Most sales compensation plans include two key components: a variable sales commission, and a more predictable base salary. The secret behind designing an effective sales commission structure is to define what everyone’s target total compensation should look like. Once you’ve defined performance-based target total compensation, you have a great starting point because you’ve established some level of control over total spend.
Step 1 – Choose A Sales Commission Structure
Here is a sample target total compensation table:
Typically you’ll want “Average” to represent 70% of sales employees – and “Struggling” and “Outstanding” to represent another 15% (each). With this in place, the next step is to define a mix between predictable vs. variable compensation. For example, you could decide that base salaries should represent 60% of everyone’s total compensation.
You could use one type of mix across all positions. Or you could use different mixes depending on the position. For example, you could decide that more established senior BDMs should be on commission plans weighing salaries more heavily than variable commissions (ex: to promote stability). Here is a sample fixed vs. variable mix table based on titles:
|Title||Fixed (Salary)||Variable (Commission)|
|Senior BDM||70% of target total comp.||30% of target total comp.|
|Junior BDM||60% of target total comp.||40% of target total comp.|
|Senior ADR||60% of target total comp.||40% of target total comp.|
|Junior ADR||40% of target total comp.||60% of target total comp.|
Step 2 – Define The Variable Component Based On Business Goals
Congratulations! You’ve fully defined fixed vs. variable pay – based on attained sales performance and job titles. You have a good basis for estimating total spend. Now it’s time to understand which business goals you want to promote – and how to measure sales performance (these should be well aligned).
For example, should sales performance be based on total revenue, revenue growth, total profit, or profit growth? Do you want any dollar in revenue to always be counted as 1, or should it be counted as more than 1 for some products whose sale you want to promote? How do you want to penalize refunds? Do you want to reward representatives based on their own individual performance, or based on their team’s performance? What about territory managers? Is it possible that a competitive ranking could make more sense than a target number?
Here is an example of a relatively simple revenue-based plan:
However, by now, it should be clear that simple, traditional revenue-based quotas may not match true business priorities. Unless you want to limit things to traditional revenue quotas, you probably need a proper incentive plan designer (sign up here to use a free incentive plan designer). And you probably need a software solution with sufficient flexibility to calculate and manage more complex commission structures.
Step 3 – Spice Up Your Incentive Plan
To make your commission plan more exciting, you need to spice things up. To do this, you can add special rewards for reaching difficult yet attainable business goals. Those can be “SPIFFs”, prizes, awards, badges, or general employee recognition. You can also offer multipliers and other accelerators for outstanding sales performance (although cash is not always what leads to higher levels of performance).
Step 4 – Consider Hidden Complexities of Incentive Plans
Defining your plan’s commission structure is just a start. You need to make sure your plan is legally protected. You need to ensure your plan meets new accounting rules (especially in terms of order-to-commission tracking). You need to define a process for formally enrolling participants and possibly collecting e-signatures. You need to prepare for situations where a representative leaves the team. You may also need to handle cases where total spend exceeds a certain limit. You need to decide who is authorized to view and release rewards. This is obviously quite a bit to deal with, but the plan designer mentioned above takes care of those.
Step 5 – Implement Your Commission Plan
Once you’ve defined your commission plan, it’s time to implement it, including:
- Communicating your plan
- Enrolling participants
- Measuring performance
- Handling disputes
- Verifying crediting
- Releasing rewards
- Monitoring spend
- Allowing participants to review crediting
- Allowing participants to review rewards