How do you design a great sales commission plan?
That’s the question an entrepreneur recently asked me as he’s preparing to build a sales team.
It’s a difficult question to answer because a wide range of variables go into designing a great sales compensation plan, including, but not limited to:
Average sales price.
Length of sales cycle.
Recurring vs. non-recurring vs. annual vs. other sales types.
How the sale affects retention of customers or referrals.
Difficulty of the sale.
How well leads are vetted or marketed prior to the sale.
Strength of the brand being sold.
And more...
A great sales plan for your company may be very different from the company’s next door, even if that company is a direct competitor.
While I don’t have the recipe for a perfect commission plan applicable to every business, I do have enough experience in fixing shitty compensation plans to know the symptoms that improvement is necessary. Here are some of the most common things you’ll find in a commission plan that needs to be reworked.
You have to cap commissions.
A properly designed sales compensation plan results in a win-win-win between the company, the customer, and the sales rep. The need to cap commissions is usually reflective of a plan that creates a big loss for the company when the sales rep delivers a big win. This is a critical misalignment and a common symptom of a commission or compensation plan that needs to more effectively align incentives offered with the behaviors desired.Sales teams have an opportunity to rake in big commission checks for behaviors that hurt the company or the customers.
A great example of this type of misalignment is offering extraordinarily high commissions for securing new customers that have a retention rate well below what the company needs to be sustainable. Sales reps are getting rich bringing on business that won’t stick around, and oftentimes you have to pay those extraordinarily high commission rates again to go secure the business - again. In this case you may actually be rewarding behaviors that lead to long-term stagnation and unhealthy sales practices.Your company churns sales reps despite opportunities to earn very lucrative commissions.
A classic example of this is the 100% commission role that allows people to earn “six and seven figures right away,” if they’d just make all those calls or knock on all those doors like that one unicorn sales rep you reference in recruiting is doing. The lure of high earning potential, coupled with evidence that it can physically be done, attracts the starry eyed sales rep in the door. Once there they learn about all the things that prevent this from happening on a regular basis and bail, like many before them. If this is the experience you have with sales reps on a routine basis, it’s a sure sign the comp plan may help recruit people, but not retain them.
There are just some of the symptoms I’ve seen in sales compensation plans that need improvement.
More than anything, if you want to know if your sales plan should be reworked, just ask yourself, “Am I happy with the results I’m getting?”
Every system is perfectly designed to get the results it’s getting. If you are unhappy with sales results, retention of sales reps, or customer retention, it’s very likely the sales compensation plan is contributing to the problem.
If you’d like help reviewing your sales team’s comp plan, or evaluating the results it is producing, please don’t hesitate to reach out to request a call below.
