In one of my previous blog posts I debated whether a sales manager should sell and carry a quota. It’s a controversial topic and opinions vary depending on who you speak with.
I guess I have a knack for writing blog posts on topics that salespeople tend to be very opinionated about. Today, I’m going to take a swing at how you should design the perfect commission plan for your sales team.
Whatever the opinions of everyone might be, I am a huge believer in keeping things super simple. Just because we are in a sales team does not mean that it should take a mathematical genius to figure out how the comp plan is structured and most importantly how it works.
No acronym needed, it should be simple enough so the reps know what they need to do in order to earn commissions. And for the love of God, don’t sand bag the reps. Once the trust is lost, I promise you, you will never gain it back again.
At the root of every company is a sales team: a group of passionate, tenacious souls squeezed in the middle seats without upgrades, making outbound calls to hot leads, that are semi-qualified at best. Anxiously waiting to make a sale so they can slowly pace themselves towards their monthly quota.
Each year, on average, salespeople experience eight to ten times more rejection than acceptance from the prospects they contact. Yet somehow they persevere – most with continued optimism – in pursuit of the close, the add-on sale, the contract renewal. Most of them are driven by a quest for three things: personal accomplishment, recognition, and compensation.
The sales compensation plan is one of the most significant drivers of performance in an organization and represents one of the larger expenses a company will incur. Depending on the size of the company it can be anywhere from a few thousand to hundreds of thousands of dollars.
And if the compensation plan’s message isn’t clear or to their liking, sales reps will interpret it in their own financial interest. As a sales leader, you’ll get what you measure and what you pay for – and it may not always be what you expect.
Perhaps because of its power, sales compensation programs have long been a point of conflict within companies. Everyone has an opinion and everyone is an expert, yet few agree on the best approach to drive performance toward the company’s objectives.
The following points will help you design the perfect compensation structure for your sales team.
1) Set a commission structure that aligns with your business model and stage of growth
While this may sound easy. In reality, it can be very challenging. No company is alike, so make sure you offer a commission structure that fits directly with what kind of company you are and where you are in the stage of growth. If you’re looking to expand your business, then make sure you are incentivizing the sales reps for new customers, market share and not deal size.
Go through the company metrics and plan where you want to be vs where you currently are. Build a comp structure that will help you push towards the desired goal.
One of the structures that I have implemented in all of the companies that I have worked in in MRR based comp.
Let’s break it down.
- Commissions kick in once the sales rep achieves 75% of their monthly target.
- For every prospect you close, you get one month of MRR from that sale.
So, if your new MRR goal for the month is $2000
You need to close $1500 in new MRR to start earning commissions.
- (50% of the 100% goal) is $1000 in new MRR = $0 in commission
- (75% of the 100% goal) is $1500 in new MRR = $1500 in commission
- (100% of the goal) is $2000 in new MRR = $2000 in commission
You get the drift. The reason for the comp to kick in at 75% is to make sure that the sales reps are striving to hit their target every month, you can tweak this number to suit your team, it’s not a number that is written in stone. 75% just worked for my teams very well.
Performance thresholds help sales reps get more vested in their work as they have more skin in the game.
Also, be flexible with the reps. I treat my teams as people I want to see succeed. So if that means there are a couple of months out of the year where the rep performed really well and struggled to hit the 75% mark, I would give them the comp anyway. They tried their best, it builds goodwill, and they know that the manager is in their corner and wants them to do well.
Be genuine and take care of the team and the team will take care of you as a manager.
As for the first MRR of the month. Well, that just makes the calculations that much easier and leaves no room for mess.
2) Determine the target pay
Research the market, see what the typical pay is for a particular role in sales. Based on the findings, determine the target pay you would like each sales rep to have. Having a target pay in mind will help you nail down the OTE (On-target earnings). Which is a mix of both the base salary and commissions.
3) Make the commission plan your asset, not a contract
A commission plan’s job is to make sure your sales team is motivated and they’re getting a proverbial pat on the back for a job well done. You want to make sure that it stays that way, if the commission structure intimidates your sales team, it will almost always lead to disaster. Communicate it in such a way that everyone is on board with it and not add that as a verbose clause with over the top explanations in the contract.
4) Keep it simple
The more complicated a compensation plan is the more difficult it will be for your sales team to get behind it. Salespeople look at the comp plan in a way that helps them determine how much money they will make at the end of the month or once they hit their targets. If there are many variables involved and terms are tangled and not well defined, it will cause a lot of headaches for the sales manager.
A compensation plan should easily help the sales team calculate how much money they will make once they hit their numbers. Extreme illogical calculations involved in this process are going to come back to bite you, it’s better to structure the plan to be very simple from the get-go.
5) No cap on earnings
Don’t ever penalize a salesperson for closing a lot of deals. There should be no limitations on how much a salesperson can make on commissions. Since their work is directly related to how much revenue they are bringing in to the company.
Salespeople often justify their own existence and if a particular salesperson is performing well, you should encourage them and appreciate the effort. Putting a cap on the commissions is a sure shot way of making a salesperson demotivated. Sky should be the limit when it comes to earning commissions, as the salesperson’s work can very easily be translated into a $ amount.
6) Align the team
A sales team consists of SDRs, Account Execs and Sales support crew. Make sure you align the whole team to the compensation plan according to what their roles and targets are. In the case of an SDR, their commissions should directly be linked to the amount of SQLs they bring in and generate for the Account Execs. Likewise, for the Account Execs, the commission plan should revolve around the new revenue that they generate.
To work together as a team, plan designs must interface as a complete system.
7) Sand-bagging the company
Whenever money is involved, chances are there will be foul-play of some sort. When creating a sales compensation plan, always make sure that it cannot be exploited by bad actors.
A very famous example of this is when I worked for a company a few years back. One of my account execs was closing deals left and right, the rep was really good. However, 2-3 months down the line the customer would churn. When a pattern started to emerge, we investiagted it and turned out, the sales rep was over-selling the product.
In the process, the rep was raking in tons of commissions but the customer didn’t get any value out of the product and neither did the company since the customers would churn shortly after purchasing the tool.
To make sure this doesn’t happen again, I implemented a rule, where if a customer churns within 4 months of buying the tool, the commission will be nullified and subtracted from the next payment of the sales rep.
It worked really well, churn went down dramatically. Always have a plan in place to make sure that situations like these don’t occur.
8) Communicate the plan while in the idea phase
It’s always a good idea to involve the sales team in the discussion once a compensation plan is being developed. If you go ahead and develop it without their input and communicate only once you roll it out, the team may feel like they are in a catch-up position.
It’s best to involve them throughout the process. At the end of the day, it’s a plan for them and should involve them from the very beginning. Get their feedback on it, make sure that their voices are heard, a plan that your team stands behind on and is communicated well can do wonders for the company.
9) Evaluate the plan
And most importantly, evaluate the plan and tweak it accordingly, should the need be. Sales compensation plan evaluation should be an ongoing process throughout the whole year. If something is not working, you can always go back to the drawing board and start anew.
However, not to lose all the work, try and monitor the metrics so you have enough data points at hand, to tweak areas, in the need of change. Which really helps, since you will end up not having to redo the whole plan and implement from the very beginning.
One of the keys to great sales compensation design is having a playbook for your team that everyone references to make sure you’ve considered each step. The playbook will play a vital role in making sure that the team has all the resources they need and know exactly how the compensation plan work and can refer to it at any time.
Bottom line, if you take away one point from this blog post, that would be to make sure that the structure of the commission plan is utterly simple and rewards the reps for a job well done without any ceilings. You do that and you’re already leagues ahead of most of the folks in the industry.