The Do’s and Don’ts of Designing a Sales Compensation Plan

Figuring out your company’s sales compensation plan can simultaneously be one of the biggest headaches and one of the most important aspects of your sales organization. Which model you choose and how you design it will have far-reaching consequences for your entire organization. A poor plan will likely harm your ability to attract and keep top sales reps, encourage the wrong selling behaviors, negatively impact your revenue, and, in extreme cases, ruin your business.

Conversely, the right plan can help you find great talent, boost your sales, and ensure long-term employee and company health. There’s a dizzying array of options out there – too many to outline in something as short as a blog post. What we’ll instead do here is discuss some basic dos and don’ts when formulating your sales compensation plan – regardless of your industry, company size, age, or number of sales reps.

The Don’ts

1. Avoid making changes without consulting your sales reps first. There may be good reasons to make changes to your compensation plan. Perhaps a change in revenue requires a change in the compensation structure. Maybe there’s a new owner who wants to explore alternative ways of designing compensation.But don’t unilaterally impose changes without having a conversation with your sales team first. Representatives may have useful ideas about how to shift compensation and even if they don’t, taking into consideration your team’s desires, wishes, and motivations can pave the way for a new compensation plan that works for everyone – even in those cases where hard choices have to be made and compensation has to temporarily be cut.
2. Avoid complicated compensation plans. We’ve seen some compensation plans that practically require a mathematics or economics doctorate – stuffed with so many variables: accelerators, decelerators, clawbacks, tiered commission structures, gradients based on experience, the position of the constellations and Mercury in the House of Jupiter (okay, the last is a joke) – that sales reps are confused and don’t understand how much they’re making or why.A confused sales team is inefficient at best. Keep it simple so that your reps can focus on what they do best: getting qualified clients and closing deals.

The Do’s

1. Connect your compensation plan to your business objectives. One of the ways to make your compensation plan do a lot of heavy lifting is to align it with your company objectives. For example, if your goal is to sell your higher profit products, you might want to have a plan that incorporates commission on gross margin. If you want to build market share, your compensation wouldn’t use gross margin and instead be designed to reward other behaviors, such as a bonus on X number of new contracts achieved in a tracking period (whether monthly, quarterly, or annually).
2. Research the compensation plans of your industry competitors. Because so much of a compensation plan’s structure is customizable, it’s well worth your while to get a sense of what other players in your industry are doing. That’s not to say you have to copy them – in fact, you could draft a compensation strategy that serves as a differentiator in the labor market and makes you a more attractive employer to top talent.But without being aware of what others in the industry are doing, you can neither create the differentiator (bar blind luck) nor have a sales compensation plan that fits in with your vertical – and the latter could result in your compensation either being too low (can’t attract quality sales reps) or too high (damages your profitability).
3. Consider different compensation for different sales roles on your team. A sales development rep and a field sales rep will have completely different tasks, objectives, and KPIs they’re measured by. Given that fact, the same compensation plan used for both probably doesn’t make much sense. Instead, the SDR should have a compensation plan that rewards outcomes like sales-qualified leads and sales-accepted leads; whereas the FSR’s compensation is obviously tied to more traditionally thought of sales metrics like deal size and number of sales.In essence, devising your compensation strategy to account for the goals and KPIs of different sales roles is like designing compensation around your business objectives – only on an individual, micro level rather than a global, macro one. It’s also a smart move – one that will make your sales reps more productive and focused on their assigned job duties, driving the behaviors that will have the greatest positive effect on your bottom line.

Sales compensation plans are a tricky business (no pun intended). There’s a seemingly unlimited number of options and ways to plot them out. But using these basic principles will give you a start on crafting the framework to a successful compensation strategy.

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