3 Key Objectives of a Sales Compensation Plan
Incentivizing employees to boost performance is effective, but many ineffective sales compensation plans end up doing more harm than good because of poorly planned objectives.
Just like any great coach will tell you, the fundamentals have to come first. These are the fundamental sales compensation plan objectives that should underpin any good program.
Stick to these, and you’ll never drive the wrong behavior or outcomes.
1. Boost individual salesperson performance
Whatever other objectives may be included in the compensation plan, this is the number one goal of all incentive plans.
While many companies will have their own long-term strategic goals (more on those below), it’s important not to forget that the core reason to incentivize is to increase the number of sales that the individual sales representative closes above baseline.
If it doesn’t matter how many extra deals your reps make, then just put them on a base salary and save yourself the time and hassle of administering commission-based pay.
2. Align individual actions with organizational goals
Enterprise growth strategy is a constant balancing act, with incentive compensation a key lever.
The sales team will naturally focus on the short-term goals that yield a quick payback. You must ensure that the actions they take to meet those goals create outcomes that also meet the long-term goals of your enterprise.
Many managers fail to realize that poorly planned short-term sales goals can undermine the businesses in the long-term and reduce profitability in other facets of the business.
Short-term goals may involve:
- Sales quotas
- Profit targets
- Strategic milestones related to product use, channel or account growth, etc.
- Internal ratings or customer feedback scores
Long-term strategic goals for the business may include:
- Strategic changes to the customer base or the pipeline
- Sustained cashflow
- Incremental profitability
- Improved employee retention
- Increased market share
- Greater shareholder value
- The introduction of new or refreshed products or services
3. Retain the best salespeople
The best salespeople are few and far between, and losing them costs more than just the cost of replacement and retraining (which is high enough as it is).
Despite what many sales managers might think, there is a lot we can do to stop our best people from moving on for better opportunities elsewhere.
Most salespeople leave because of issues with their compensation package. That means both their potential earnings but also the speed and accuracy that they’re paid.
If you’re regularly dealing with sales commission disputes and errors, it will cause a massive drag on your sales organization if it hasn’t already.
Best Practices for Creating Your Sales Compensation Objectives
All compensation objectives should be operational, controllable, measurable, and communicable.
Objectives should not be so complex that they strain resources, or it becomes impractical to administer the incentives and operate the program.
One of the main reasons leaders are encouraged to simplify commission objectives is because supporting complexity can quickly become expensive and impractical to operate.
Simplify your commissions to keep them cost-effective and easy for you and the sales ops team to perform. Or invest in sales compensation automation software.
Controllable means that your sales objectives should be within the control of the people they intend to incentivize. If management creates an impossible target to pay commissions out, it will demotivate the sales team and adversely affect their performance. Make sure your salespeople can control whether they reach the goal or not.
It’s also important to ensure that management has levers to control the compensation plan when there are unexpected sales events. Commissions on some products and services can quickly get out of control in extreme circumstances.
This may seem obvious, but objectives must be measurable. Make sure you can easily tie the outcomes to the objectives at the end of the sales cycle to reduce sales commission disputes.
The final important thing to remember is that your plan should be easy to communicate. If your sales reps don’t understand how to maximize their compensation, you will demotivate them, and sales will rapidly drop.
Incentives Make Objectives Subjective
The objective of sales force compensation is to tie your business objectives to the success of the individuals most able to impact them. Keep that in mind at all times, and you’ll go a long way to designing a winning sales incentive compensation plan.