Skip to main content

How to Set Up a Commission Plan in Six Steps

Jan 21, 2019
4 min read
Commission plans motivate sales teams to achieve goals and helps attract and retain top talent in your industry. Learn how to set up your plan in 6 steps.

Motivating your sales reps is one of the key factors of sales success. In most sales organizations, the sales commission plan is the best way to do this. Your sales commission plan is a portion of your sales compensation plan. Often, it includes a pay mix, made up of a base salary and variable commission pay. Ultimately, your sales commission plan motivates reps to close deals and perform specific sales behaviors that align with your company goals. 

When it comes to designing sales compensation plans, there are many factors that can affect the success of your plan. To help ensure you set your sales team up for success, here are six steps to setup a commission plan.

1. Gather as Much Data as Possible

Data is the most important and useful tool for any part of a strategic sales plan. It helps us analyze past performance, but when used effectively, it can help sales organizations proactively plan ahead before company goals are derailed by unforeseen sales disasters.

For your commission plan, it's important to consider the following data points:

  • Past sales performance: Start by analyzing your previous years' compensation and commission plans. Identify what elements (e.g., sales commission structures, bonus plans, pay mix, etc.) worked most effectively and which did not work. Look at what elements were most effective in motivating sales reps and which deals brought in the most revenue. Formulate your new plan around the successful elements and structure incentives for new goals similarly.
  •  Industry pay levels: Competitive commission structures are key to attracting and retaining top sales talent. Benchmarking against industry pay data helps ensure your compensation plan is competitive and will motivate reps effectively. For example, Xactly Insights allows customers to benchmark their commission plans against 13+ years of aggregate pay and performance data. And, ultimately, Insights customers achieve 10% higher sales objective attainment than non-Insights users.

2. Bring Together the Right Planning Team

There's a fine line between too little and too many people when it comes to designing your commission plan. Ideally, you need a sales incentive planning team of six people. You want senior representatives from sales, finance, human resources, and marketing. It's essential to also include compensation admins to ensure that the plan can be realistically executed. Then, as you finalize your plan, loop in legal teams for a final check.

While your planning incentives, consider bringing in sales managers and top reps to review the plan and get their feedback from the perspective of the sales team. This helps you ensure your plan is both easy-to-understand and easy-to-execute.

3. Optimize Your Sales Plan

Your sales plan identifies how the sales team will reach the company's goals. It identifies your capacity needs, quota allocations, and sales territory design. This plan should also be designed with a data-driven mindset.

This plan should be locked down before you start building your commission plan. Capacity tells you how many reps you need to realistically achieve goals. This, in turn, informs how much each rep needs to sell (i.e., quota), assuming that not every rep will reach quota. Optimized territories then ensure reps have the opportunities they need to reach quota.

Your sales capacity needs: To reach sales goals, you need the right amount of sales resources on the sales floor. However, it's more than just having the right amount of sales reps now. You need to have enough resources hired to account for possible sales rep turnover. It's important to consider the average amount of time it takes new reps to onboard fully and how sales rep tenure impacts their sales performance.

Your sales territory design: To put it simply, poor territory planning can derail sales success and cause sales team morale to plummet. Balanced territories are cost-effective and help ensure you have the right amount of resources in each area. Most importantly, they give each sales rep equal opportunity to reach and exceed their quota—regardless of their territory.

Read more about sales capacity, quota, and territory planning in our recent sales planning fundamentals series by Xactly Chief Sales Officer, Marc Gemassmer.

4. Follow the ABCs of Incentive Planning

Your incentives must be tied to performance. The best way to ensure your commission plan drives the right behaviors to reach company goals is to follow the ABCs of compensation planning. Your commission plan should be:

  • A—Aligned With Sales Roles: It's important to remember that not all sales roles are equal. Managers and their reporting reps have different responsibilities. Therefore, their commission plans should be adjusted accordingly and incentives should be tailored to each sales role.
  • B—Benchmarked against the Industry: Your sales organization lives and breathes by your sales team, and it's important to consider factors that motivate your reps. Like we mentioned above, benchmarking against industry pay rates is key to attracting, retaining, and motivating your sales team effectively.
  • C—Constructed to Drive the Right Sales Behaviors: Design your plan to put emphasis on the sales behaviors that will help reach company goals. Simply, if incentives drive the wrong sales behaviors, you're less likely to reach your sales goals.

5. Communicate Your Plan Effectively

Once built, the next step is communicating your sales compensation plan to the sales team effectively. Start with senior sales leadership, then pass the plan on to sales managers before sharing with the rest of the sales organization. The ideal place for full company rollout is your annual sales kickoff meeting. This allows senior sales leadership to present the plan to the entire sales organization and answer any immediate questions.

To follow up, sales managers should sit with their teams as a whole and with individual reps. The goal is to ensure each person on the sales team fully understands how the plan benefits them and the actions they'll need to take to hit quota and reap the benefits.

Learn more about successful commission plan rollout in our webinar "5 Tips to Articulating Your Sales Compensation Plan in 2019."

6. Continuously Analyze, Improve, and Repeat

Your job with your commission plan doesn't end with rollout and implementation. In fact, commission planning is a year-round process. Successful sales organizations must analyze their commission plan on a continuous basis. Learn more about the importance of continuous analysis and download our checklist for commission planning, rollout, and analysis, "5 Steps to a Competitive Sales Incentive Plan."

Making Planning, Execution, and Performance Easier

Continuous commission plan analysis doesn't have to be daunting. Using automated tools like Xactly Incent allows sales leaders to monitor rep performance and identify problems before they derail performance. In addition, sales reps can also use Incent to see their earned commission in real-time so they aren't spending valuable selling time calculating their own commission.

  • Incentive Compensation
Kelly Arellano, Senior Content Marketing Manager at Xactly
Xactly News Team

Led by Editor-In-Chief, Kelly Arellano, The Xactly News Team reports on the latest products, events, and market trends taking place within Xactly and throughout the revenue intelligence industry.