How to Design a Sales Compensation Plan That Drives the Right Behaviors

Why the Right Sales Compensation Plan Matters

While sales compensation plans provide the framework for salespeople's earning potential, they are much more important than that in terms of conveying the importance of certain results and behaviors. If sales incentives are properly structured, they can help salespeople direct all their efforts on performing actions that contribute to business goals in the long term. Poorly structured incentive plans, on the other hand, can lead to undesirable behaviors that can negatively impact customers, profitability, and revenues in the future.

That is why creating a sales compensation plan goes far beyond choosing a percentage for commissions. Business leaders need to think about the company's sales strategy, desired results for the customer, sales process, and responsibilities of the sales roles, and behaviors that result in sustained success.

What is needed is to make salespeople see what is required of them, how performance will be assessed, and what the impact of their achievements will be on their salaries.

Start With the Sales Behaviors You Want to Encourage

First, you need to know what behaviors you wish the sales force to display before you can decide how much you should compensate them. The compensation system needs to encourage behaviors that will take the company towards the strategic goals.

A firm that wishes to expand the base of customers might have sales compensation that emphasizes new business or the number of qualified new accounts. A company that is looking to maximize the recurring revenue might emphasize customer retention and renewals. Another company could have a sales compensation plan that encourages strategic accounts, market entry, or cross-selling.

The important point here is that incentives need to reflect strategy. If management wants high-quality clients but the compensation system pays only for the number of sales, reps might naturally gravitate towards more quantity than quality.

Be careful about what your sales compensation pays for. Reps receiving compensation for heavily discounted business might end up discounting more than they would normally do. Likewise, reps paid only for sales will not care if the client is successful in the long term.

The sales compensation system should reward the right behaviors.

Align Compensation With Business Goals

After understanding the desired behavior, align it with broader business goals. Sales incentives should complement the organization's objectives, not exist as an independent system.

For example, when the organization wishes to generate profitable revenue instead of booking maximum revenue, the incentives model should be designed to match that goal. Also, if the organization values customer retention, then it should not reward the sales force with any incentives that encourage closing customers who might turn out to be unprofitable.

To achieve such a link, the organization must go beyond sales data. The following may be among those elements affecting the design of the incentives plan: revenue, profitability, retention, CLV, expansion of markets, strategic account growth, and other criteria.

The incentive compensation package of a single person should be linked with team or corporate performance, if necessary, to avoid situations when a sales representative meets the goals on an individual level while generating negative results from the corporate perspective.

The best incentive compensation package for sales staff provides a straightforward answer to the simple question: "What does the organization expect me to do, and what rewards will I receive for that?"

Choose the Right Compensation Structure

The design of sales compensation must match the nature of the sales position. There is no universal solution that fits all businesses.

Often a combination of base salary and variable compensation is used for sales teams. The first ensures stable income; the second links part of the income to performance. The ratio of fixed to variable components may differ depending on the nature of the sales position, its influence on the sales process, and the sales cycle.

In some cases, individual commissions can be a primary motivating factor for the employee; in others, bonuses related to team or corporate performance. Positions that include long and complicated sales cycles can require other types of structures than those that imply numerous transactional sales.

Finally, the structure must be comprehensible enough for sales representatives. It is expected that salespeople will not require any sophisticated calculations to determine their potential income by achieving the goal.

A compensation structure that is hard to comprehend creates doubts about the whole system. The simple structure reveals the link between performance and income.

Build Clear and Measurable Incentives

The key requirement of any good sales compensation plan is to have clear rules. The sales force should be aware of all the outcomes that will bring some compensation and how they are compensated.

First of all, you should outline key metrics that will be used to measure the sales performance of your reps. Depending on your business model, you can use revenue, gross margin, acquisition, MRR, expansion, renewals, or some other metric.

Secondly, you should have clear quota and threshold structures. You can offer different commissions depending on the level of achievement, including accelerators if your reps exceed their quotas. Such a structure can motivate sales representatives to perform well, although it is crucial to keep the rules of the game understandable.

Thirdly, all of the important terms should be outlined. Reps should know when the deal will qualify for compensation, how cancellations or returns will affect the incentive payment, and when account switching will change anything.

Balance Short-Term Results With Long-Term Sales Quality

The main problem in developing the sales compensation program is the problem of overemphasizing the short-term perspective. When each closed sale brings the same reward, it will produce intense pressure for sales, but it will lead to behavior that undermines performance in the long run.

The reps will be ready to discount heavily, to qualify customers poorly, and to sell those deals that are hardly going to be sustainable since their only aim would be to generate revenue immediately.

To minimize the negative effects of such an approach, one should build a compensation system that accounts for the quality of sales. Depending on the organization, the factors may vary from profitability to renewals, customer retention, and others.

This doesn't mean that one should complicate the compensation system unreasonably. It should be ensured that the fastest way to earn additional money won't be to behave in a way that will cause bigger problems in the future.

A proper sales incentive program provides a balance between short-term performance and sales quality.

Make the Sales Compensation Plan Fair and Motivating

It is crucial for any compensation plan to be equitable. Sales representatives would feel comfortable using such a compensation plan that gives them an opportunity to reach their goals and be evaluated based on objective criteria.

Territories, account prospects, markets, customer groups, and the sales cycle of an individual sales rep may vary, which should be reflected in the design of the compensation plan. There are differences in situations of individual sales reps that should not be neglected while designing the sales compensation plan.

On the other hand, the top performers must be given the opportunity to earn more money in case of exceptional achievements by means of accelerators and other performance-related motivators.

The transparency of the plan is just as important. It means that sales representatives should understand why certain quotas were set and how the commissions are paid.

It does not mean that the same opportunities should be provided to all sales representatives, but the sales compensation plan must be consistent and relevant to the role.

Review and Adjust the Compensation Plan

The sales compensation plan should not be static just because it has produced good results in the past. Things change in the market, in the firm's objectives, products, and sales approach.

It is important that the management constantly evaluates whether the compensation plan encourages the right behavior in salespeople. It may be necessary to look into what types of deals are being closed, what the customers are like, whether there is excessive discounting, how high the retention rate is, the revenue mix, achievement of sales quotas, etc.

Sometimes it turns out that the compensation plan introduces unintended incentives only when the plan starts working. New commission rules may encourage one revenue stream and discourage the other without even realizing that.

Employees' feedback may uncover additional problems with a specific compensation rule when employees constantly misinterpret it or cannot predict their own pay.

Conclusion: Reward the Behaviors That Build Better Sales Results

A good sales compensation plan should not only reward sales revenue but link organizational priorities, sales behaviors, performance requirements, and financial rewards clearly.

The first step in designing such a plan is to define the behaviors the organization would like to foster. Such priorities should be reflected in the sales compensation design, performance metrics, quotas, and incentives.

The plan should be transparent enough to give salespeople an understanding of how their sales behaviors affect their compensation. At the same time, the leadership should make sure that the business will not suffer from long-term consequences as a result of salespeople taking shortcuts and making deals that are potentially detrimental but bring instant revenue.

The most successful sales compensation plans achieve alignment. The sales representatives know what is important, the managers can reinforce the right sales behaviors, and the organization has a well-designed sales compensation system that helps pursue organizational strategies.

Designing a sales compensation system with such parameters as transparency, purposefulness, consistency, and measurability makes compensation more than a tool to compensate the salespeople. It becomes a sales strategy itself.

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