For many companies, growth is greatly impacted by sales performance. Sales reps respond to incentives. But devising an effective sales compensation scheme that reflects the overall commercial strategy is a complex and highly emotive process. That’s why a smart compensation plan is part 3 of our Sales Excellence Kit.
Smart sales commission structures effectively steer sales force behavior. They can take into consideration geographies, market dynamics, sales role profiles, legal environments, and workplace culture. And there are substantial rewards for investing time and resources into getting commission plans right. An optimized compensation structure can improve staff retention and satisfaction levels, and ultimately grow your business.
“Getting commission plans right
means substantial rewards”
Paths to enhance sales force performance
We have identified proven paths to sales success with compensation structures. Here are four steps to follow when implementing and designing a compensation program:
- Set incentive objectives consistent with your commercial strategy
What happens when compensation incentives conflict with your commercial strategy? Not only do employees become demotivated, the business may also miss its targets. Parameters of a remuneration system should support, not undermine your strategy. So the first and most important step in designing an incentive system is to determine what types of behavior from the sale force do you want to reward
- Determine what constitutes sales success…
…and therefore the payout for the various sales roles in the company (e.g. internal vs. external sales). KPIs such as sales, revenue, and market share indicate achievement of volume-oriented targets. But do they focus on your company’s actual earning power? Other important criteria such as price achievement and profit margin should be included to achieve profitability targets. Otherwise you end up with a system that rewards “volume hunters” and punishes the sales reps who are focused on profitability. Non-financial parameters such as customer satisfaction, new customer rates, and migration rates can improve customer orientation and sales in the long term.
- Communicate the compensation structure effectively
Sales professionals can only use a sales compensation plan to reach commercial targets if they are familiar with its levers and can practically apply them. Therefore, it’s essential to train sales reps on how to deal with the new parameters, and outline the compensation criteria and rules. Since each sales rep responds differently to incentives, communication should also be specific to individual behavior. One way to do this is to show the impact of possible sales decisions in real time. Provide understandable and useful rules of thumb such as "if the achieved price increases by x%, the profit margin increases by y%". Some sales call centers already have these kind of systems in place. They show reps the impact of various tariff options on their commissions directly during the sales discussion. This helps them figure out how they can influence parameters and achieve their goals.
- Evaluate and refine
Even the best remuneration system is worthless if it isn't properly implemented. So the next step is to ensure the new remuneration system is understood, accepted, and correctly used in daily business. Are the targets being achieved and are further adjustments required? Now the sales team is trained and has hit the road, controlling needs to give constant feedback on achievements, keep reps motivated, and take corrective action with target deviations.
Throughout this process, it’s important to avoid the pitfalls common to many compensation structures, which include:
- Failure to align the strategic objectives of the executive team with those of the sales team.
- Setting commission rates too low or making compensation structures too complex to effectively steer sales force behavior.
- Failure to include all relevant metrics meaning that important sales activities get neglected.
Too many compensation schemes fail to deliver any real growth outcomes for companies. It is crucial to take a systematic approach to establishing the right incentives and effectively measuring performance. A smart compensation scheme will champion your success both now and into the future.
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