales compensation plans, and offer advice on how to avoid these pitfalls.

1. Ensure Commission is Results-Based

One mistake that many sales organizations make when designing their compensation plan is that they identify desirable events early on in the sales process and attach commission to them. However, doing so is not the most effective way to actually get the results the business needs in terms of completed sales.

Designing a compensation plan in this way can often result in salespeople being rewarded for doing half the job, removing incentive to actually complete the deal. For this reason, in the vast majority of cases, commission should revolve around results, rather than making a certain number of calls, or arranging a certain number of meetings.

“Creating commissionable events around process (rather than results) is another way of overpaying for under-performance,” says Teanna Spence, writing for Hubspot. “Instead, you should reserve compensation budget for star performers – the reps who are closing deals and ultimately furthering progress toward company goals.”

2. Make Earning Potential Clear

Designing an effective compensation plan is one thing, but the plan must also be clearly explained to salespeople. Indeed, in a CSO Insights Sales Compensation & Performance Management Study, all respondents felt ‘reps understanding how to maximize their earnings’ was important, while 41 percent felt it was mission critical.

However, more importantly, the study revealed a clear correlation between such an understanding among reps and actual sales performance. In companies where improvement was needed in this area, 41 percent of salespeople met or exceeded quota, while the the percentage of annual revenue plan attainment stood at 80 percent.

In organizations where salespeople have a very clear understanding of their compensation plan and how to maximize their earnings, 61 percent of salespeople met or exceeded quota, while annual revenue plan attainment reached 97 percent. This highlights the real business results associated with making a plan clear and actionable.

3. Keep Your Plan Company-Specific

Another common problem for sales leaders and talent management professionals is that they attempt to implement a sales compensation plan they have seen somewhere else. For instance, it could be that a leader attempts to recreate a plan from a previous employer, or has read about a plan which produced excellent results for another business.

The problem with approaching the design of a compensation plan in this way is that it fails to take into account the fact that different sales organizations, or even different sales departments, can operate in drastically different ways, and can have vastly different objectives and priorities.

As an example, a business where sales territories are clearly defined and sales teams genuinely work as a team to achieve their goals may benefit from a territory volume plan, where compensation is split evenly between employees. However, in most businesses, performance will not be equal and top performers want recognition.

4. Ensure Your Plan Is a Team Effort

Finally, sales compensation plans can often be complicated to design, administrate and explain, which is why it is important that the responsibility for doing so is not left to an individual, or even a single department. Instead, the plan needs to be a genuine team effort, which makes use of the available expertise in the organization.

“The goal of a collaborative team approach is twofold: to construct the best sales compensation plan, and ensure the key stakeholders understand how it was constructed,” says Lee Bartlett, a renowned sales leader and best-selling author. “It is critical that everyone is on the same page. Avoid short-cuts.”

Generally, the best approach is to build a team, using leading figures from various departments, including sales, human resources and, of course, finance. This team should devise the plan together, be willing to make adjustments when evidence supports it, and work with risk officers before gaining executive level buy-in.

Conclusion

Sales compensation plans are a vital component of talent management and can have a major impact on morale, motivation and overall sales performance. By implementing these tips, it should be possible to avoid some of the most common mistakes that are made, ensuring that impact is positive, rather than negative.

Photo credit: Sales team concept from Syda Productions/Shutterstock

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Monika Götzmann
Monika Götzmann is the EMEA Marketing Director of Miller Heiman Group, a global customer experience and sales training company. Culturally savvy, Monika has years of international experience in B2B marketing on behalf of dynamic, world-class enterprises. She likes to share her insights about talent management and employee development within sales and service organisations.

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