Are you ready to setup a brand new sales commission program? We’ll walk you through all the steps. But let’s start with a reminder of why you need to setup a sales incentive program:
- You want to generate more sales motivation
- You want to better incentivize your employees
- You want to promote specific sales behaviors
- You want to increase retention and reduce churn
- You want to attract top sales talent
Step 1 – Gather Sales Data
Sufficient data gathering is an absolute requirement to design a great sales commission plan. Data gathering will help you understand past sales performance, but also plan ahead and avoid disasters. The type of data you will need includes the following:
- HR – current sales roles and responsibilities
- HR – base salary vs. commissions for each role (historical)
- HR – market / competitor sales compensation benchmarks
- HR – stats about sales attrition (sales churn)
- Finance – sales volume by product, by quarter, by territory, etc.
- Finance – general profitability data (ex: profit per product lines)
- Finance – variance / distribution of sales commissions
- Finance – paid commissions vs. revenue vs. profit
- Sales – assessment of effectiveness for past incentives
- Sales – documented rules of engagement (ex: split commissions)
- Sales – historical quota and target attainment
Equipped with this type of data, designing your new incentive program will be a lot easier. Key data will be available each time you need to make a key decision. Also, going through this exercise will help you answer the following questions:
- Is our current sales compensation competitive?
- Which sales incentives have led to the best results?
- Are sales quotas or targets attainable and set correctly?
- Are there big differences in terms of who gets paid what?
- How many reps are we losing every year over commissions?
- Is the amount paid in commissions financially sustainable?
Step 2 – Gather A Team
You probably need a planning team of at least 4 individuals to create a great sales incentive program. If you want to make the design process more inclusive, your team could be as large as 6 by including top sales reps / sales managers. In addition, you will likely need to go through legal at some point of time in order to wrap up your program. So who do you really need on your planning team?
- A Sales leader – to set the general direction for your incentive program.
- A Finance leader – to ensure your incentive program remains cost-effective.
- An HR leader – to review compensation and ensure payroll feasibility.
- A SalesOps leader – to gather key stats and implement required automation.
Here are some optional individuals to include:
- Legal representative – to think about all the “gotchas” (ex: FMLA leave, interns, etc.).
- Territory managers – to ensure your sales incentive plan will work in all regions.
- Payroll managers – to ensure reps will be paid the right amount – on time.
- A representative per sales role (ex: one for SDRs, one for BDMs, etc.).
This will be a working committee which should meet frequently. By keeping the number of individuals under 6, you can make sure everyone will always fit in any conference room and keep making progress.
Step 3 – Identify Capacity
Before working on sales incentives, you need to make sure you have the right capacity. In fact, this step is also a unique opportunity for you to redesign broken territories, roles, or synergies. Here is a recap of what you need to think about and plan for:
- Overall capacity
- Roles & synergies
If you don’t have enough sales capacity, your new commission program will fail because a lack of resources will prevent your reps from reaching goals. If you have too much capacity, commissions will be spread among too many individuals.
You also need the right roles. Some organizations will choose to create new job titles, shift responsibilities between roles, or redefine how different roles work together. Extra effort will be required if multiple reps can be involved in a single deal.
Finally, you need the right territories. Your territories don’t need to be physical (ex: West Coast vs. East Coast). They can also be virtual (ex: legacy products vs. new products). This is an opportunity for you to re-balance things and better define expected sales behaviors.
Step 4 – Define Incentive Plans
The next step is to define several incentive plans. Some organizations will only have one incentive plan, but many will have a dozen or more. You can make the plan design process fairly systematic by answering the following questions:
- What is the name of the plan?
- Which sales roles does it apply to?
- Which sales behavior does it promote?
- Which products does it apply to?
- Which type of sales does it apply to?
- Which territories does it apply to?
- When are commissions paid?
- Is this an individual or team-based plan?
- Is the offered compensation competitive?
- Are the goals challenging but attainable?
Here is an example:
- This plan is called “New Product Line + Channel”
- This plan applies to senior BDMs only
- This plan promotes profitability of new products sold to channel partners
- This plan only applies to new products
- This plan only applies to channel sales
- This plan applies to all US territories (not international)
- This plan pays commissions every quarter
- This plan is for individuals (not teams / territories / managers)
- On-target compensation is 10% above local competition
- About 75% of reps should be able to reach quotas
Next, it’s time to go into more depth and agree on details such as:
- Is there one level of attainment (simple quota) – or multiple ones?
- Are incentives based on revenue, profit, or something else (ex: scoring, bonus)?
- How exactly are incentives calculated?
- Are there any limits or caps to the plans?
- What are some of the gotchas (ex: new hire, transfers, interns, etc.)?
Step 5 – Test Incentive Plans
Once you’ve completed step 4, you should have a clear idea of your incentive plans and how they will work. Now it’s time to test the theory! For example, suppose that your sales end up being 5% lower than expected. You don’t want to end up in a situation where your incentive design could cause every rep to receive no commissions and quit. To prevent this, it may be useful to run simulations.
In order to truly test your sales commission plans, you need to be methodical. Here are various “qualities” you need to evaluate as part of your test:
- Is the incentive program easy to explain to the team?
- Is the expected total spend acceptable to the Finance team?
- Will the payroll be able to pay reps the right amount on time?
- Will SalesOps be able to implement the required customization or automation?
- Which types of reports must be created to monitor performance or spend?
- Is the plan robust in terms of handling unexpected scenarios (ex: mega deal)?
- Has the legal team reviewed and accepted the plan?
- Should all new plans be deployed at the same time (vs. a pilot)?
- Will some reps be able to cheat the system?
One possible option is to not switch to new plans immediately, but run the new plans “in parallel” with existing ones. You can then make sure everything works while working with real sales data. In other terms, make your new incentive plans (and commissions) hidden until you’ve practiced them.
Step 6 – Communicate And Deploy
Your are almost there! Now it’s time to communicate your sales commission program. All sales compensation programs have many moving parts and so it’s easy for things to break. Make sure you have everybody’s support. If someone isn’t ready (ex: payroll), your brand new shiny initiative could fail. Communicating with everyone involved while asking stakeholders to formally sign off on the plan, helps ensure everyone understands their responsibilities.
Making Planning, Execution, and Measurement Easier
Sales commission plan design and reporting doesn’t have to be daunting. Using automated solutions such as Sales Cookie, you can easily design incentive plans and measure performance. In addition, all reps have access to a personalized dashboard where they can review progress, goals, and commission payouts real time. They will spend less time on shadow accounting (calculating their own commission) – and more time on selling.