The concept of sales compensation is fairly straightforward: you perform a task and are rewarded for your efforts. Sales incentive compensation, on the other hand, is a bit more complex. Incentives are meant to encourage specific sales behaviors that will help organizations achieve sales and revenue goals. However, it's important to implement sales compensation best practices to ensure your incentive plan is motivating and successful.
A big part of successful sales compensation is implementing the right pay mix, or balance between base and variable pay. Comp plans should also be tailored to specific roles to reflect their unique responsibilities, for example, companies wouldn't use the same compensation model for a sales manager and their reporting reps. Sales leaders should also focus on creating incentives that drive middle- and bottom-performers to increase performance and reward those who consistently over-perform.
On that note, what exactly does adequate compensation for top performance look like? What pitfalls are there when it comes to overpaying vs. underpaying? How do you know if and when you are paying too little or too much? Fortunately, by implementing sales compensation best practices, continuous analysis, and data-driven planning, organizations can answer these questions and avoid common compensation mistakes.
Sales Compensation Best Practices
When sales leaders set sales quotas but provide no incentive for reps to reach higher, reps aren't likely to make an effort to further improve their sales performance. When organizations experience a drop in sales performance after quotas are met, the success of the company takes a hit with lost potential deals. To help avoid a performance drop, here are four sales compensation best practices that will motivate reps and encourage them to achieve and exceed their quota.
1. Set the Quota Bar at the Right Place
Accurate and precise quota planning is a necessity for sales team success. If leaders set the bar too low, reps are unlikely to reach higher. If they set it unrealistically high, sales reps might feel discouraged and give up. Using historical data helps leaders determine what is attainable and realistically set stretch goals for sales teams.
Alongside quota planning, leadership should also consider different sales commission structures within the overall sales compensation plans to motivate reps. For example, a tiered commission structure uses different levels of commission rates to motivate reps to continue improving performance—even after they reach quota.
2. Make Incentives Worth the Effort
To be effective, sales incentives must be authentically motivating. If incentives aren't enticing enough, reps won't be motivated to reach and exceed their goals. When reps weigh the cost (effort) against the benefit (compensation), their compensation must be structured so the benefit emerges a clear winner.
Of course, it's important to make sure that leaders have accurate sales forecasting in place so that the company can "afford" the compensation their reps earn. That way, organizations can avoid a nightmare scenario—such as paying out high incentives when performance is actually low (often due to poor forecasting and compensation planning).
3. Don’t Cap Your Commission Plan
Sales compensation plans must drive the behavior you seek. If sales incentives are reduced after reps meet 120% of quota, reps receive a clear signal to stop once that level has been met. That means organizations are missing out on sales opportunities and achieving peak performance because reps hit quota and stop selling.
4. Shoot for the Bell Curve
Give your incentive compensation plan some time to align with your goals, and then revisit data to determine if rep engagement has improved. If reps are still just meeting or barely exceeding quota, take a closer look at your commission plan and the actions it’s driving.
If your sales reps are barely hitting quota and then reducing their efforts, it’s often because they’re only meeting the expectations you set. Raise the bar, make their rewards to reach it worthwhile, and they will jump to new heights.
Course Correction: Make Time to Make Money
Manually gathering data and other information from dozens of sources seems daunting, nevertheless, companies must do this each year to achieve successful sales compensation planning. Fortunately, innovative automated commission management software makes this easier by providing up-to-the-minute data for accurate research, analysis, and insight—all in one place.
Here’s how to use data for your Q1 check-in:
1. Gauge the Success of the Organization
How do this year’s results compare to last year’s, and, did you meet your goals? In a nutshell, your data will help you adjust the strategic plan that guides the direction of the business, allowing you to make better decisions about everything from hiring to spending.
2. Evaluate Your C-Suite
See how other executive leaders and their teams and divisions are performing, including your president, vice presidents, managers, and directors. Use the data to determine who is meeting goals, and who isn’t. Strategies to fix problem areas may include adjusting compensation and incentives or making changes to your staff.
3. Analyze Activity Surrounding Products and Services
Reports from your commission management software can give you insight on customer demand and opportunities for expansion. Use the information for forward-thinking development and implementation of organizational strategy.
4. Assess Your People Plan
Do you have the right people in the right jobs to meet company goals? Data will highlight any gaps and can also tell you if the current staff aligns with future projections. Accurate visibility makes it easier to hire the right talent right now—while you’re still in good shape—not when you might be struggling to keep it together in the fourth quarter.
5. Keep Tabs on Risk
Run reports that will provide insights on potential credit risks, project or service failures, competitive behavior, and shaky markets to help you make decisions that mitigate risk moving forward.
If you wait until the fourth quarter to tackle these issues, the load could be too heavy to bear. Use your compensation management software to perform a Q1 check-up now—so that you have enough muscle power left at the end of the year to finish strong.
The Danger of Sales Compensation Errors
Sales compensation errors can be serious and expensive. According to the IRS, about 33% of all employers make payroll errors that result in costly penalties. Compensation errors can also result in lack of compliance with the Fair Labor Standards Act (FLSA) and—you guessed it—more fines.
If compensation admins manage sales commission manually, they know that keeping track of varying comp plans can be time-consuming and confusing. Because the task is so tedious and manual, there's a high risk of error. Here are four sales compensation best practices to keep administration on track:
1. Contact the individuals/entities impacted by your mistake immediately: The IRS, the local or federal government, and/or your employees—and let them know what happened.
2. Own up to the mistake: Don’t try to cover it up, blame someone else, or minimize the damage. Admit error and apologize.
3. Fix it, and fix it fast: The government starts exacting fines when you are as little as one day late, and employees get really grumpy when their paychecks don’t reflect what they’ve earned. If you don’t want costs to accrue, and if you want your best employees to stick around, make your mistake go away ASAP.
4. Prevent future errors: Use sales compensation management software to manage payroll. This type of software completely removes the manual element from the compensation process, ensuring deductions are correct and that you’re adhering to FLSA guidelines. You also won’t have to spend hours and hours slogging through spreadsheets only to go back when errors are found and spend more time correcting inaccurate commissions.
Engagement and Top Performer Retention
The team members who have been with the organization the longest are worth hanging on to, especially as businesses grow. Maintaining a retention strategy targeted toward them can help keep them and their valuable, time-tested experience. It also avoids the cost of turnover.
Compensation is critical for recruiting and retaining top sales reps. By benchmarking against industry pay and performance data, sales leaders can ensure compensation is competitive and fair. The cost of paying top sales reps is far less than the cost of replacing them.
Here are a few sales compensation best practices that will help you avoid common sales compensation challenges:
Re-Evaluate Sales Pay Mix
If you’re only increasing salary with tenure, your incentive compensation plan could lose effectiveness. When you give rewards for results, you’ll motivate continued success. Just make sure you can track payouts at a glance.
Just because someone has been with your company for a long time, doesn’t mean he or she should be a manager. Different key skills and behaviors characterize the best managers and the best sales reps. Promote the former. Meanwhile, recognize the latter with bonuses and other incentives.
Monitor Territories Closely
Sales territories are a key part of a strategic sales plan. In fact, poor sales territory planning hurts more than just sales team morale. Unfair, unbalanced territories result in missed sales opportunities—leaving money on the table.
Luckily, by using data-driven territory planning, companies can effectively map territories to ensure each rep has an equal chance to meet quota—and that no sales opportunities are missed.
Give Credit Where it's Due
Affirmation goes a long way—and it’s free! Recognize high-performing sales reps during all-hands meetings. Present plaques to hang in their cubicles, or certificates they can highlight on LinkedIn. In the process, reps will find affirmation that hard work is rewarded, and ultimately, that they have a lot to look forward to in terms of long-term potential at your company.
Want to learn more about compensation best practices? Download the full 2019 Sales Compensation Administration Best Practices Survey.