How to Compensate Sales Reps in 4 Easy Steps

Jan 22, 2016
3 min read
Companies need to pay sales teams fairly and competitively to motivate them to perform. Here is how you should be compensating your sales reps in 4 easy steps.

Compensating your sales reps is easy, but doing so in a way that motivates and inspires performance is another matter altogether.

For anyone struggling with sales compensation, this is one of those instances where too many options could be detrimental. Meaning, because you can slice and dice compensation in a number of ways, you feel the need to create an overly complex plan; or possibly worse, you settle on something far too simple because you think it comes with the least amount of headaches (that is, until your reps start gaming the plan, and you haven’t thought of all the possibilities).

For now, put all of that aside. The most difficult part of the process might just be getting started.

So, let’s narrow down the process to four steps. That’s it. Below are four activities to get you on the right track towards compensating your sales people in a way that is beneficial to both them and your organization’s goals. 

Step 1: Separate the Top and Bottom Performers

There is no one-size-fits-all way to compensate your people. A top performer compensated the same as those lagging behind will result in your best reps moving on to greener pastures. With bottom performers, rewarding them beyond what they actually deserve only adds fuel to the frustration fire, and might even lead you to sending out reps to on-sites who aren’t best suited for the job of interfacing with prized accounts. Questions to ask that will help you separate your performers include:

  • Are your sales people eager to sell and do they have a passion for selling, or are they just along for the ride?
  • What are the strengths and weaknesses of each rep? Who excels where?
  • Who is cashing out above 100% targeted earnings, and how does their performance relate to quota fulfillment?

Also, don’t forget about “middle” performers. A Harvard Business Review study shows companies can improve performance by 19% with effective coaching for their middle 60%. Being able to identify top, middle, and bottom performers is something your sales performance management tool should be able to do in a matter of a few clicks.

Step 2: Establish the Playing Field

Each rep needs to know where they can expend their efforts, and you need to be sure reps are provided with territories and opportunities that match your comp plan’s intentions. Things to consider:

  • Decide how you will segment the market and split territories: named accounts, vertical markets, company size and/or postal codes.
  • Check industry databases to ensure there are enough opportunities in the assigned territories.
  • Have a system for allocating/splitting credits as the need arises; sometimes shared credits will be necessary for sales that start in one territory but finish in another.

Step 3: Create the Stretch Goals

Quotas should be based on an achievable goal for the rep’s assigned territory or target accounts, but not everyone should hit quota – it needs to be a stretch; about 60-70% of your team should be achieving quota.

Sales teams with too many goals aren’t able to focus on the objectives that mean the most to the company and the bottom line. Weighting components should provide clear direction to the rep about what is the relative priority of each. Things to consider:

  • You will see spikes in revenue regardless of the performance period. Combine monthly and quarterly goals with the annual number to help guide reps and smooth out revenue.
  • The sum of rep quotas should correlate with the sales manager’s quota, though often it will add up to more than the manager’s total goal for the period.
  • Set your plan components for whatever makes sense (e.g., units, revenue, new customers, etc.). Components should be relevant to the individual rep who can influence the outcome. If you track multiple components, be sure to designate one as primary, and keep your team focused by limiting the number of components to no more than three.

Step 4: Dangle the Carrot

Now it’s time to decide how much of your company’s revenue you want to give to the rep. You should also set up payouts that accelerate once the rep hits different performance levels (which is why step three is so important). Things to consider:

  • Compare payouts at target to the previous year’s payments to see the impact of plan changes.
  • If everyone is at target, how much will the company pay out in total commissions? What about when everyone is above or below target?

Sample Sales Compensation Plan Framework

With those four steps in mind, it is crucial that you take a holistic approach when it comes time to designing your plans. Other elements that need to be considered (and that are explained through the additional resources below) include plan eligibility, on-target earnings, pay mix, plan mechanics, upside, performance period, payout frequency, crediting, and more.

Taking the Next Step(s)

While these four steps provide starting points, the fifth, sixth, and every step from here on out is up to you. Here are additional resources to consider when it comes to compensating your sales people:

Designing an Incentive Compensation Plan (Blog)

Taking Your SaaS Sales Compensation Plan to the Next Level (Blog)

5 Tips for Designing Successful Sales Comp Plans (Blog)

How to Communicate Your Compensation Plan (Blog)

Designing Sales Compensation Plans

  • Incentive Compensation
Karrie Lucero
Karrie Lucero
Creative Strategist

Karrie Lucero is a Creative Strategist at Xactly Corp. She earned Journalism and Marketing degrees from New Mexico State University and has experience in the tech and SaaS industries, content strategy and creation, video production, and brand storytelling.