It’s OK If Sales People Make A Lot Of Money – Sales Compensation 101

It’s OK If Sales People Make A Lot Of Money – Sales Compensation 101:

It’s almost mid-way through Q4 and in addition to trying to finish or salvage a sales year most sales leaders are finalizing their 2012 sales plans as well. As part of that planning process companies will be reviewing their sales compensation plans and considering changes or adjustments. Designing a compensation plan that delivers the results your firm needs takes careful planning, testing, and most importantly, effectively and accurately communicating it to the sales team!

Almost every commission plan is based on a percentage of “something.” If that something is vague or unclear your sales reps will constantly question how and what they are being paid, a situation that must be avoided at all costs. Focus on these 5 compensation tenets and your sales incentive programs will be clear and motivational to your team.

• Make the plan simple to understand and crystal clear. Regardless of how you pay, the calculation should be simple enough for a sales person to calculate the commission on a deal in their head. If you have to rely to complicated spreadsheet calculations your sale rep will spend too much time trying to understand what they will be paid rather than focusing their efforts on closing the sale.

• Build compensation programs that do the best job of compensating your highest performers. If your bottom 25% percent leave because they are not making enough money under their comp plan, so what? No compensation plan will make every sales person happy. Build a plan that drives the behaviors you need to effectively run and grow your business. If you lose 25% of your lowest performing reps every year, eventually your lowest performers will be better than your competitors top performers.

• Make sure your plan has a “Super Size” accelerator. Once a sales rep passes a certain threshold (such as 125% of their annual revenue or profit margin) make sure there is a way to pay a higher commission than the standard rate. These sales people are your rainmakers, protect and reward them at all costs! A simple way to rationalize this approach to the executive team is to point out that you are simply paying your best performers more based on the savings of unpaid commissions to your lowest performers.

• Don’t cap a sales plan. Many companies try to protect themselves by placing a cap on sales commissions; this makes no sense at all. If you have a rep capable of producing 3X what you average rep makes why would you put a ceiling on his/her earnings. Caveat: depending on your industry or market it may make sense to put a cap on individual deals. If your firm operates in mega deal environments it sometimes makes sense to limit the total compensation on a single deal. These large deals usually take a vast amount of time and numerous resources to close and the closing credit is likely shared with several key individuals.

• Never change a compensation plan during a sales year unless you are making it richer. I have seen situations where the executive team has mandated lower compensation programs because they felt the sales team was making too much money. The effect of the change is usually disastrous, sales morale is destroyed and sales people begin exploring opportunities with your competitors. It may take 3 or 4 months before your best sales people leave but it will happen.

If you didn’t take the time to thoroughly test your sales plan bite the bullet this year and get it corrected for next year. It’s cheaper in the long run to overpay than to incur the expense and opportunities lost of replacing a rainmaker.

You want your sale people to make a lot of money assuming they have really earned it. If your compensation drives the financial performance needed by your company it’s the right plan. If you would like to discuss sales compensation methodologies or approaches feel free to drop us a note.