9 Steps to Developing an Effective Sales Compensation Plan - Part 1

June 23, 2018

The most common question I hear concerning sales compensation goes something like this: "What commission percentage should I pay for _____________?"

I'm sorry, but there is just isn't a "standard" answer to this question. Why? Because there are a huge number of variables that impact commission percentage calculations.

Here are just some of the variables:

  • Products or services sold

  • Target markets

  • Target geographies

  • Target contacts (C-level, department manager, purchasing, etc.)

  • Sales environment (company office, home office, etc.)

  • Sales approach (telephone, in-person, etc.)

  • Company profitability

  • Individual product or service profitability

Despite the fact that there is no simple answer to the "What commission percentage should I pay?" question, determining the right commission percentage is not rocket science, either. There ARE specific questions you can answer that will lead you to the right commission percentage(s) for your company.

Here is an overview of the process I recommend for developing or revising your company's sales compensation plan(s):

1. What is the average profitability of your company's sales transactions?

If there are significant differences in profitability between product or service groups or between new business and repeat business, calculate profitability by group and/or business type.

2. How much of this profit are you willing to contribute to sales compensation?

Look at all of your costs and the percentage of profit you want to re-invest in growing your business. If the best you can do is determine a range of profit that you are willing to contribute to sales compensation (example: 10% to 30%), that's OK. You will refine the percentage as you continue working through the questions listed below.

3. What is the desired mix of new business vs. repeat business?

A key consideration is how deeply your salespeople have already penetrated their existing accounts. If they are doing a great job of selling your company's entire portfolio of products and services in every assigned account, you should probably put more focus on finding new accounts.

However, if your salespeople are just scratching the surface in terms of selling your company's entire portfolio of products and services to existing customers, your focus should be on maximizing account penetration. Why? Because it is easier and faster to sell more to existing customers than it is to sell to new customers. Plus, sales to existing customers tend to be larger and more profitable.

Part 2 of this article will examine 6 additional steps to developing an effective sales compensation plan.