What’s Sales Compensation & How Can You Make it More Effective?
June 30th, 2022 (Updated 03/10/2023) | 7 min. read
For a lot of organizations, their salespeople are the main drivers of bringing in deals and making money. So, it’s no surprise that you’d want to make sure that they are well compensated. But how do you make the sales compensation plan effective and fair so that your sales team continues to be motivated to bring in deals that grow your business?
At Pricefx, one of the topics we’ve been discussing recently with our customers is sales compensation and sales performance. We’ve been discussing how to make sales compensation more effective and connect the dots between marketing sales, and finance pricing to drive better company results and to better incentivize salespeople.
In this article, we will discuss what you can do to make your sales compensation plan more effective so that your teams are motivated to close deals.
What is a Sales Compensation Plan?
Let’s start first with what a sales compensation plan is and why it’s important for organizations like yours. A sales compensation plan is the combination of base salary, commission, and incentives that constitute a sales representative’s earnings. The compensation plan is a fantastic way for the salesperson to gauge how they’ll make money and can serve as an indicator of how an organization will grow its revenue. The compensation plan is built to incentivize selling behavior and reach a quote by:
- Ensuring that salespeople sell within the given guidelines
- Selling larger deals,
- Or selling more deals depending on the needs and goals of the individual and organization.
The looks like a good plan, right? If the salesperson gets paid more for reaching specific goals, then every person should reach those goals that strengthen the organization’s overall objectives then it’s a win-win situation.
However, issues like misalignment, a lack of transparency for salespeople to understand how they’re performing, a lack of flexibility and more make compensation plans a source of tension and can lead to:
- Costly mistakes in budgeting and;
- Behavior that doesn’t align with topline strategic goals.
How to Make Your Compensation Plans Effective and Fair
Identify the Topline Objectives Your Organizations Want to Achieve
What would you like to get done in a given timeframe? More logos? Revenue through partnership? Without understanding what the goal is, then you might incentivize the wrong behavior in your sales team. Once you do this, you should ask yourself, “will this incentive help me to reach my goal?” if it doesn’t then you need to rethink the plan.
The Quotas Should Be Achievable
The last thing you want when putting together your plan is to have your team revolt because the quotas you set are unattainable. That doesn’t mean that they should be so easy as to not present a challenge to the individual. So, let’s say that you’ve determined the average deal size, close rate, average deal cycle length, and other relevant factors. If you have 1 rep that needs to close 1 million in a quarter, and the average deal size is 100,000. Knowing how many demos, meetings, cycle length of a 100,000 deal, and more you might determine that 1 million would be impossible. However, you find that 750,000 is a good challenge.
Work with All the Relevant Stakeholders to Develop the Plan
Achieving your business objectives requires having your sellers properly incentivized. That takes a lot of change management, but before you can even get there, you have to make sure to get everyone on the same page. So for instance, marketing is thinking about how to drive branding and how to drive campaigns in the market. Sellers are worried about in most cases, volume, uh, your finance department is worried about profitability and your pricing team is thinking about how to drive the overall strategic pricing strategy across your product portfolio. How to get all of those team members on the same page, not to mention getting your management team to buy into, uh, what sales incentives are appropriate for your sales team. This is critically important to bring these four teams together, to make sure that you have the right incentives driving the right behaviors and that you have the right number of incentives so that you can focus on the strategic goals of the organization and make sure the individual goals are aligned to the company goals. This is what it means to have an effective sales compensation program.
Make Incentives Flexible and Available in Real-Time
You’ll want to be flexible as you go through the month, quarter, or even year. Your sales leaders and your sales administrators should have the ability to make adjustments and changes to the program over time, based on changing market conditions. The past couple of years has certainly proven that point.
There are changes that are outside of your organization’s control, and you have to make sure you can make those adjustments so you can continue to drive the right behaviors for your sellers. After all, the point of the compensation program is to incentivize. If market changes make it so that quotas are now impossible to reach, you don’t want your reps to become increasingly unmotivated.
In addition to flexibility, visibility is also incredibly important. So, as you give flexibility to your sales leaders and to your sales administrators, it’s also important to give visibility to your sellers so that they see the incentives in real-time.
Choose The Right Sales Compensation Solution
As with some plans, you’ll want to think about the right systems and tools to have in place to enable your processes and people. Now, whether you select multiple systems and you integrate those, or you choose one system that brings it all together, it’s incredibly important for everyone to be working off the same source of truth. As an example, one of the things that we see very often is that adjustments and disputes are handled outside of a system. As a result, salespeople end up doing their own calculations because they feel uncertain about where they stand in terms of meeting their quotas and how much money they would make.
A system is incredibly important to driving the most value: by connecting your price strategy with your deals, your quotes, and your sales compensation you will improve your organization’s sales effectiveness. That’s the way to win in the market. If you’re an organization with a large sales team, and you’re struggling with some of the concepts and aspects that we’ve talked about in this video, it may be time to take a look at a more comprehensive system or tool that can facilitate better sales, effectiveness, and better sales performance for the organization, allowing different departments to come together and collaborate, bringing together your sales leaders and your pricing leaders and providing better flexibility to your administrators and more visibility to your sellers.
Better Quoting and Sales Compensation in One Place
In addition to making pricing easier, Sales Compensation allows administrators to manage sales compensation plans effectively, helps sales professionals attain quota by making it visible in real-time, and reduces compensation overpayments.
Find out more here: www.pricefx.com/salescompensation