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19 May, 2023

Driving Sales Growth: A Comprehensive Roadmap for Sales Leaders to Develop and Deploy High-Impact Commission and Compensation Plans

Sales

Written by McAlign

Introduction

This article offers a comprehensive guide for sales leaders and teams who design commission or compensation plans  to create and implement effective commission and compensation plans that will drive sales growth. It provides tools and strategies to help sales leaders align their compensation plans with their sales goals, measure performance, and develop effective incentives to motivate sales teams.



Topics covered in the article include:


  • Section 1: Sales commissions and compensation plans: types and components

  • Section 2: Business objectives and sales strategy should be aligned with sales commissions and compensation plans

  • Section 3: Effective communication and implementation of sales commissions and compensation plans

  • Section 4: Maximising results and retention through the evaluation and optimization of sales compensation plans



Section 1: Understanding the Types and Components of Sales Commission and Compensation Plans

A. Describe the different types of sales commission and compensation plans


In this article, we will attempt to briefly make sense of the different types of commissions and compensation plans available in the sales world:


Salary-only

A type of sales commission and compensation plan that pays salespeople a fixed amount of money regardless of their sales performance. Despite the fact that it is a type of plan that provides a steady and predictable income to salespeople, it does not directly motivate them or reward them for reaching their sales goals or generating sales revenue.

Commission-only

Sales compensation and commission plans in which salespeople are compensated based solely on the performance of their sales. In addition to providing salespeople with a high income potential, this type of plan also exposes them to a considerable risk of income fluctuation and uncertainty

Salary plus commission

As part of a sales commission and compensation plan, salespeople are paid a combination of fixed and variable compensation based on their sales performance. It is important to carefully design and calculate this type of plan so that the optimal combination of base and variable pay is achieved, as it provides salespeople with both income stability and income incentive.

Salary plus bonus

A type of sales commission and compensation plan that pays salespeople a combination of a fixed amount of money and a variable amount of money based on their achievement of predefined goals or targets. This type of plan provides salespeople with an opportunity to earn extra Income for exceeding expectations, but it also requires clear and measurable criteria for setting and evaluating goals or targets

Draw against commission

Sales commission and compensation plans that pay salespeople advances against future commissions. In this type of plan, salespeople are guaranteed a minimum income, but they must also repay the draw from their earned commissions. The salesperson may incur a debt or deficit if the commissions earned are less than the draw



B. Different types of sales plans offer advantages and disadvantages based on different sales roles, products, markets, and objectives

An overview of the advantages and disadvantages of each type of plan for different sales roles, products, markets, and objectives markets, and objectives, markets, and goals:


Salary-only

This type of plan is suitable for Sales roles that require more service, support, or administrative duties than selling activities, such as account managers, customer service representatives, and sales coordinators, should use this type of plan. Similarly, it can be used for products with low margins, long sales cycles, or complex sales processes, such as software, consulting, or engineering solutions. Additionally, it is suitable for markets that are mature, stable, or saturated, with limited sales volume or predictable growth. Using such a plan allows salespeople to focus on delivering value to customers and building long-term relationships without putting too much financial pressure on them. Sales performance and compensation are not directly linked in this type of plan, which can reduce motivation and productivity.

Commission-only

This type of plan is appropriate for sales roles that emphasise selling over service, support, or administration, such as hunters, closers, and independent contractors. Products with high margins, short sales cycles, or simple sales processes, such as commodities, consumables, or retail goods, can also benefit from it. It is also suitable for markets with high sales volume or variable growth that are dynamic, emerging, or competitive. In such a plan, salespeople are encouraged to work harder, smarter, and faster in order to generate sales revenue, which maximises their income potential and reward. As a result of this type of plan, income stability, burnout, and unethical behaviour may occur for salespeople.

Salary plus commission

This type of plan is suitable for Account executives, business development managers, or field sales representatives may benefit from this type of plan. As well as equipment, services, or solutions with moderate margins, medium sales cycles, or mixed sales processes, it can be used for products with moderate margins, medium sales cycles, or mixed sales processes. As well as moderate or growing markets, it is suitable for markets with moderate or variable sales volumes or growth. Its main advantage is that it provides salespeople with income stability and income incentives and aligns their compensation with their sales performance and contribution to business objectives. A disadvantage of this type of plan is that it requires careful design and calculation to ensure an optimal mix of base pay and variable pay, in order to avoid overpaying or underpaying salespeople.

Salary plus bonus

The type of plan is suitable for sales roles that require achieving specific goals or targets beyond sales performance, such as strategic goals, customer satisfaction, product mix, cross-selling, upselling, or team selling. Also suitable for products with differentiated features, benefits, or value propositions that require more customer education, consultation, or persuasion. Sales performance may also be impacted by external factors beyond the control of salespeople in markets that are challenging, uncertain, or evolving. This type of plan provides salespeople with the opportunity to earn extra income if they exceed expectations. This type of plan has the disadvantage of requiring clear and measurable criteria for setting and evaluating goals or targets, as well as avoiding creating unreasonable or conflicting expectations.

Draw against commission

This type of plan is ideal for roles with high income variability due to seasonality, cyclicality, or unpredictability of sales results. As well as products that require a longer payback period or have high upfront costs, it is suitable for investments that require a long payback period. In addition, it is suitable for markets with high competition or low demand that require more aggressive sales efforts. This type of plan provides salespeople with a minimum income guarantee and helps them manage their cash flow and expenses. Its main disadvantage is that it requires repayment from earned commissions, which may create a debt or deficit for salespeople if their commissions are not sufficient


C. Common components of sales commission and compensation plans

The purpose of sales commissions and compensation plans is to motivate and reward salespeople for their contributions to a company. There are two main elements of these plans: base pay and variable pay, also known as incentive pay or commission. There are some sales compensation plans that include only commissions, while others include only base salaries. Most include a mix of the two.

The following are some common components of sales commissions and compensation plans:


Base pay

Salespeople receive a fixed salary regardless of their performance

For example, if the average base pay for a sales position in your industry is $50,000 per year, you might set your base pay at a similar level

Variable pay

Salespeople can earn additional income based on their performance. An incentive can be in the form of a commission, a bonus, or another form of compensation

For example, if the goal is to increase market share, then the plan should incentivize sales reps to sell to new customers . One popular model is the revenue commission model, which pays a percentage of the revenue generated by the sales rep. For example, if the sales rep sells a $1,000 service, they might earn a 10% commission, or $100 

Incentives/Bonuses

Salespeople are rewarded for achieving specific goals or targets using incentives or bonuses

For example, a company might offer a bonus of $1,000 for exceeding a sales quota by 10% or for selling 100 units of a new product.

Quotas

Commissions and bonuses are earned when salespeople meet their quotas

For example, you might set a quota of $100,000 in revenue or 100 units sold per month

Thresholds

Before salespeople are eligible for bonuses or commissions, they must meet certain performance levels

For example, you might set a threshold of $80,000 in revenue or 80 units sold before commissions are paid.

Accelerators

When salespeople surpass their quotas or targets, they receive increased commissions or bonuses

For example, you might increase the commission rate from 10% to 15% when salespeople exceed their quota by 20%

Caps

Salespeople are limited in how much they can gain in commissions or bonuses

For example, you might set a cap of $10,000 per month on commissions

Clawbacks

The clawback provision requires salespeople to repay commissions or bonuses if they fail to comply with certain conditions

For example, you might require salespeople to repay commissions if a customer cancels an order within 30 days

Splits

Commissions or bonuses are shared between two or more salespeople.

For example, if two salespeople work together to close a $10,000 sale with a 10% commission rate, they might split the $1,000 commission equally.

Overrides

Managers and supervisors receive commissions based on their subordinates' performance.

For example, you might pay managers a 5% override on the commissions earned by their subordinates



Section 2: Aligning Sales Commission and Compensation Plans with Business Objectives and Sales Strategy

    A. Aligning sales commissions and compensation plans with overall business objectives and sales strategy

    It is crucial to align sales commission and compensation plans with the overall business objectives and sales strategy of the organisation because they play a critical role in motivating and incentivizing salespeople. In order to achieve the company's goals, well-designed sales commission and compensation plans are essential.

    As an example, if the goal of the company is to increase market share, then the commission and compensation plan should emphasise new customer sales. As part of this strategy, the company may offer higher commission rates or bonuses for acquiring new customers or selling certain products or services.

    As an alternative, if the company's goal is to increase profitability, then it might design a sales commission and compensation plan to encourage salespeople to sell high-margin products or upsell existing customers. The company may offer higher commission rates or bonuses for selling these products or services or for achieving certain profitability goals.

    It is therefore crucial to align sales compensation and commission plans with the overall business objectives and sales strategy of the organisation. Salespeople are motivated and Employees are incentivized to succeed. This can lead to growth, profitability, and long-term success for the company


      B. Identify the key factors to consider when setting sales commission and compensation plans.


      When setting sales commission and compensation plans, there are several key factors to consider. These include:



      Revenue growth

      The plan should be designed to motivate the sales team, an incentive plan that focuses on revenue growth needs to be created

      Profitability

      The plan should be designed to encourage salespeople to drive revenue growth vices and to drive profitability for the company.

      Customer acquisition

      The plan should be designed to encourage salespeople to drive revenue growth

      Customer retention

      The plan should be designed to encourage salespeople to drive revenue growth repeat business

      Customer satisfaction

      The plan should be designed to encourage salespeople to drive revenue growth and to drive customer satisfaction

      Market share

      The plan should be designed to motivate salespeople to increase market share for the company

      Product mix

      The plan should be designed to motivate salespeople to increase market share for the company services that align with the company’s goals and strategy

      Cross-selling

      he plan should be designed to motivate salespeople to increase market share for the company services to existing customers

      Upselling

      The plan should be designed to motivate salespeople to increase market share for the company-value products or services

      Team selling

      The plan should be designed to motivate salespeople to increase market share for the company at each other in achieving the company’s goals

      Sales cycle length

      The plan should be designed to incentivize salespeople to shorten the sales cycle and to close deals more quickly


      These are just some of the keys that motivate salespeople to increase market share for the company and compensation plans. The specific design of the plan will depend on the goals and priorities of the company, as well as industry norms and best practices.


        C. A framework for defining SMART (specific, measurable, achievable, relevant, and time-bound) goals


        Incentives should be designed to encourage salespeople to increase time-bound) goals for sales commission and compensation plans might include the following steps:



        1. Specific

        To increase market share, the plan should incentivize sales people to be specific and unambiguous, so that salespeople understand exactly what is expected of them.

        For example, a specific goal might be to increase revenue by 10% in the next quarter.


        1. Measurable

        Incentives should be designed to encourage salespeople to increase and are measurable. This means that progress towards achieving the goals can be tracked and evaluated

        For example, revenue growth can be measured by comparing revenue in the current quarter to revenue in the previous quarter

        1. Achievable

        Incentives should be designed to encourage salespeople to increase people should have a realistic chance of achieving the goals if they put in the necessary effort

        For example, a goal to increase revenue by 10% in the next quarter might be achievable if the company has a strong product line and a growing market

        1. Relevant:

        Ensure that the goals and objectives of the sales commission and compensation plan are relevant to the overall business objectives and sales strategy of the organisation. This means that achieving the goals should contribute to the success of the company

        For example, increasing revenue by 10% in the next quarter might be relevant if revenue growth is a key priority for the company

        1. Time-bound

        It is important for the plan to be designed so that sales people are motivated to increase the company's market share.ensation plan. This means that there should be a deadline for achieving the goals, which provides a sense of urgency and helps to focus effort

        For example, a goal to increase revenue by 10% in the next quarter is time-bound because it has a clear deadline


        Incentives should be designed to encourage salespeople to increase and compensation plans that are specific, measurable, achievable, relevant, and time-bound. This can help to ensure that your plan is effective in motivating and incentivizing salespeople to achieve the desired results.

        D. Examples and best practices for aligning sales commission and compensation plans with different business objectives and sales strategies


        Following are some examples of aligning sales compensation and commission plans with different business objectives and sales strategies:


        Increasing market share

        If the goal  to increase market share, the sales commission and compensation plan must incentivize salespeople to sell to new clients

        For example, a company might offer a higher commission rate or bonus for acquiring new customers or for selling certain products or services that are key to the company’s growth strategy

        Increasing profitability

        If the goal  to increase profitability, commissions and compensation should be structured so that salespeople focus on high-margin products and services

        For example, a company might offer a higher commission rate or bonus for selling these products or services or for achieving certain profitability targets

        Improving customer satisfaction

        If the goal is to improve customer satisfaction, sales commissions and compensation plans should reward salespeople for providing excellent customer service

        For example, a company might offer a bonus or other incentive for achieving high customer satisfaction ratings or for resolving customer issues quickly and effectively

        Cross-selling and upselling

        If the goal is to increase revenue through cross-selling and upselling, the commission and compensation plan should encourage salespeople to sell complementary products or services.

        For example, a company might offer a higher commission rate or bonus for cross-selling or upselling

        Shortening the sales cycle

        If the goal is to shorten the sales cycle and close deals more quickly, commissions and compensation should be designed to motivate salespeople.

        For example, a company might offer a bonus or other incentive for closing deals within a certain timeframe


        These are just some examples of how sales commissions and compensation plans can align with different sales strategies and business objectives. In addition to industry norms and best practices, the specific design of the plan will depend on the company's goals and priorities. 



        Section 3: Communicating and Implementing Sales Commission and Compensation Plans Effectively