Sales compensation planning is a crucial part of organizational success. Because incentives motivate sales rep behavior, they have a big impact on company growth and revenue. However, designing strong sales comp plans is not always an easy feat. In fact, without access to data insights and sales comp best practices, this can prove to be a challenging task for companies.
More often than not, planning teams fall victim to a "this is how we've always done it" mentality. While this might have worked in the past, it's not helping you design a strong, strategic sales plan. This mindset does the opposite—keeping organizations from staying ahead of the competition. In fact, to stay head of the competition, companies must plan strategically, but also look to reinvent their entire sales organization.
First and foremost, however, sales organizations must take advantage of sales comp best practices.
10 Sales Comp Best Practices
When compensation plans are well designed, they help companies drive growth and increase their bottom line. However, it takes more than getting sales commission structures and pay mix right. There are several factors, leadership must consider to ensure sales comp plans are effective.
To help you build a strong, successful plan for the upcoming year, here are 10 sales comp best practices you need to know.
1. Plan with the Right Team Members
Before you even start considering variable pay options, you must have the right comp planning team in place. Incentive compensation impacts more than just sales teams. Therefore, your team should be made up of members from both sales and other departments, including:
- Sales Leadership
- Compensation Admin
- Finance & Accounting
- Human Resources
When you include more than just sales in your planning, you ensure that everyone is on the same page. Each representative will prioritize their department initiatives, so having a voice for each team means incentives work towards different team and overall organizational goals.
2. Use Data to Drive Planning
You can't truly implement sales comp best practices without access to data. This is crucial for any part of sales planning, including capacity, quotas, territories, and incentives. First and foremost, you need to consider historical data. How have past incentive plans performed? Were there elements that worked and others that didn't?
Use this data to inform how you go forward and improve in your sales comp planning. They key is to aim to improve, rather than maintain, performance with new plan. It's important to consider different compensation models and remember that just because something has worked in the past doesn't mean it's the best option.
3. Align Incentives with Company Goals
To be most effective, sales incentives must drive the right sales behaviors. Ultimately, this means they must be aligned with company goals. When incentives drive the wrong behaviors, you end up with a nightmare scenario: high amounts of reps hitting quota, but you're missing the mark on organizational goals. That means lower revenue and less growth.
As a sales comp best practice, incentives should drive behaviors and actions that add towards company goal completion. For example, if the goal is to increase revenue selling product X, ensure that incentives motivate sales reps to sell product X.
4. Benchmark Against Industry Pay Data
Because sales is a highly competitive industry, organizations must stay ahead of competition by hiring top talent. To do this, your sales compensation must be competitive in order to attract and retain talented sales reps. So how do you know that you're paying competitively enough to attract and retain top performers? With data.
Benchmarking your internal pay and performance data against industry data ensures you're paying reps competitively. When your pay is fair, equal, and competitive, you also help reduce sales turnover. Ultimately, sales compensation is your company's largest investment—and in order to see real ROI, the incentives must motivate sales reps to close deals.
5. Tailor Compensation to Different Sales Roles
No two sales roles are the same—and under sales comp best practices, neither should their incentive plans. Think about the different responsibilities on your sales team. Managers and their reporting reps don't perform the same day-to-day tasks, and their sales comp should reflect that.
Compensation should be tailored to individual sales roles so that they have more control over them. For example, because sales managers spend more time completing admin tasks and less time selling, their pay mix should include a higher base and lower variable pay (You can see the full breakdown of comp by role in the Complete Guide to Sales Team Compensation.)
6. Examine the Relationship Between Tenure and Performance
According to Xactly Insights data, the average sales rep hits their peak performance level at the three year mark. At this point sales reps have gained enough experience to achieve quota at the highest level. Prior to this time (years 1-2), reps aren't as tenured, and won't perform as high. At the 5+ year mark, performance tends to decline, and companies should look to rep's career goals and possibly move them into a new role, segment, or territory.
Incentives should reflect these experience levels. Less experienced reps are still onboarding and learning, and therefore, they might initially need an incentive boost. This is where companies often implement a draw against commission. As reps gain experience, their variable pay should increase alongside their performance abilities.
7. Aim for Incentive Plan Simplicity
When incentive plans are complex, companies see a higher attrition rate. While the incentives themselves are important, to truly implement sales comp best practices, your planning should also focus on plan mechanics. The key is ensuring everyone understands how the plan works.
Sales reps need to understand why it works so they understand what the actions they need to perform to hit quota. Compensation admins must understand how the plan functions, how to assign shared credits, and how to accurately pay out commissions. The best plans are simple in their mechanics and functionality, but are also effective in motivating reps to do their job.
8. Communicate Your Plan Effectively
Communicating your incentive plan is just as important as design. Again, it comes down to ensuring everyone understands how the plan works. This means from top down, leadership must be transparent in rolling out the plan. Explain what is expected from sales reps but also how they benefit from any changes.
The key is to make sure everyone on goals and plan functionality. When the entire company is on the same page—from sales to comp admins, to HR and sales leadership, everyone can work more efficiently and effectively towards organizational goals.
9. Take Advantage of Automation
80% of organizations struggle with compensation payment inaccuracies. Whether this derives from lack of a single source of truth, human error, or version control of spreadsheets (80% of which contain errors)—the point is manual processes cause a lot of costly problems. Especially when manual payout processes take the average company up to 6 weeks to complete.
Consider the following example. A company pays 500 employees $100k in incentives. That equals $50M paid out in incentives. If the business operates with a 3% payout error rate, that's $15M that is mishandled in compensation—a big cost for a small error percentage.
Automating incentive compensation helps fix this. In fact, using automation companies are able to:
- Achieve up to 99% payout accuracy
- Complete 100% payout in 3 weeks or less
- Save up to 172 hours per month of admin time
10. Consider Non-Financial Compensation
Financial compensation is often the most popular incentive offered to employees because money is a powerful motivator. However, non-monetary incentives have also proven to be successful (sometimes more so than money) at encouraging sales teams to perform.
Talk with your sales teams to find other compensation items that can be added to your comp plan. For example, you might consider tickets to local events, such as a sporting event, concert or festival as incentives for sales reps (check out a list of more than 100 non-financial incentive ideas here).
Putting Sales Compensation Best Practices into Action
As you start updating and changing your compensation plan for the new year, remember that it does not have to be a daunting task. With sales comp best practices in mind, you can create an incentive plan that motivates employees and is a win-win for every department in your company! Already have a new incentive plan for next year? Schedule your personal Xactly demo to help implement your plan more smoothly!