Top 7 Things to Consider When Designing Sales Compensation

Are you concerned about whether your sales compensation program is designed for optimum revenue attainment?  You aren’t alone.  Many of the business owners and sales managers we work with at Sandler Training Seattle share those concerns.  Following are my top 7 things to consider when designing an effective sales compensation plan.

1. Keep the Purpose In Mind – The purpose of sales compensation is to reward the sales professional for their role in leading the customer to a revenue-generating buying decision.  Keeping this in mind will help you determine where the “point of persuasion” occurs and what people or positions should be eligible for incentive compensation.
2. Define the Sales Job – All good sales compensation plans stem from good job design.   Factors to consider include scope of responsibility, degree of accountability, level of customer contact, and influence over the company’s financial goals.  It’s also important to consider where in the sales cycle the position impacts the customer and what customer segments the position will serve.  Are customers segmented by geography, industry, size, etc.?
3. Determine Target Cash Compensation – Target Cash Compensation is the amount of base pay plus incentive payments targeted for employees who achieve the expected performance results.  Factors to consider are include job content, scope of responsibility, whether you want to pay market rate (lower or higher), your budget, and internal equity of sales payments.
4. Determine Mix of Base/Incentive Pay – Pay mix in sales is the ratio of base salary to target incentive expressed as a percentage.  As a general rule, the more influence the salesperson has over the customer’s decision to buy, the greater the incentive portion and lower the base.  For example, new account territory sales jobs tend to have a pay mix of 60/40 meaning Total Target Cash Compensation is 60% base / 40% incentive pay.  Major account sales jobs are typically 80/20 and average B2B sales jobs are 70/30.
5. Determine the Pay-At-Risk Leverage – Leverage is the upside earning potential for the position expressed as a multiplier of the target incentive amount.   This number helps you define optimum sales performance.  For example, 2X (double leverage) means the target incentive for optimum performance is twice the amount for expected performance.  3X (triple leverage) means the target incentive for optimum performance is three times the amount for expected performance.
6. Select Relevant Performance Measures – Performance measures must align with the company’s revenue goals with the desired behavior of the salesperson.  Production /volume measures are the most popular since the core responsibility of most sales jobs is to expand the company’s market share and grow the customer base.  Other measures include: product/service measures, account measures, and milestones achieved.  There should be no more than three measures for each sales position, and none should be weighted less than 15%.
7. Select Your Incentive Plan Design – There are four basic sales compensation plan designs:  Base salary only, commission only, base plus bonus, and base plus a combination of commission and bonus.   Factors to consider include: whether the plan encourages the desired behaviors, level of customer influence, assignment of territories (equality of opportunity), length of sales cycle, and complexity of the sale.

As you have probably figured out by now, developing your own sales compensation plan is more complex than can be described in a blog post.  For a great “how-to” book, check out David Cichelli’s Compensating the Sales Force.   For more information on sales compensation trends check out WorldatWork’s October 2010 Sales Compensation Programs and Practices Report.

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