How to Setup a Commission Plan in Six Easy Steps!

Karrie Lucero
Karrie Lucero
In Incentive Compensation
Karrie Lucero is a Content Marketing Manager at Xactly. She earned marketing and journalism degrees from New Mexico State University and has experience in SEO, social media and inbound marketing.

Motivating your sales reps is one of the key factors of sales success. You want reps to find new customers, upsell existing customers, and close deals on a consistent basis. Yet, how do you motivate them to not only make the sale but also overperform?

It’s no lie–money motivates. This is where your commission plan comes in. It plays a large factor in how well your salespeople perform because it holds the incentives that drive reps’ sales. As a result, it is imperative to set up a sales commission plan that motivates your sales teams, compensates them for achieving agreed upon milestones, and attracts and retains the best talent in your industry.

 

Ready to build a plan? Access ready-to-use templates to get started in minutes. Or, download our guide, "Designing Sales Compensation Plans," for more details.

1. Think of Your Salary Mantra

The most common commission plans are made up of a salary and commission package or salary and bonus, but it is important to also consider other factors, such as benefits, 401ks, memberships, and company perks. For example, Google has gone above and beyond to attract the best global talent with perks not typically found in organizations, such as on-site dry cleaning and day care.

In all reality, employees never need to leave a Google campus. Of course, most companies don’t have the same types of resources that Google does, but nonetheless, you still need to think of how you can compensate your sales team as a whole. When building your sales compensation plan, ask yourself:

  • Do we want to offer salary with a commission or bonus package?
  • How does our company’s compensation plan compare to the competition?
  • Are we incentivizing the right sales behaviors?
  • Should managers be paid on the same plan?
  • What metrics qualify employees for a raise?

When answering these questions, put yourself in your sales teams’ shoes. Consider the actions you want to encourage and the incentives you want to drive those sales behaviors. This means you must also consider your base pay for sales reps. Some companies pay purely commission or a base salary with a bonus or commission plan.

In commission-only compensation plans, employees don’t earn a base salary and are paid for each sale they close. While this can save your company money, reps may try to sell products clients don’t want just to pad their paychecks, which is something that can certainly backfire on your company.

If sales people are necessary to move your products and services, then it might make sense to offer a salary with a commission or bonus. In these plans, reps earn a base salary with additional commission or a bonus for reaching quota.

Of course, you want to ensure reps are selling the right products to the right prospects and clients. In contrast, if your salespeople perform a role where they are main servicing clients, then a larger base salary might be the best option.

2. Take a Look at Your Competition

In today’s job market, employees may switch from one company to the next–in the same industry–looking for the best commission structure and compensation system. When building your compensation plan, it is critical to understand how your competition compensates their employees.

A tool such as Xactly Insights for Sales can be helpful in finding the right compensation structure. With Insights for Sales, you can see how reps in your industry are paid compared to your company. With this information, you can develop a sales compensation plan that will attract and retain top sales talent in your industry.

3. Think of Sales Behaviors

Your incentives must be tied to performance. It is important to define the sales behaviors needed to reach company goals and incent reps to focus on those sales. You must also consider how to identify sales reps that are overperforming, reaching quota, or failing to reach quota. Each performance level should receive different compensation. Ultimately, you want to heavily reward top performers and weed out poor performers.

It is also important to remember that not all sales reps have the same responsibilities. Your sales managers will have a wider set of responsibilities than the reps reporting to them. Therefore, their compensation plans should be structured differently (Read more about compensation best practices here).

4. Offer Financial and Non-financial Rewards

If you have launched a new product or service, or want to pick up sales for an established line, it should be prioritized in your compensation plan. Emphasize the top priority sales to reps by offering larger incentives for higher-priority products or services.

Naturally, the goal should be to push your sales reps out of their comfort zone to make sales. You may consider setting a limit on discounts for deals, so that each sale benefits both the company and the sales rep.

In addition to financial compensation, consider offering reps additional non-monetary rewards, such as concert or sporting event tickets, trips, or team outings and dinners. These incentives often motivate reps to overperform as well as or better than traditional commission.

5. Set Up Commission Tiers

Another method for keeping your top sellers motivated is through commission tiers. To illustrate, if your average sales per employee is $10,000,  you might set the first tier at 10 percent for sales between $10,0001 and $13,000. The mid-level commission tier might be a 13 percent commission for sales between $13,001 and $15,000. And you may have additional commission levels for larger sales and higher commission rates after reps meet quota.

6. Consider Your Company Culture

When paying for performance, you want to keep your company culture in mind. Happy employees are more productive and motivated in any job setting. For example, when Jack Welch was the CEO of GE, the bottom 10 percent of employees were let go each year. This motivated employees to continually give their best effort.

However, motivating employees takes more than the threat of losing their job. You must also consider offerings within your culture that make employees want to stay and attract new talent. This can include on-site gyms, parking and transportation reimbursement, or team incentives, such as weekly or monthly lunches.

Ultimately, you want your plan to focus on:

  • Your company goals
  • Employee satisfaction and motivation
  • Incentives that drive desired sales behaviors
  • If the plan is cost-effective for your company

Final Thoughts

It is important to remember that no compensation plan is perfect and successful plans require a lot of thought, planning, and tweaking throughout the fiscal year. The right compensation plan for your company should be competitive within your industry, but more importantly it should drive the sales behaviors needed to reach company goals, be within your budget, and motivate and incent your employees.


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How to Setup a Commission Plan in Six Easy Steps!

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