Skip to main content

How to Create a Sales Incentive Compensation Plan

Feb 27, 2024
5 min read

A sales compensation plan is an important tool for any sales manager. It lays out your sales compensation structure and helps you better manage your budget. Without an incentive compensation plan, your organization is depriving itself of information that can be used to manage current and future marketing campaigns and maximize the success of your sales efforts. According to Gartner, only 24% of sales managers can accurately calculate their total variable compensation. With proper planning, your team can have access to that information.

Tips for Building Effective Compensation Plans

Leveraging a compensation plan template is a good starting point for building a plan that will work for your team. To help you add more detail to your compensation plans, consider these tips.

1. Motivate the right sales behaviors

For incentive compensation to be effective, it needs to motivate your Sales team behaviors that work towards your overarching company goals. Aligning your incentives to higher objectives ensures that sellers can prioritize more effectively, understand what’s expected of them and that every action they take works towards achieving those targets. 

It’s also important to consider the spread of performance across your Sales team. In an ideal world, every rep would be a top performer and exceed their quota, but realistically, you have to expect that 100 percent of reps will not meet their individual goals. Your incentive compensation plans need to reward your top sellers and encourage mid and low-performers to improve their sales achievement.

2. Find the right sales commission structure

When building incentive plans, you also should consider the best way to pay reps. The most common form of variable compensation is a commission. There are a variety of sales commission structures you can use to pay reps and motivate them to close deals. 

The most common are: 

  • Revenue Commission Structure: Reps earn a flat percentage of total revenue from each deal closed
  • Gross Margin Commission: Reps earn a flat percentage of gross revenue from each deal closed
  • Tiered Commission Structure: Reps earn higher commission percentages as they reach thresholds of total revenue sold 
  • Multiplier Commission: Reps earn a percentage of commission based on their progress towards quota
  • Straight Commission: Reps earn no base salary pay and earn only commission
  • Draw Against Commission: Reps earn a cash advance that may or may not have to be repaid in the next pay period

3. Tailor Incentives to Different Roles

The roles on your Sales team all have different tasks and responsibilities, and your sales incentive plans and commission structures reflect that. Each member of your team should have goals and incentives that are tailored to their unique role and are targets they have a direct impact on.

Managers and their reporting reps have different duties. Reps will most likely spend more time making calls and closing deals, while managers will likely split their time between calls and administrative tasks. Build your compensation plans so that they provide opportunities and goals that are aligned with the different roles on your team.

4. Benchmark against industry data

Compensation planning should be a data-driven effort. By benchmarking your compensation against industry data, you ensure your compensation is competitive and your expenditure and targets are reasonable. According to HubSpot, 16% of salespeople believe that unrealistic quotas contribute to employee turnover.

Good compensation plans are designed in a way that rewards high-performing salespeople fairly and that cannot be manipulated by salespeople who are looking to exploit the compensation structure you're offering. Compensation plans with unreasonable expectations or that aren't in line with industry averages could alienate effective sales staff, harming your bottom line in the long term.

The most effective way to ensure your pay is competitive is by benchmarking against industry data. Using an AI-driven compensation tool like Xactly Benchmarking allows you to compare different incentive structures and see how your compensation plans stack up against your industry.

5. Focus on plan simplicity and transparency

A good compensation plan is concise and laid out in a way that's easy for people to understand. This ensures other stakeholders can look at your plan, including your sales reps. Transparency and simplicity help your salespeople understand the targets they're expected to meet and how those targets impact their compensation.

If commission and bonuses are a major part of your Sales team's compensation, they'll want to have an idea of how they're performing each week so they know what to expect at the end of the sales period. If they don't have a clear compensation plan to work from, they'll find themselves guessing and trying to reverse-engineer the calculations performed to calculate their compensation.

This kind of opacity and guesswork benefits no one. It leaves your sales staff confused and anxious and means you could find yourself having some tense conversations if your team members come up with a compensation figure that's wildly different from their actual pay.

6. Use technology to pay your reps accurately and on time

A sales compensation plan is useful only if it's properly implemented. If you have to process sales compensation manually, this can delay payment for your Sales team and could result in errors in their compensation. Today, technology is available to streamline and automate the process of creating a sales compensation plan and issuing payments following that plan. 

In addition to calculating the payments due under the compensation plan, the same tools can be used to feed data about compensation plans into other software for reporting and analytics. This helps sales managers iterate on their compensation plans and make improvements to further boost your ongoing sales performance.

Xactly Incent is a solution that can help you manage your sales compensation more efficiently, saving you time and improving morale within your Sales team.

Sales Incentive Plan Template Examples

Every company is unique, and incentives will vary depending on your business structure, product and service offerings, and industry. These sales incentive templates will give you a good foundation to set each role on your team up for success. You can learn more about tailoring incentives to specific sales roles in our Complete Guide to Sales Team Compensation.

The Importance of Data in Creating Incentive Compensation Plans

Data should be at the core of any incentive compensation plan. Today, most organizations have a wealth of data available in the form of CRM and ERP systems, along with access to statistics from third parties. This information can be used to remove the guesswork from creating a sales compensation plan and help managers draw meaningful conclusions about both the past performance of their teams and what their future performance is likely to look like.

Armed with that information, you can motivate your Sales team more effectively and steer their efforts to the areas of your business that are most likely to produce good returns.

If you're reviewing your sales compensation plan or writing one for the first time, take a look at Xactly Incent to see an example of a compensation plan along with tools and templates to help you create your own, and streamline your entire sales compensation process!

  • Compensation
  • Cloud/SaaS
  • Incentive Compensation
Xactly "X" logo, left half orange and right half grey
Xactly News Team

The Xactly News Team reports on the latest product, events and market trends taking place within Xactly and throughout the revenue intelligence industry.