9 Steps to Developing an Effective Sales Compensation Plan - Part 2

July 06, 2018

In 9 Steps to Developing an Effective Sales Compensation Plan - Part 1 we set the stage and explored the first 3 steps to developing an effective sales compensation plan. Here are the remaining 6 steps:

4. How much can a salesperson realistically sell in one year?

You will zero in on the answer to this question by answering a number of other questions such as:

  • How many properly qualified opportunities can a salesperson manage at once?

  • What is the length of the average sales cycle?

  • Do you think this time frame can be shortened?

  • What is the average close ratio?

  • Do you think this close ratio can be improved?

5. What is the total target income you are willing to pay for this amount of annual production?

If you have determined the percentage of profits that you are willing to contribute to sales compensation, and you have determined how much a salesperson can sell in a year's time, you have the factors you need to calculate a target income. Once you have made this calculation, consider another question: Is this target income significant enough to motivate successful salespeople to join your company and stay with your company?

6. How much and what kind of income "floor" are you willing to provide to your salespeople?

Now that you know the total target income for your sales position, you can break it down into fixed and variable compensation. The fixed compensation provides a "floor" to income and is usually paid as a salary or draw. The variable compensation consists of commissions, bonuses, and any other incentives that you choose to include in your sales compensation plan.

7. What commission percentage will you pay?

Once again you will find the answer by answering a number of additional questions, including:

  • Does it make sense to pay a single commission percentage, or do you want to have different commission percentages for new business and repeat business?

  • Should commissions be calculated based upon revenue or gross margin?

  • Does it make sense to have a "sliding scale", where the commission percentage increases as the gross margin percentage increases, and decreases as the gross margin percentage decreases?

8. Do you want to include any bonuses for achieving specific performance targets?

In addition to paying commissions, you may want to consider paying bonuses to salespeople who achieve specific performance targets. For example, you may want to pay a quarterly bonus for achieving each quarter's sales target, and an annual bonus for achieving the annual sales target.

9. What other sales behaviors are critical enough to attempt to motivate via the sales compensation plan?

You may find it desirable to tie bonuses or other incentives to specific behaviors such as team selling, cross selling, etc. However, it is important to recognize that the motivational value of your sales compensation plan will decrease as its complexity increases. If your salespeople cannot easily determine how much they will earn from their efforts, they will not perform as well as they would if they could easily correlate sales performance to earnings.

If you develop carefully considered answers to the preceding nine questions, you will have the core information you need to develop an effective sales compensation plan for your company!