A company’s compensation plan is usually the cornerstone of its plan to motivate the salespeople to perform. If the plan is too generous, it fosters a culture of complacency. If the plan is too challenging, it can lead to costly turnover. Make sure that your sales compensation plan rewards the right behavior. Money drives behavior for salespeople. Regardless of what the plan is, good salespeople will figure out how maximize the money they can earn under the plan. As Greg Coleman, the President and Chief Revenue Officer at The Huffington Post has said, you need to create a plan that when salespeople “beat the heck out of it, the company is making a ton of money.”
Compensation plans are always evolving, especially with more and more salespeople no longer being primarily motivated by money. This has led to companies to find alternative methods for motivating and compensating their salespeople.
There was a time when most salespeople were paid solely on commission. However for the past two decades the pendulum has been moving away from commission toward higher base salaries and less variable compensation. Our experience has been that top performers prefer a compensation plan that is more heavily weighted towards commission where there is no cap on potential earnings. Your weaker performers want the security of a high base salary and a small bonus. When seeking guidance on what the going rate is for specific types of sales positions, and the balance between base salary and variable compensation the website called Salary.com is a good place to start.
Sales compensation is complicated and we recommend that you talk to colleagues inside your industry or consult an expert when devising your plan from scratch. Nevertheless, there are some fundamental rules to abide by:
- Make it Simple – Make it simple enough so that the salesperson can calculate the commission or bonus they will earn on every sale and be able to track their monthly earnings in a spreadsheet.
- Calculate the Variable Component on Gross Profit – The best way to ensure that salespeople do not discount is to pay their commission as a percentage of gross profit instead of as a percentage of gross revenue. This ensures that when they discount the price they are hurting themselves just as much as it hurts the company. When paying a commission on gross revenue the pain felt from offering a discount is felt more by the company than by the rep themselves. For example, let’s suppose the rep earns 1% on gross revenue. They would earn $250 on a $25,000 deal. If they discount the deal 20% to close it, the company loses $5,000 in profit but the rep only loses $50. Conversely, let’s suppose we assume a gross profit margin of 25% and you pay the rep 4% of gross profit. Gross profit on a $25,000 deal would be $6,250 and their commission would be $250. If they cut the price by $5,000 the gross profit is now only $1,250 and their commission on the deal would only be $50 instead of the $200 when calculated against gross revenue.
- Avoid Changing It. Salespeople always assume that a change in the compensation plan will be detrimental to them and this will have a negative impact on their motivation.