What is a fair sales compensation plan?
Designing an effective sales compensation plan is not an easy task. There are many people in the company that have distinctly different opinions on how the sales compensation plan should be structured. In some companies the decision on how to structure the sales compensation plan is left to an individual. Often the task is just one of the many they do and they aren’t even trained in the art and science of creating an effective plan. They look at the world from their vantage point or keep an ineffective sales compensation plan that they used before. If the sales compensation plan is the way you focus your sales reps on delivering on your strategic vision, why do so many organizations settle for suboptimal plans?
Sales compensation plans created solely by sales executives will emphasize incentives and motivation whereas plans designed by finance will be skewed toward ensuring affordability. I can usually tell when reading the comp plan document who was the major designer of the plan.
The CEO is charged with defining the company strategy and seeing that it is delivered. Often the CEO doesn’t understand the full extend the role the sales compensation plan plays in achieving the company’s goal. How much time do they really have to design an effective sales compensation plan anyway? Without a carefully crafted sales compensation plan that defines the right sales goals that match the company’s goals and the proper commission structure in alignment with those goals, sales will not deliver the desired result. The sales compensation plan is the way you communicate your company’s priorities to your sales reps.
The CFO is all about the numbers. That is the revenue and expense numbers for the company. Unfortunately, most CFOs have not been trained in creating an effective sales compensation plan. They often feel that sales reps are paid too much money and never deliver enough revenue. I once created a sales compensation plan for a company that drastically changes the way the reps were compensated. The result was double bookings and the CFO was unhappy because the upside earnings caused the cost of sales to go up. The CFO didn’t understand that the double bookings was a direct result of the higher commission rate paid for exceeding quota! Without that higher commission rate the company would not have reached their desired growth.
The CRO is tasked with delivering the revenue goal. They do that through their sales reps and they want them focused on selling and not trying to figure out their sales compensation plan. They want a team of winners, mostly top sales reps exceeding their quotas. Because of this they will attempt to make the quotas more easily achievable than the CFO. They want their reps paid accurately and quickly and if that doesn’t happen, they know their reps will waste valuable selling minutes to figure out what they think their right commission should be.
HR wants a sales compensation plan that pays fairly, retains top sales talent, and helps in the hiring process. They know the cost of hiring a replacement and the time spent to find that valuable resource.
The sales rep wants to succeed and make a comfortable living in the process. They want to be rewarded for the work they have done and be able to count on what is coming. If the sales compensation plan document is not clear, they will do their best to understand it and how they understand it is by figuring out where and how they make their commission.
A fair sales compensation plan is one that takes all the input from multiple constituents to help you achieve the right balance and ensure your sales compensation plan is within budget, is primed to motivate your sales team, aligns to strategic goals, and is well communicated across the organization.