Three Tips to Design a Sales Compensation Plan
How to set commissions that motivate your team.
By Suzanne Paling •
Opinions expressed by Entrepreneur contributors are their own.
As we begin a new year, many business owners will consider revamping or creating a new sales compensation plan. It can be one of your most critical undertakings. The best plans serve as strong motivation for your sales reps and help you recruit top producers, which ultimately will boost your bottom line.
Of course, writing a compensation plan is a specialized skill. If you have the expertise, go for it. If not, consider hiring a compensation specialist to work with you and offer suggestions that are tailored to your small business.
Consider these three tips to help you get started:
1. Reward Top Producers
Remember your superstars. Design a plan that recognizes top producers for sales efforts over and above the average.
As an example, let's say your sales staff has a sales quota of $100,000 per month and they are paid a commission of 5 percent per dollar. Most of your reps sell between $103,000 and $110,000 monthly, but your strongest sales rep routinely brings in more than $170,000 a month. Then, you may want to consider paying 7 percent commission on sales revenue between $101,000 and $150,000 and go a little higher – say 10 percent -- for sales above $150,001.
The difference in income is as follows:
5 percent commission | ||
| Sales | Commission | |
| $170,000 | 5% | $8,500 |
Tiered compensation plan | ||
| Sales | Commission | |
| $100,000 | 5% | $ 5,000 |
| $ 50,000 | 7% | $ 3,500 |
| $ 20,000 | 10% | $ 2,000 |
| $170,000 | $10,500 | |
The tiered plan will entice a money-motivated superstar to sell more -- month after month.
2. Make Room for Sales Contests
Generally one to three percent of the amount available for sales commissions or bonuses should be set aside for contests. When a sales rep wins a gift certificate to their favorite store, movie tickets or passes to an amusement park, they feel good about themselves, their profession and the business they work for. In my experience, sales representatives typically enjoy longer tenures with companies that sponsor regular sales contests.
3. Don't Operate in a Silo
Once the elements of your new plan are in place, ask for guidance from a business mentor or fellow entrepreneur who has experience managing a sales staff. They can point out inconsistencies, inequalities or mistakes in your compensation plan. You also want to seek feedback from your sales staff; ask them what changes they would make. You may be surprised at the interesting and fair-minded suggestions that reps will share with you.
After you received all feedback, make the tweaks and finalize the plan as quickly as possible. You don't want sales reps holding off on closing deals because they're waiting for the plan to take effect. Once the compensation plan is official, you'll be sending out your sales reps on a clear path for success. Your entire organization will thank you.
This article is an excerpt from the book The Accidental Sales Manager available from Entrepreneur Press.
