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U.S. organizations spend more than $800 billion yearly to manage their sales force, with $200 billion devoted solely to compensation. Almost 80% of U.S. firms revise their compensation structure every two years or less, to better motivate salespeople and to tailor their behavior to the constantly evolving sales environment.
This blog will share seven tips to help you set up a great sales compensation system.
We'll start by figuring out the right mix of salary and commission. Then, we'll discuss setting tough but achievable sales goals and why it's important not to cap your team's earnings. We’ll also cover how to offer rewards that matter to your team and fit their roles, plus ways to encourage habits that lead to more sales.
What is sales compensation?
Sales compensation is how companies pay their salespeople for their work to sell products or services. It's like a reward system for salespeople. Companies use different methods to determine how much to pay, such as a fixed salary, commission based on sales, or a combination of both.
The goal is to motivate salespeople to work hard and sell more, which benefits both the salesperson and the company.
What are the key components of sales compensation?
- Base Salary: This is the amount of money salespeople get regularly, like every month. It stays the same even if they don't sell much. It's like a steady paycheck.
- Commission: This is extra money based on how much they sell. The more they sell, the more they earn. It's like a bonus for selling a lot.
- Bonuses: These are extra rewards for selling well. They get them when they meet or beat their sales goals. It's like a special prize for doing a great job.
- Incentives: These are special rewards to motivate salespeople. They can be things like trips, gifts, or awards. It's like getting a treat for doing well.
- Benefits: These are extra things the company gives to help the salesperson. They can be health insurance, retirement plans, or paid time off. They're like extra perks for working hard.
Importance of sales compensation
- Boosts Sales Performance: Good sales compensation plans encourage salespeople to hit their targets and even go beyond. This helps the company sell more and make more money.
- Attracts Top Sales Talent: Offering attractive pay packages helps companies bring in the best sales professionals. Talented salespeople are more likely to join companies that reward their hard work well.
- Keeps Employees Happy and Loyal: Competitive pay helps keep salespeople satisfied and loyal to the company. When sales reps feel they are paid fairly, they are more likely to stay longer, reducing the need for constant hiring and training.
- Aligns with Company Goals: Well-designed compensation plans ensure that salespeople's efforts match the company's goals. This means sales activities are focused on what the company wants to achieve, like entering new markets or launching new products.
- Ensures Fairness and Transparency: Clear compensation plans create a sense of fairness and openness in the company. When salespeople understand how their pay is calculated, it builds trust and reduces conflicts, leading to a better work environment.
7 excellent sales compensation best practices to follow
1. Establish the pay mix ratio
Determine the balance between base salary and commission in your sales compensation plan. For some sales roles, a typical pay mix might be 70% base salary and 30% commission, while others might have a 50-50 split. This ratio should reflect the company's sales strategy, financial goals, and industry standards. A higher base salary provides stability, while a higher commission motivates salespeople to perform better.
To determine the right pay mix ratio, consider industry standards, the length of the sales cycle, and the overall sales strategy. For example, industries with longer sales cycles might benefit from a higher base salary to provide stability, while those with shorter cycles might focus more on commission to drive performance.
2. Set achievable sales goals
Setting sales targets that are challenging but realistic is key to keeping your sales team motivated. Goals should be based on past sales data, market trends, and your overall sales strategy. Involving your sales team in setting these goals can make them feel more invested and motivated to achieve them. Regularly providing feedback and support can also help them stay focused and overcome any obstacles. Consider offering rewards or recognition for reaching or exceeding these goals to keep motivation high.
Setting realistic and attainable sales goals is crucial for several reasons. Firstly, it helps maintain the salesperson's motivation and morale. When goals are within reach, salespeople are more likely to stay engaged and focused on achieving them. Unrealistic goals, on the other hand, can lead to frustration and demotivation.
3. Don't limit how much can be earned
Salespeople should have the opportunity to earn unlimited commission by selling more. This motivates them to continuously strive for higher sales volumes, benefiting both the salesperson and the company. By removing caps on commission earnings, you encourage a culture of performance and excellence, where salespeople are rewarded for their efforts and contributions to the company's success.
4. Offer attractive rewards
In addition to cash bonuses, trips, or gifts, consider offering other meaningful incentives to your sales team. This could include recognition in front of their peers, opportunities for career advancement, or special privileges within the company. Tailoring rewards to the preferences and motivations of your sales team can make them more effective in driving performance and morale.
Examples of attractive rewards include cash bonuses, which provide immediate financial gratification, trips or vacations, which offer a memorable experience, and recognition programs, which acknowledge and celebrate the achievements of salespeople. These rewards can vary in scale and frequency to cater to different preferences and performance levels.
5. Match rewards to the job
Matching rewards to the job is crucial in sales compensation to ensure salespeople are motivated and rewarded appropriately for their efforts. This starts with clearly understanding the role, including its responsibilities and requirements. It's important to align the reward structure with the organization's overall goals and sales objectives, ensuring that incentives drive the right behaviors.
Complexity also plays a role; factors such as the size of the target market, product complexity, and sales cycle length should be considered when designing the reward system. Conducting a competitive analysis can help determine industry standards for similar roles, allowing for adjustments to ensure competitiveness. Customization is key, as rewards should be tailored based on individual performance and contribution to encourage motivation and engagement. A balanced approach, incorporating base salary, commissions, and bonuses, provides a comprehensive reward package that appeals to a variety of motivations. Regular review and adjustment of the reward structure are essential to keep it competitive and aligned with the evolving needs of the sales role.
6. Encourage the right sales habits
Encouraging the right sales habits is crucial for effective sales compensation. Here's why:
- Focus on Behaviors: Reward behaviors that align with long-term success, like building strong customer relationships or exploring new markets, not just immediate sales.
- Training and Development: Offer training to improve skills and knowledge, reinforcing positive behaviors.
- Feedback and Recognition: Provide regular feedback and recognition to reinforce desired habits.
- Setting Clear Expectations: Clearly define expectations for sales habits, ensuring everyone knows what's expected.
- Team Collaboration: Encourage collaboration and knowledge-sharing among sales team members to foster a positive culture.
- Continuous Improvement: Emphasize the importance of continuous improvement, encouraging sales reps to learn from both successes and failures.
- Incentivize Learning: Offer incentives for completing training programs or acquiring new skills, promoting a culture of learning.
7. Clearly communicate and regularly review your compensation plan
It's important to ensure that your sales team understands how they are being compensated and what they need to do to earn more.Clear communication and regular reviews of the compensation plan are essential. Salespeople need to understand how they can earn rewards and what is expected of them. This clarity motivates them to perform well. Regular reviews ensure the plan stays aligned with the company's goals and can be adjusted as needed. This adaptability is crucial in a changing business environment. Reviews also provide a feedback loop for salespeople to suggest improvements, ensuring fairness and effectiveness for all.
Case studies
Here are 2 case studies of businesses that have successfully used the above sales compensation best practices and have seen significant results.
1. German luxury auto brand boosts sales with Compass
A prestigious German luxury auto brand faced challenges in maintaining a competitive edge in the highly saturated luxury automotive market. Their primary goal was to enhance their top-line sales and improve the efficiency and motivation of their sales team.
Challenge
The luxury auto brand's sales figures stagnated, and its sales teams struggled with low engagement. The primary challenges were outdated sales incentives and a lack of transparent communication regarding performance metrics and compensation. This led to decreased motivation among sales representatives, directly impacting their sales performance and, consequently, the company's overall revenue growth.
Solution
To address these challenges, the brand partnered with Compass to implement a comprehensive sales enhancement strategy that included:
- Sales Commission Management Software: Introduction of Compass's sales commission management software to automate commission calculations and streamline payout processes.
- Sales Gamification Techniques: Implementation of sales gamification to boost sales team engagement and competition.
- Real-Time Sales Analytics: Integration of advanced analytics tools that provided real-time insights into sales trends and individual performance metrics.
Results
Within just 90 days of implementing the new sales incentive program through Compass, the German luxury auto brand saw significant improvements in several key performance indicators:
- Top-line sales grew by 11%, directly attributable to increased sales activity and higher closing rates among the sales team.
- Sales team engagement soared, with a notable increase in sales reps' active participation in pursuing higher sales targets.
- Payout accuracy reached 96.2%, ensuring that sales reps were compensated correctly and promptly, boosting morale and trust in the system.
2. Sales compensation redesign at a leading food and beverage company
A distinguished food and beverage industry company boasting a 120-year legacy of market leadership encountered growth stagnation. Despite several attempts by the internal team to address the issues, no effective solutions were found, prompting the need for external expertise. Empirical Consulting Solutions was engaged to uncover the root problems and devise a strategic response to revamp the sales compensation framework to stimulate growth and enhance results.
Challenges
The primary challenge was the existing compensation structure, which was not effectively driving the sales team towards achieving business objectives. This misalignment resulted in stagnated growth and decreased motivation among experienced sales personnel. Additionally, the company faced pressure to retain existing market share and expand into new, emerging markets.
Solutions
Empirical Consulting Solutions adopted a comprehensive approach to address these challenges:
- Evaluation and Gap Identification: The initial commission structures were thoroughly assessed to identify weaknesses and immediate opportunities for improvement.
- Alignment of Sales Goals: Collaboration with the executive team helped align sales objectives with both short-term and long-term strategic business goals, focusing on account expansion and market penetration.
- Development of New Compensation Plans: Targets and incentive plans were benchmarked against those of high-performing organizations to ensure competitiveness and effectiveness.
- Implementation and Communication: A new incentive plan was rolled out, accompanied by extensive training and coaching to ensure salespeople were well-prepared and informed.
- Tools for Performance Tracking: Empirical provided advanced tools for planning, measuring, and reporting performance to facilitate ongoing adjustments and improvements.
Results
The restructuring of the sales compensation plan yielded significant improvements in the first year:
- The client saw a 10% increase in gross profit.
- There was a $500K reduction in the costs associated with the sales plan.
- The new plan improved pay alignment with business priorities and helped retain top sales talent.
Conclusion
In conclusion, setting up a strong sales compensation plan is more than just about paying your team—it's about creating an environment where everyone is motivated to achieve their best. You encourage hard work and smart work by establishing a balanced pay mix, setting attainable goals, offering unlimited earning potential, and providing meaningful rewards.
Remember, matching the rewards to the job and promoting the right sales behaviors are key to sustaining success. Also, never underestimate the power of clear communication and regular check-ins; they keep everyone aligned and focused on common goals. Implement these seven best practices, and you'll be well on your way to building a motivated, high-performing sales team.
