The concept of sales compensation is reasonably straightforward—you perform a task, and your company rewards you for your efforts. But when you start to peel back the layers of that statement, it doesn’t seem as black-and-white as it did before because salespeople aren’t coin-operated machines. Yielding the kind of growth and revenue results organizations need isn’t as easy as putting a quarter into the machine and getting the same desired outcome every time.
A big part of successful sales compensation is implementing the right pay mix or combination of variables, like base salary, commission, and incentives, to motivate and inspire sales reps in your company to drive performance and exceed quota quarter-over-quarter.
When choosing a plan that is right for your organization, many questions will come up that will need to be addressed before moving forward into the fiscal year like:
- What exactly does adequate compensation for a top performer 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 leaders set quotas but provide no incentive for sellers to go above and beyond, reps aren't likely to make an effort to improve their sales performance further. When that happens, companies tend to experience a drop in performance after their numbers are met, resulting in a loss of potential deals. To help avoid that dip, here are five sales compensation best practices that will motivate reps and encourage them to achieve and exceed 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, they might feel discouraged and give up. Using historical data helps leaders determine what is attainable and set realistic stretch goals.
Alongside quota planning, leadership should also consider different sales commission structures within the overall compensation plans. For example, a tiered commission structure uses different levels of pay rates to motivate reps to continue improving performance—even after they hit their numbers.
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 sellers weigh the cost (effort) against the benefit (compensation), their earnings must be structured, so the benefit emerges the clear winner.
Of course, it's essential to make sure that leaders have accurate sales forecasting in place to improve pipeline visibility, enhance seller performance, and gain early insight into commissions earnings. That way, organizations can avoid a nightmare scenario—such as paying out high incentives when performance is low (often due to poor forecasting and compensation planning).
3. Tailor Employee Incentives to Job Roles
Comp plans should also be customized to specific roles to reflect their unique responsibilities. For example, companies wouldn't use the same compensation model for a manager and their reporting reps. Leaders should focus on creating incentives that drive middle- and bottom-performers to increase performance and reward those who consistently over-perform. These incentives encourage specific behaviors that will help organizations achieve sales and revenue goals.
4. Don’t Cap Your Commission Plan
Sales compensation plans must drive the behaviors you seek. If organizations reduce incentives after reps meet 120% of their quota, your sellers receive a clear signal to stop once that level has been completed. That means organizations are missing out on sales opportunities and achieving peak performance because reps hit their numbers and stop selling.
5. Shoot for the Bell Curve
Give your incentive compensation plan some time to align with organizational goals. Once that happens, you should then revisit data to determine if rep engagement has improved. If they 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. Try raising the bar. If their rewards are worthwhile, your sellers will rise to the occasion, which will result in higher performance rates and ROI for you.
Course Correction: Make Time to Make Money
Manually gathering data and other information from dozens of sources seems daunting, but companies must do this each year to create successful sales compensation plans. Fortunately, innovative and 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? Did you meet your goals? In a nutshell, your data will help you adjust the strategy that guides your business, allowing you to make better-informed decisions and optimizations for the upcoming year.
2. Evaluate Your C-Suite
See how other executive leaders and their teams are performing—including your c-suite, vice presidents, managers, and directors. Use the data to determine who is meeting goals and who isn’t. Strategies to fix this problem may include adjusting compensation and incentives or making strategic changes to other business areas.
3. Analyze Activities Surrounding Products and Services
Reports from your commission management software can give you insight into customer demand, illuminate opportunities for expansion, and highlight areas for improvement in operational efficiencies and productivity. 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 role gaps you may have while also offering visibility into the current headcount. This can help leaders make sure that current numbers align with future projections. Accurate visibility makes it easier to hire the right talent at the right time (a.k.a while you’re still in good shape) and 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. This will help aid you in making decisions that will 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 can confirm that you will 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 severe and expensive. According to the IRS, about 33% of all employers make payroll errors that result in costly penalties. Inaccurate payouts can also result in a lack of compliance with the Fair Labor Standards Act (FLSA) and—you guessed it—more fines.
If comp admins manage commission manually, they know that keeping track of varying comp plans can be time-consuming and confusing. Because the task is extremely tedious and manual, there's a higher 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—let them know what happened.
2. Own up to the error: Don’t try to cover it up, blame someone else, or minimize the damage. Admit the mistake 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 lose patience quickly 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, address your mistakes immediately.
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. This helps to ensure that 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.
Compensation is critical for recruiting and retaining top talent. By benchmarking against industry pay and performance data, sales leaders can ensure pay is competitive and fair. Remember, the cost of paying top reps is far less than the cost of replacing them.
Here are a few best practices that will help you avoid common sales compensation challenges:
Re-Evaluate Your 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. These combinations of incentives are meant to encourage specific sales behaviors that will help organizations achieve sales and revenue goals.
Just because someone has been with your company for a long time doesn’t mean they should be a manager. Different vital skills and behaviors characterize the best managers and the best sales reps. Promote the former while recognizing the latter with bonuses and other incentives.
Monitor Territories Closely
Sales territories are a crucial part of a strategic sales plan. That means organizations cannot skip over the effect poor territory planning can have on overall performance. Unfair and unbalanced territories can not only hurt team morale; it can also result in missed sales opportunities—leaving money on the table.
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, see long-term potential working at your company.
Want to learn more about compensation best practices? Download the full The 2019 Sales Compensation Administration Best Practices Survey