3 Steps to a Successful Compensation Plan for Salespeople

We're regularly asked by clients to help them create compensation plans for salespeople and others in their sales operation.

They want to know how to make sales compensation effective for the salespeople and good for their bottom line.

We generally start consulting by suggesting they break the process up into the following three steps.

A Successful Compensation Plan for Salespeople

1. Define Each Position

For each member of your team, answer the following questions:

• What is the primary job to be done?
  
  
• Is it to set up appointments with new prospects, upsell current clients, or develop new prospects into large customers?

Start with a one or two-sentence summary of the job.

2. Determine Which Performance Metrics to Track

What are the most important measures you will use to evaluate success in this job?

Generate a list of five or six and then narrow them down to the most important three, or at most four, metrics.

3. Figure Out the Compensation Plan for Salespeople

What should be the total compensation you pay your typical salesperson, including commissions?

Now that you have a number in your head, set a base salary of 65-70% of that total, then develop the incentive portion around the top metrics you will be tracking.

That’s it. Three simple steps.

You’ve defined a role, you’ve set the metrics, and you’ve turned those metrics into incentive elements in the compensation plan.

There’s just one more principle to consider now. Make sure the metrics you’re measuring do two things: encourage the salesperson to accomplish important company goals, while at the same time, make sure they’re doing the right thing for your customer.

One manager created their compensation plan around the customer. They observed that customers who spent more with their organization were getting a better return on their investment, so they created an incentive that was tied to getting a large commitment in the first month.

That’s the kind of thinking that makes sales incentive plans highly effective for all three parties—customer, salesperson, and company.

Compensation Plan in Action

1. Job to be Done

Take a list of leads and approach them to secure an appointment—and ultimately sell them.

2. Performance Tracking

Some of the important measures:

• Number of total customers each month
• Number of new customers each month
• Average order size
• Length of time someone remains a customer
• Budget attainment

3. Compensation Plan

$60,000 base salary with the potential to earn another $30,000 (or possibly more). Incentive elements:

• $1,500 a month for 100% budget attainment (90% of $1,500 with 90% of budget, 110% of $1,500 with 110% of budget)
  
  
• $500 bonus for any new customer that spends at least $10,000 in their first month

Try out these three steps and remember to look for ways to encourage your salespeople to accomplish important company goals while also doing the right thing for the customer.

Creating an effective compensation plan is one way to turn your talented salespeople into top performers.

For more ideas, download 30 Ways to Turn Talent into Performance.

*Editor's Note: This blog was originally published in 2014 and has since been updated.