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Business Resources

7 Things to Consider When Designing Sales Compensation

October 7, 2015 | Written by James Alberson

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. Here are my top 7 things to consider when designing an effective sales compensation plan.BizX_Blog_James_Alberson_Sales_Compensation

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.

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.?

The Compensation Break Down

Target cash compensation is the amount of base pay plus incentive payments targeted for employees who achieve the expected performance results. Factors to consider include job content, scope of responsibility, whether you want to pay market rate (lower or higher), your budget, and internal equity of sales payments.

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.BizX_Blog_Sales_Compensation_James_Alberson

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.

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%.

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.

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