The concept behind sales compensation is fairly straightforward: you perform a task, and are rewarded for your efforts.
If someone performs a task for you, you reward that person accordingly. It is not difficult to grasp the general principle here, as it is the basis for labor in general – put in time and effort, get out wages.
Except that sales compensation goes beyond this simple mechanic in practice. Pay is what you receive for doing your job, but commission is your incentive to push yourself past a standard level of performance, the inspiration you need to achieve growth.
So what exactly is adequate compensation for top performance? What pitfalls are there to overpaying vs. underpaying? How do you even know if and when you are paying too little, or too much? The answers to these and more questions are ahead, so buckle up and grab a pen – we are going to lay out sales compensation best practices, figuring out just what works and what you need to achieve inspired performance. (For even more details, download the comprehensive guide "Sales Incentive Compensation 101.")
Making the Mark – The Power of Benchmarking
When you set sales quotas at a certain level but provide no incentive for reps to reach higher, they’re not likely to make an effort to further improve their sales performance. According to information from Xactly’s empirical database, only about one-third of reps meet 120% or more of target incentives. An incentive attainment bell curve shows a spike at 100%, which drops off as the percentage of quota attainment climbs.
If your organization experiences a drop in sales performance after quotas are met, and you’ve been wracking your brain for solutions to this problem, just follow these four steps to push reps to reach their full potential:
1. Set the bar at the right place. If you set the bar too low, reps are unlikely to reach higher. If you set it unrealistically high, they might feel discouraged and give up. Use historical data to determine attainable goals, and then set stretch goals that can be met.
2. Make it worth it. Just like the track coach has to incent athletes to jump higher, you have to motivate sales reps to perform beyond quota. When the rep weighs the cost (effort) against the benefit (compensation), compensation must be structured so the benefit emerges the clear winner.
3. Don’t cap your plan. Your compensation plan must drive the behavior you seek. If sales incentives are reduced after reps meet 120% of quota, you are sending reps a clear signal to stop once that level has been met.
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 just hitting quota, it’s because they’re only meeting the expectations you set. Raise the bar, make their efforts to reach it worthwhile, and they will jump to new heights.
Course Correct – Making Time to Make Money
The thought of manually gathering information from dozens of sources seems daunting, and it would be; fortunately, innovative automated commission management software lightens your load 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:
- 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.
- 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.
- 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.
- 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 current staff aligns with future projections. Accurate visibility makes it easier to hire the right talent right now — when you’re still in good shape — not when you might be struggling to keep it together in the fourth quarter.
- 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 you have enough muscle power left at the end of the year to raise a celebratory drink to your organization’s success.
For more information on how an end of first quarter analysis can benefit your company, read Q1 Sales Compensation Plan Check Up — See What’s Working.
Breaking a Few Eggs – The Danger of Compensation Errors
Sales compensation mistakes 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. Add to this the cost of overpayments and the cost of turnover when unhappy reps seek more accurate employers, and the price you pay for sales comp errors is high, indeed.
If you’re managing sales commission manually, you know that keeping track of varying comp plans is time-consuming and confusing. Because the task is so tedious, payroll employees are bound to make mistakes – its statistically inescapable. When you find errors, here are four steps to getting back 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 it, 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.
To err is human, but mistakes that seem small can have big consequences.
Close the Revolving Door – Engagement and Top Performer Retention
The team members who have been with you the longest are worth hanging onto, especially as a growing business. Maintaining a retention strategy targeted toward them can help keep them and their valuable, time-tested experience. It also avoids the cost of turnover.
Experienced salespeople are especially critical when you’re trying to scale. That’s why you can – and should – use your sales incentive compensation program to help keep experienced staff around. But is longevity itself reason enough for a bonus?
Here are a few compensation potholes you need to sidestep along the way to creating a solid pro-retention plan:
- Watch your pay mix. If you’re constantly 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 track payouts at a glance.
- Promote carefully. Just because someone has been with your company a long time, doesn’t mean 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 your territories. Tenured sales reps might use their institutional knowledge to negotiate better territories with other sales reps, so watch out. Instead, allocate territories across your sales team in a way that is fair to everyone.
- Give public recognition. Affirmation goes a long way—and it’s free! Recognize your salespeople during staff meetings. Present plaques to hang in their cubicles, or rewards they can add on LinkedIn. In the process, you’re telling the rest of your sales force that they have long-term potential for the company.