Mastering the Sales Commission Plan: A Complete Guide

A firm is nothing without sales. And without an excellent sales commission plan, a company can't retain its best salespeople.

Strong sellers propel the company forward and mask a slew of flaws in an otherwise unstable financial picture. When you're building the ideal team, you'll need to instill in them the desire to succeed. This is where a commission structure for sales comes into play.

But let me tell you this outright: the sales commission package is only half of it. An excellent 'plan all' must include organizational support for career growth. 

Sales compensation plans are the most crucial driver of success in sales operations and one of the organisation's most significant financial investments. With such high stakes, it's critical to get your strategy just right.

But what exactly does that imply? And how does a successful commission plan appear?

Sales compensation plans must be designed strategically to drive the right sales and inspire the desired behaviours from your sales team.

Let us quickly examine how the sales commission came to the fore to understand its concept better.

History of Sales Commissions

Businesses created a sales compensation system to compensate sales representatives fairly. It all started with a straightforward approach: 

Here's your quota, hit your numbers and get paid at an 8% commission rate. If you meet your quota, you get paid a 12% commission.

However, a straightforward compensation plan is as uncommon as red flowers blooming in the arid Sahara desert. Plans have changed over time and have become a complex code to crack. The change in the attitude of sales professionals toward their comp plans is a significant factor too.

Aside from the complexity, many salespeople have had at least one occasion where their general commissions did not match all the plan's relevant criteria. And in most cases, the compensation plans had provisions that allowed for such an occurrence. 

The right plan is structured differently for every organization. The steps below are the best practices to follow when building your own sales compensation plan.

How to Design a Strategic Compensation Plan?

Eager to get started? Review and follow these steps to structure a compensation plan for your sales organization.

1. Define your Business Objectives.

It would be best if you started at the top before you began crunching numbers and digging into sales territories and roles. Sales compensation plans are best when strategically aligned with an organization's objectives.

2. Determine Sales Roles

Now that you have your business sales strategy in place, you can focus on your sales force. Identify which sales roles within the organization will be eligible for commissions (e.g., hunters, farmers, channel partners, etc.). Each of these roles will require a compensation plan.

These are some typical customer-facing sales roles:

- Sales Development Representative (SDR)

- Account Executive (AE)

- Customer Success Manager (CSM) 

- Account manager (AM)‍

It is possible to create junior and senior positions within these roles to compensate entry-level employees fairly and allow more experienced employees to focus on larger, more strategic deals.

3. Establish your sales goals and align them.

The next step is to define and align your sales objectives. Your sales objectives might include the following elements:

• Expand market share by X%.

• Launch new products.

• Increase ROI by X%.
  

If you want your compensation plan to be successful, you need to know your sales goals to create incentives that align with them. By strategically aligning your business and sales objectives, you can ensure your sales force drives organizational success.

4. Establish a Pay Structure

This is the point at which we get to the meat and potatoes. Once your business and sales objectives are aligned, you can delve into the specific structure of your compensation plan. To accomplish this, you must first determine the target pay, pay mix, and upside potential for every sales role. These are your sales commission structures:

3. Target Pay

Target pay (also known as total target compensation or on-target earnings) includes everything the company provides, such as base salary, commission, bonuses, and perks. This figure will assist you in budgeting and breaking down the remainder of the commission payout.

4. Pay Mix

The pay mix is the proportion of base salary to target incentives that comprise total target pay. 

A 70/30 pay mix, for example, means that 70 percent of the employee's compensation package is a fixed salary, and 30 percent is potential earnings from incentives.

5. Pay Mix Ranges

The sales roles and your overall objectives will determine how you balance the pay mix. If you lean too far to one side, you'll incentivize (or de-incentivize) the wrong behaviors.

In general, your pay mix should be more aggressive for roles that significantly influence the final purchasing decision. Account executives, for example, should have aggressive pay packages as closers to incentivize them to seek out new opportunities.

6. Upside Potential

The amount of compensation available to sales reps who exceed their quotas is the "upside" (or leverage). The upside can be a powerful motivator, so you have to integrate it carefully into your plans. The greater the influence of the sales role on the final purchase, as with the pay mix, the greater the upside opportunity.

Effective Sales Commission Plan

To keep salespeople in your company, you must make them feel valued and involved. Furthermore, there are several ways to recognize its employees' initiatives. 

However, it's critical to remember that everyone has different needs, so there's no such thing as a cover-all solution. Check out the following methods for retaining sales reps with an effective sales commission plan:

1. Select the best-fit sales representative.

It is critical to hire the right sales representative who meets your sales and business needs. Many sales opportunities would be lost if the right employee were to leave.

Furthermore, it is critical to treat your employees fairly and equally, as this saves your company time and money on turnover. Employees who believe they are valued are more likely to work harder and stay longer, proving a valuable asset to your company.

Furthermore, your compensation strategy should be both exciting and motivating for employees to stay with your company for a long time and give their all at work.

2. Determine the correct pay for your sales representatives.

To set accurate pay for your sales reps, you must thoroughly research and analyze market data; certain platforms provide you with detailed information in that segment. 

Furthermore, these platforms provide information on average base salaries based on geographical location and your specific industry. Commissions should be factored into the overall remuneration for each function. Once you've determined the correct pay, you'll have the foundation for your compensation strategy.

3. Decide on your metrics.

It's critical to track each sales rep's progress. Choose the KPIs you'll track and how they affect your sales reps' compensation and commissions. Check the following most commonly used metrics:

• New business revenue vs. revenue from current customers.

• Customer's average lifetime value (LTV).

• The net promoter score (NPS).

• Successful deals vs. lost deals.

• Income earned vs. the cost of selling.

• Growth in market penetration.
  

Also, make use of CRM platforms that will assist you in tracking and managing KPIs for your sales business. Let me tell you though, your sales compensation plan will never be effective if employees can't see and feel their parent company's support for their career growth. These two must go hand in hand.

Now that you understand how to craft an effective sales compensation plan, let us proceed to the growth of your employees' careers to make it a perfect plan.

Why is Career Growth Important?

Employees would love to work for an organization that helps them acquire field knowledge and build their skills. This means: organizations must provide opportunities for employees to learn new skills and utilize their learning.

Career growth also means taking on new challenges and responsibilities to build employees' credentials and enhance their management skills.

The company should pave the way for employees to gain insights and expertise to impact and excel in their chosen profession, thus providing value to their organization.

Why is it Important to Support Career Growth?

Two compelling reasons:

How to Support Career Growth?

1. Take an active interest in employees' career goals.

Meet regularly with team members and have a one-on-one discussion to attune to their career expectations and aspirations. This type of leader support can help staff feel valued. This will also translate to better productivity and loyalty.

Guide your employees to outline a potential career path to envision their future better. Determine specific milestones for achievement and resources needed to advance along their journey. 

2. Promote training and development of employees.

As the tide in the marketing and sales industry shifts quickly, your sales and marketing team needs to keep up with the new developments, innovations, and consumer behavior to perform at their optimum.

Continuing education and job training will help fuel employee career growth.

3. Encourage mentoring and job shadowing.

The "old" can learn from the "young," and the young can learn from the wisdom of the old. Mentorship is a two-way street. It is both a transfer and an exchange of skills and knowledge. Allow work-life balance.

Hard work is necessary for career advancement, but that doesn't mean making employees commit to an endless series of heavy workloads and lengthy workdays. 

Encourage your employees to work smart, leave energy, and reserve time for personal interests to maximize efficiency. This is especially crucial for remote workers, who may find it challenging to separate work from personal life.

4. Keep the communication line open.

Keeping open communication between management and the sales and marketing teams can align toward the same goal. And that is the company's growth.

When your company grows, it will also mean career advancement for individuals, whether from the sales or marketing team.

5. Recognize employee strengths.

Telling and acknowledging employees of their individual contributions to their company's goals adds value to their role. It increases motivation and inspires them to expand their responsibilities in the organization.

Don't presume employees already know. Providing insights and feedback can make a massive difference to your organization.

6. Be thoughtful about extra projects.

When managers understand employees' strengths and motivators, they can help employees in their roles to begin to prove they have what it takes to handle the job.

Employees sooner or later will pick up extra tasks or get additional exposure to things that are not part of their job description. In these situations, they can show what else they can do. The challenge is ensuring that extra tasks don't keep employees from performing and finishing their day jobs. 

7. Establish transparent pathways to success.

Establish transparent pathways to success. Your employees are better positioned to achieve their career goals if they know a supportive manager. 

For remote work, hybrid, or in-office teams, you can always make employees' professional advancement a high priority for your organization.

Emphasizing you are supportive of their career growth creates significant and lasting benefits for your employees. Thus, it helps position your organization to be even more competitive.

The Final Note

Salespeople occupy vital roles in every organization. It is wise to provide a competitive sales commission plan and carve a clear career path for salespeople to achieve organizational goals and business sustainability.

Employee satisfaction and retention are enhanced and achieved when they know their organization provides financial gains and career development opportunities.

Doing it well will require empathic managers eager to invest in people. It must also be a team effort involving transparency at the organizational level about career paths and financial expectations.

AI bees would be more than willing to help you build your plan. We are always on the other end of the line for you. Let's talk. Do give us a call.