How To Design A Sales Compensation Plan

how to design sales compensation plan package

Sales compensation plans for sales professionals are becoming more popular throughout the sales world. A compensation plan is an essential part of every sales job. It allows you to structure your employees' careers in a way that best suits their individual needs. It also helps drive them to have a better performance. 

A sales compensation plan is a mix of a salesperson's base salary, commission, and incentives based on their earnings. Aside from helping the sales team have a better performance, a sales compensation plan aims to drive revenue for the company. 

Each sales compensation plan must be designed and tailored based on the sales representative's role within the team. It should also depend on the length of the sales cycle, types of sales engagements, and the level of the representative's seniority. 

If you're leading the sales team and you think that your sales commission plan might need some improvements, here are some tips and steps to help you out: 

1. Establish Role Levels 

The first step in creating a sales compensation plan is to establish role levels. You should make three basic role levels based on the sales representative’s experience: 

• Entry-Level 
• Baseline 
• Experienced 

With these three basic role levels, you can easily define the differences between new employees and those with experience. It also helps you offer promotions to people who have spent longer and who are top performers. This information will help you design their careers and motivate them to do better in their jobs. 

2. Determine Key Performance Indicators (KPIs) 

With the growth of your business and the increase in customer demands, you must have key performance indicators for the sales team that will measure how effective your team is at meeting these demands. Also, keeping a close eye on this performance will help ensure the business's continued survival and growth. Examples of some KPIs are: 

• Sales Growth And Targets 
• Customer Acquisition Costs 
• Average Revenue Per Representative 
• Customer Lifetime Value 
• Average Sales Cycle Length 
• Lead Conversion Ration 
• Profit Margins Per Sales Rep

Setting sales quota and KPIs are also essential to determine when your sales team will receive their commission and incentives as part of their sales compensation plan. 

designing sales compensation plan package contracts

3. Know What Should Be Included In The Sales Incentive Plan 

Your sales compensation plan should include some key sections that are clear and based on your sales commission structure, and these include the following: 

• Monthly and Quarterly Commission Payments – each sales rep should know how much they expect to earn every pay cycle. 

• Payment Timing – the norm for many sales teams is a payment cycle after the quarter or month closes. 

• Capping Compensation – as much as you want to give maximum compensation to your sales team, there should always be a limit to protect the business. 

• Fair Compensation – it should be noted that the compensation plan must be equal and impartial regardless of the sales representative's age, gender, or race. 

Everything included in the sales incentive or commission plan should show good governance in implementing the contract. Every detail should be explained to each team member so they have a better understanding and realistic expectations of what they’ll receive in return for good performance. 

4. Review Your Sales Compensation Plan 

A reasonable and effective sales compensation plan provides a win-win situation for the sales representatives and the company. It should be easy to implement and provides benefits for everyone fairly. When you review your sales compensation plan, look for the following qualities: 

• Simple – There should be a summary of your compensation plan placed on a single page. 

• Casual – The compensation plan should be directly related to the desired effect you wish your sales team to achieve. 

• Short – The time between activity and compensation should be less than 60 days. 

• Fair – All Compensation must be equal to every sales rep of the same level. 

• Easy To Implement – The sales compensation plan must be easy to measure and easy to implement. 

Make sure that your sales compensation plan has these characteristics before you start drafting a contract. 

Smart Sales Strategy Summary 

One of the strategies in building a quality sales team is providing compensation or incentives for good or excellent performance. A sales compensation plan is a helpful guide for new businesses and experienced ones alike. It can show you the best ways to structure an annual incentive program, work out the details of incentive packages, and even the importance of providing incentive rewards. With detailed instructions, it can help you design a profitable plan that your employees will admire. 

When creating a sales compensation plan, you should keep it simple and easy to implement. A sales compensation plan must be different for every level of sales representative in your team. Aside from that, it should also determine key performance indicators and the process of how and when these are monitored. When you create an effective sales compensation plan, your sales team will increase their efficiency, and your business will increase its revenue.

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