WHAT SHOULD YOU DO if you have a unique product or service, and a solid sales team supporting it, but you still aren’t realizing your company’s potential? How can that happen? Often, your compensation plan is not encouraging the right sales approach, or even worse, it may be draining the motivation from your sales team. Changing your compensation structure can reward the right behaviors, boosting your bottom line.
Step One: Establish a Total Compensation Target First, find out what your competitors are paying their top performers. Next, identify what ideal total compensation target you want your top sales reps to reach — their ideal total base and variable pay combined. Ideally, your top sales professionals who are hitting 100 percent of their targets should earn at least what the market is paying elsewhere — or even more.
Step Two: Determine the Compensation Mix Your sales cycle, market maturity, and the type of sales position all play a role in determining the ideal mix between base and variable pay. If your sales cycle is long — usually taking six months or a year, for example — combine a high percentage of base pay with less variable pay, or establish a salary guarantee to ensure a new rep can make a living while building his sales pipeline. If you have a shorter sales cycle, lean more heavily toward commissions. Remember that the type of sales position you’re offering is also an important factor. Are you hiring “farmers” to maintain and up-sell existing customers, or are you looking for “hunters” to track down new business? Hunters are generally comfortable with high commission-based compensation plans, while farmers prefer a more predictable compensation model with a higher degree of base salary.
Step Three: Decide on Performance Measures Next, determine the goals you need your sales team to reach. Generally, in newer markets, companies pay based on a percentage of total revenue a sales professional generates. In established markets, previous sales benchmarks make it easier to set specific sales quotas. Another way to approach performance measures is to establish a short list of goals which could be a combination of revenue generated, sales quotas met, new prospect activity, profit margins earned, or even volume of a specific new product sold. Prioritize goals, and weight them in increasing importance. You should also consider including a component based on management discretion to reward performance factors that are hard to quantifiably measure.
Step Four: Establish a Payment Formula and Parameters In creating your compensation formula, consider setting a minimum commission threshold so that each sales professional generates enough business to cost-justify his base salary before earning commissions. You might also integrate a “stretch goal” that significantly increases the sales rep’s commission once the goal is met.
Step Five: Conduct Modeling Finally, apply your proposed new comp plan to your sales team’s actual performance during the last two years. How would the team have faired under the new plan compared to the old one? If your sales team isn’t reaching sales targets, look at your compensation plan. Remember, in more ways than one, you get what you pay for.
