5 Common Questions about Sales Compensation Planning
As every successful sales organization already knows, there are a numerous amount of ways to incentivize your sales team. But regardless of the strategy you use, the goal of every business has always been the same: motivate sales reps to close deals and hit quota.
There are many different compensation structures out there to reward and incentivize your sales team, and the decision isn’t always easy. When designing incentive plans, there are several important considerations and questions you should ask yourself before choosing the right incentive structure(s) for your team.. Here are five questions you should ask yourself before choosing which plan will best motivate your team and drive performance.
Q: When should you use a tiered commission structure
A: When performance drops off after reps hit their goal
Explanation: Tiered commission plans initially pay a flat-rate, but things change once a sales rep hits a performance threshold. When reps hit a specific performance level (e.g., $100,000 in sales revenue), their commission rate increases to motivate reps to maintain high levels of performance. This type of plan works well on many levels and serves to encourage the following behaviors:
- Reward the reps who over-perform
- Motivate the “middle tier” of reps to increase their performance
- Encourage sales team to meet and surpass quota
- Incentivize top-performers to not only hit their goals but also keep selling to earn higher payout rates
- Attract and retain top-performers due to the lucrative nature of the extra payout rate
But tiered commission plans are not a one-size-fits-all solution. Learn more about these payment structures here.
Q: When should I use a Draw Against Commission?
A: When you want to offset your new hire’s ramp time
Explanation: Research shows that on average, sales reps ramp up to full productivity in 9.1 months. A draw against commission serves as an offset to the lack of incentive payments during a sales rep’s ramp up time; it basically functions more like a stable base salary payment than it does variable pay.
The draw amount is the predetermined advance paid to the rep that will be repaid in the next pay period. To put it simply, when a rep earns a commission less than the set draw amount, they keep their commissions along with the difference between the commissions amount and pre-determined, or “borrowed” draw.
But not all draws against commissions function the same. Learn more about the different structures here.
Q: When should you use a bonus structure?
A: When you want to incentivize both sales & non-sales teams to drive performance
Explanation: Incorporating a bonus payment model into your corporate structure is an easy way to incentivize not only your sales teams, but also other departments as well. Implementing a bonus system can be an easy way to increase employee productivity, engagement, motivation, collaboration and overall performance to make sure your company is firing on all cylinders.
The overall goal of this type of incentive structure is to encourage your entire workforce, not just your sales team, to hit their goals month-after-month. Reassuring your employees that you see the benefit of their hard work is an easy way to show each worker that they are not only making a direct impact on your company, but also that you are making an investment in their performance and ability to succeed. This type of recognition inspires them to constantly evaluate their own personal impact on your business, which ultimately can lead to an increase in productivity and profitability.
Q: When should I tailor compensation to different roles?
Explanation: When motivating your team to have higher performance, you need to understand that different sales roles require different compensation plans—and having a one-size-fits-all plan won't work. Your incentive plans must be customized to the specific responsibilities and tasks you are asking each role to perform in their position.
According to the CSO Insights Sales Compensation & Performance Management Study, a well-designed sales compensation plan can improve your ability to meet key business objectives. By building a competitive incentive plan specifically designed for each role on your sales team, you can motivate higher performance across the team—directly benefiting your bottom line.
Q: When should I use a variable pay mix?
A: When you need to pay by role and by performance
Explanation: There’s no right or wrong amount to pay employees. However, there are several types of pay mixes that can benefit your sales teams. Understanding which combinations of compensation plans would work for you can be crucial to drive a competitive edge in your sales organizations and attract top talent.
This includes a combination of base pay, variable pay, and perhaps non-monetary variables like company equity. Pay mix is the ratio of base salary to target incentives that make up the On-Target Earnings (OTE) and is an important part of employee motivation and performance. For example, depending on the role, companies may offer higher incentive-based compensation with a lower base or a higher base with lower variable pay.
However, without access to benchmark data across peers in the same industry, companies are at a disadvantage to determine the optimal pay mix. Sales and finance leaders will benefit greatly by having access to benchmark data to help design the optimal comp plans to attract and retain top talent while also driving sales behaviors to attain quota.
Picking the Best Sales Compensation Plan for Your Team
In reality, one plan design doesn’t fit all, and the most successful organizations are implementing a hybrid mix of these commission structures to map their own corporate objectives and to inspire the best performance from their sales reps and teams.
While figuring out what type of compensation plan would work best with your sales team sounds like a simple task, determining your company’s pay mix can be a critical factor in the overall success of your organization. This decision shouldn't be a directionless game of darts or pin the tail on the donkey, getting your pay mix right can mean the difference between sink and swim for everyone involved (a.k.a this can mean the difference between hitting or missing your team's quota and revenue targets).
If your company is currently compensation planning for the next fiscal year or planning a redesign of your current incentive structure, reach out to Xactly’s Strategic Service team. They can help you analyze your current plan, provide compensation advice, and overall help you design a strong incentive plan that will work best with your sales team!