The Life Cycle of Your Sales Compensation Planning Season

Dec 19, 2017
6 min read
A properly structured sales compensation plan is one of the most effective tools for maximizing profits. Discover what areas determine a successful plan.

A properly structured sales compensation plan is one of the most effective tools for maximizing profits. With the new year fast approaching sales planning season is upon us—meaning now's the time to take a good look at your compensation plan. Let's begin with a quick refresher.

What Is a Compensation Plan?

For the uninitiated (or rusty), in sales, compensation plans often include both monetary compensation in the form of a minimum salary, as well as non-monetary perks such as retirement plans and health or dental insurance. Occasionally, employees are offered additional financial bonuses for completing impressive goals over the course of the fiscal year.

Most importantly, your company's compensation plan is its sale engine. And just like a car engine, you need to check on and tweak your compensation at least annually.

Did Last Year's Compensation Plans Turn Out to Be Ineffective in More Ways Than One? 

Looking back at this past year, did your employees seem to be unusually distracted or stressed? Was your bottom line affected by payout complications or variable expenses? The best sales compensation plans provide a non-biased method for retaining hard workers and rewarding their contributions to your business.

Why Do Sales Compensation Plans Matter?

Successful business owners know and understand the importance of a well structured and competitive compensation plan, and how to limit each plan, in an effort towards maximizing net profits. An excellent compensation plan will also appeal to the best applicants, without offering them too much up front, allowing room for unexpected bonuses or raises in pay in future years.

Adequately compensated employees are recognizable through a positive and productive work environment and employees who complete job responsibilities enthusiastically. When in place, the right compensation plan will save valuable time in the recruitment and replacement process, and allow upper management to concentrate on more critical tasks.

In addition, an appropriate compensation plan will enhance your employees' overall understanding of their job title and expectations. Do you find that your employees often misinterpret sales goals? Did you experience an increased number of compensation disputes than you would have liked last year?

Perhaps the time has come to make some modifications regarding your sales compensation models and their life cycle. So, how do you go about making changes to your current sales compensation plan, or how do you create a plan for a new business?

Look at Various Roles

Executives and members of upper management often receive compensation plans that differ from sales and lead representatives. Not to mention, you may want to offer more compensation for loyal and valued employees who have been with your business for a long time.

Don't forget, however, that even the best employees start at entry level so be sure to offer a starting compensation package that is both appealing to qualified prospective employees, but also protects your business from having to rehire, should the applicant decide that they are not suited for the position.

Consider Varying Sales Compensation Models

Ultimately, there are three factors to consider in compensation: salaries, commission rates, and bonuses: 

  • Employee salaries are a direct payment from you for the time that your employee invests in your company. Many business owners prefer to keep this number to a minimum, to protect against unnecessary losses in labor costs, in the event of unmet sales quotas.
  • Commission plans are a standard way to reward salespeople for their achievements, and a percentage of goods sold usually dictates commission rates. Commission rates account for the majority of your sales team's earnings and should be adjusted according to their worth to increase motivation in sales, and line up business and employee interests.
  • Bonuses can also come in many forms, such as health or dental insurance, retirement benefits, free meals, company vehicles, cellular accounts, gas and paid vacations among other things. Furthermore, some business choose to offer monetary bonuses to select high-performing employees on a regular basis.

Create A Sales Compensation Plan Template

Take a minute to think about how compensation plans have worked for you, your business and your employees in the past. Take what you know that you have to offer, and consider your ideas seriously during this process. What roles does your organization currently fill?

It is recommended to use a separate template for each position, and different templates for multiple levels of experience within each role. It is also crucial to examine all of the possible elements that your compensation plans could include, for every individual role within your business.

On-target earnings take into account the total amount of earnings that each sale and lead generation rep should receive, provided that they achieve their sales goals. If you have many years of experience running your business, you should have a fairly decent idea as to how to best construct this base model for compensation. If you are new to sales, look at any available salary surveys or market data sets before thinking about this base number.

At-risk earnings are available only when sales goals are reached, and can not only motivate sales representatives to succeed but also protect your business from unnecessary or undeserved payouts. At-risk, also known as an add-on, bonuses may seem unfair but are the base of most sales compensation plans and will be accepted by most applicants.

Then, think about the pay mix that you want to offer on the downside of things—keeping worst-case sales scenarios in mind. On the other hand, you also need to consider protecting your business against top performers.

Yes, these employees exceed sales goals, and they do indeed deserve higher compensation and higher end-of-day earnings. Yet, how much more will they earn in comparison to those that are performing at their sales target? Will you place a cap on salaries, or decelerate payment rates when employees meet certain sales levels?

How will you decide the point at which an employee is considered a top performer and moves onto the next pay grade? What sales quotas will you set, by varying compensation plans? Will these expectations be different from role to role, area to area? Who will get credit for each sale?

Many employees consider recognition compensation in itself. It is also essential to keep timing in mind. Over what period will you measure the performance of your employees? What is the length of your business' sales cycle, and the start of your fiscal year? How often should your reps be paid out for their sales performances?

There are many benefits to a quick payout, but some downsides to consider as well. Lastly, consider other perks and incentives that you may be able to offer to your team as compensation, such as paid vacations or employee trips, sales contests, and short-term incentives or spot bonuses.

Legal and Accounting

Remember that compensation laws are in place in many areas of the world and that your company must abide by them. Sales compensation plans can be time-consuming to put together, and it is easy to overlook small details when it comes to legal matters or the overall accounting of your business' financial reports.

If in doubt, it is always a wise decision to first consult with a lawyer or accountant. Sales firms with solid compensation plans can hire the best sales and lead representatives, and make them feel motivated, focused and valued over their successful course of employment. So, when is the best time to roll out your new company compensation plans? You should consult with upper management, as well as legal and accounting before making any final decisions.

Nonetheless, it is commonplace for new plans to take effect at the beginning of the year, to simplify the tax reporting and record keeping process. As a result, you don't have much time. This year, eliminate ineffective compensation plans that prevent your business from maximizing profits and take the next step towards meeting and exceeding your personal and professional goals.

Final Thoughts

When in doubt, talk to your most trusted employees about how they feel their ideal compensation package should look. They will likely give you an in-depth description. After all, they have the first-hand experience and know what will ultimately motivate them.

  • Incentive Compensation
  • Sales Planning
Ronald Sierra
Ronald Sierra
Content Writer

Ron Sierra is a Content Writer at Xactly. He earned a literature degree from UCSC and specializes in creating value-driven content for professionals in everything from construction to tech to sales & finance.