How To Create A Sales Compensation Plan

If you are a sales or business leader how can you create a sales compensation plan that will improve sales results?  Here are four rules that will help guide you in devising highly effective pay plans.

Rule #1: Drive Desired Sales Behaviors

Every great pay plan is built on the idea that compensation drives behavior.  So the first step in forming an effective compensation plan is to identify the specific behaviors you want your sales people to engage in.  How can you do this?   You start with the strategic business objectives of your organization and then build a pay plan that rewards sales people for executing the behaviors that accomplish those objectives. 

Far too often management blindly constructs pay plans that incentivize sales people to sell against the goals of the company.  They pay them to focus on the wrong customers, products and activities.

To make sure that this does not happen to you, ask yourself:  Are all of your customers of equal value?   Does your compensation reflect the profit and growth objectives of your organization?  Then once you know exactly what you want your sales team to accomplish, align your pay plan with these goals. 

Rule #2: Focus On Generating Revenue, Not Saving Money

Too often I see compensation plans that are more focused on saving money than generating revenue.  These inept compensation plans actually de-motivate sales people and decrease sales.

For instance, in an effort to save money one company required sales people to give up 50% of their commission if they received any help from their sales manager.  This is in spite of the fact that the data showed that when sales people did receive assistance from their sales manager, closing rates nearly doubled.  Yet, instead of leveraging this in their favor to boost sales, company leadership created a pay structure that compelled reps to only use a manager after exhausting all options.  This nullified the previously disclosed closing ratios because the manager was only called in when a miracle was needed to revive the sale.  The result of this flawed pay plan was a devastating decrease in sales results.

So I encourage you to make sure that your compensation plan is focused on profitable revenue generation, not saving money.  Pay plans concentrated on reducing expenses are counterproductive because they cost more than they save.

Rule #3:  Understandable and Transparent

When it comes to sales compensation plans there is credibility in simplicity.  Excessively complex plans create unnecessary clutter and usually breed distrust.  In contrast, effective pay plans are transparent and can be easily tracked by everyone involved.

I suggest that when crafting your compensation plan you make it simple enough that a third grader could understand it.   This may sound basic, but don’t confuse complexity with sophistication or effectiveness.  Great pay plans are always straightforward and transparent.

Rule #4:  Attracts and Retains Top Performers

What kind of sales people do you want on your sales team?  Does your compensation plan help you attract and retain those individuals?  Your pay plan should help you create your ideal sales team.  Make no mistake, top performers will rarely subject themselves to weak compensation plans, so create a plan that rewards heightened levels of performance.   In other words, you only get what you pay for.

By following these four rules of effective compensation plans you will motivate your sales people and drive the specific sales behaviors that will help you grow your business.