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What is Sales Compensation?

Sales compensation is the combination of base salary, commission, and other  incentives used to motivate sales reps. Learn planning and management tips.

6 min read

Sales compensation is the combination of base salary, commission, and incentives that are used to drive the performance of a sales organization. A sales compensation plan is the individual plan for a sales representative within your sales organization, and it should be designed with specific concepts and components in mind, based on their role within the sales cycle, types of sales engagements, seniority, and more.

Different sales team roles will require plans that are unique to each rep. Sales compensation management is the method of overseeing plans and ensuring components drive performance aligned with organizational goals.

Importance of Sales Compensation

Leveraging targeted incentives within a sales compensation plan creates a new level of value within your sales organization, allowing you to achieve results and encourage behaviors in a way that is tailored to individual roles within your organization.

Sales compensation influences the behavior of everyone in your organization, from sales reps to senior-level executives. A one-size-fits-all approach simply doesn't work when you need to impact a variety of roles across your department. Therefore, it's important that compensation be tailored for different sales roles.

The Need for Sales Compensation

Top-performing sales organizations rely on compensation as the driver of their sales performance. Most often, compensation is the sales performance management tool of choice to achieve strategic objectives. There is a large opportunity here to leverage sales incentive compensation to improve employee behaviors and performance.

With the right kind of sales compensation plans, companies can reward desired behaviors to create better and more consistent performancenot just on a one time basis, but monthly, quarterly, and yearly.

Targeted, benchmarked incentives can set your company up to succeed from the start, and enable tactical adjustments throughout the year to adjust to changing market conditions. Sales compensation is improved dramatically by the inclusion of compensation planning tools that are designed to give you empirical insights and improve your plans without relying on hunches or gut feelings.

Automating Sales Compensation Management

There is a critical difference between the strategy and the execution of sales compensation. The proper strategy is essential, but without automation, effective execution is nearly impossible. The biggest issue companies face is compensation errors. In fact, a 1% error rate in commission calculations can result in a $22,500 error expense.

By automating sales comp, companies take control of their sales compensation process, drive performance with built-in features like leader-boards and badges, and motivate their sales force with increased, mobile visibility.

Sales compensation only works when it is top of mind for sales, and you can encourage this by providing easy access to commission estimators and competition elements like leader-boards that rank your team. This makes your plans more powerful than they ever could be in a manual system.

Bringing in a sales performance management solution to improve your sales compensation practices is key to achieving greater performance and ensuring a return on your investment in sales compensation.

Sales Compensation Plan Components

Sales comp plan components are the defining factor for what and how you plan to measure each particular sales role. An empirical, big data platform like Xactly Insights™ will enable you to benchmark the elements of your plans against industry compensation best practices, allowing you to remain competitive against your peers.

These elements should be objective in nature, easy to understand, and limited to a specific, focused number – usually no more than three, based on comparative analysis. This allows your reps to work towards goals that are most important to both your business and your bottom line.

You can also weight specific elements to highlight their significance. Plan components should follow the ABCs of compensation and be:

  • Aligned to job roles and responsibilities
  • Relevant to individual reps that can actually influence the outcome
  • Forecasted and tracked with ease
  • Focused on a particular outcome or result

Certain principles should be used to guide the sales incentive compensation design and planning process. Typically, a well-designed sales compensation plan should be aligned to sales roles, based on company culture and philosophy, and constructed to drive the right sales behaviors.