For everyone, personally or professionally, the New Year – or even the new sales year – is an opportunity to look back and reflect on what has worked over the last 12 months and what you might do differently in the coming year.
For sales managers, this review might be about thinking of how best to support upcoming product launches, restructuring their sales teams, allocating accounts, and employee recruitment. One issue that rarely gets reviewed is how a company compensates its sales team. Sales managers rarely question how best to pay their key assets. Why would they? Surely their compensation plans must work, as a proportion of their sales team always hit quota every year.
One answer to that question might be “not as well as you think” if your competitors are growing faster than your business. Equally, in a fast-moving world, why wouldn’t you update your approach to rewarding the potentially most decisive element of your whole go-to-market strategy? Companies review and change pretty much everything else in the business all the time, so why not their compensation models?
The honest answer is that there’s often no compelling reason to change without the hard data to back up the arguments for changing a sales compensation model.
But that’s changing now because sales managers now have access to business and market data undreamt of by their predecessors. This data can help you create a sales compensation strategy that could take your sales team’s performance to the next level.
If you think that’s just some sales story, let’s investigate all this in more detail.
- The Significance of a Sales Compensation Strategy
- The Different Types of Compensation Models
- Designing Incentive Programs That’ll Work for Your Business
- How to Create the Right Incentive Framework for Your Business
The Significance of a Sales Compensation Strategy
It’s a truism to say that salespeople are coin-operated, and the more you reward them, the better they’ll perform – hopefully.
That said, after collaborating with our customers and industry practitioners, it’s clear that the world is more complex than that. It’s also changing rapidly, and the ideas that worked 5–10 years ago may not work so well now.
A sales compensation strategy is crucial in ensuring that your business’ sales team focuses on what the business needs to be successful in the coming months and years.
The challenge in designing and managing a sales compensation framework is that in a single sales team, there may be several strands of your sales strategy all working in parallel. One objective for part of the team may be to increase revenues from new customers. Other team members may be focusing on expanding your presence and installed base within your existing accounts. You may be looking to promote product upgrades to your customers or protect the use of your existing products in a more mature market. You may be looking to change how your customers buy from you as companies increasingly move towards annual leasing or subscription models for their products rather than outright purchases. Other members of your team will be looking to maintain and develop your relationships with your third-party partners, who can influence your target audience or sell to them on your behalf.
There’s plenty going on.
Managing the differing compensation objectives and plans for all these different sales teams is difficult. Having a generic model won’t work for everyone. Having different models is a management headache, and even then, how do you know the model you use is the best one for your sales team? Getting it wrong could be expensive.
Ideally, you want incentive options that capture the difference between these different sets of objectives to maximize your opportunity. You may even want a range of different incentives options to perform “what-if” scenario planning. These can be based on your business and how your customers buy from you to see what mix of incentives across your entire sales team will work the best for you.
Clearly, compensation management is a complex topic, so let’s unpack it more to see what we have to play with.
The Different Types of Compensation Models
There are three broad types of compensation frameworks that companies typically use. They focus on aligning individual and team efforts toward the overall direction of the business. These aspects form a significant part of its offering to current and prospective employees. These vary between sectors, as the needs of compensation models for banking and insurance services are vastly different from those operating in media, telecommunications, or high-tech, for example, where customer buying and decision-making behaviors, as well as regulations, differ significantly.
Commission-based models are the cornerstone of almost all sales incentive models across almost all industries. The aim is to use financial incentives to motivate salespeople to sell more product to more people more often. This model encourages people to work harder and smarter because there are only two hundred or so selling days per year. It emphasizes productivity and allows salespeople to maximize their earnings.
Commission models can be a blunt instrument, but as we shall see, they offer flexibility in helping to motivate and direct the behavior of salespeople in a way that their employers need.
Not all members of a sales team directly generate revenue. Some salespeople will be business development executives whose prime role is to manage new leads and other customer inquiries. They qualify them and engage with the most viable opportunities to the point where they can be handed to salespeople for further development and, in time, for closing.
Pre-sales engineers or consultants may also be an essential part of a sales team, helping to define and refine customer needs and making your case from a technical or operational perspective. They can be hugely influential in managing the needs and concerns of the operational and technical buyers who are often part of the decision-making group in large enterprise sales or technically complex engagements.
The activities of business development or pre-sales teams lend themselves to activity-based measures that can be used as part of a personal bonus plan. Pre-sales consultants might be measured by the number of meetings they attend or customer proposals they’re involved in. Or they may be measured on presentations they make at industry events as “product evangelists,” for example.
Business development teams will likely focus on the number of leads they pass over to the sales team, with the potential for additional bonuses if leads they pass over convert into revenue.
These personal bonus plans that typically come with these roles may complement broader company-wide incentive schemes.
Other non-commission-based incentives might be sales competitions to promote specific products or services over a limited period. The aim here is to get people to focus on short-term gains, with cash prizes or funded team events as the reward for extra effort and success.
Travel incentives can also be used to incentivize sales staff, with Quota Club or Presidents Club for the highest achievers at high-end holiday resorts with all expenses paid.
Commission and bonus schemes are geared toward directing, motivating, and rewarding individual effort. Other non-financial incentives also form part of the overall package to make your company a destination of choice for would-be employees.
Initiatives like support for charitable activities, professional training, professional development opportunities, a thriving corporate social “scene,” and an engaging work environment can significantly help attract and retain experienced staff. Other issues like inclusivity and flexible working arrangements can also help to differentiate one employer from another.
These are broad-brush descriptions of the incentive models typically used. Let’s look at how you can add some flexibility to these frameworks to fine-tune the direction and motivation of your staff. This’ll help you become more aligned with how your customers buy your products and services, as well as the commercial needs of your business.
Designing Incentive Programs That’ll Work for Your Business
Clearly, there’s almost infinite flexibility in developing incentive plans, with plenty of scope to get it right and take your business to the next level. There’s also scope to get it wrong and reward the wrong behaviors for the business. Let’s explore how best to develop a sales incentive plan to maximize the chances of success.
Targeting Your Commission Plans
Commission models have the most significant impact on how a business develops. The smart move is to align your commission model around how your customers buy your products and make their decisions, as well as your own business needs. Having insight into this dynamic can help you design a compensation plan that works for your business, sales team, and customers.
What options are there?
Commission-only models are the most common incentive model in business. A salesperson is paid a specific commission on any revenue, generally between 20–50%. It’s a straightforward model and ideal where a product is clearly defined and designed to meet a specific need, with little customization or implementation required. A good example is real estate, where this model isn’t uncommon. It is clear, transparent, and elementary to manage. There’s little opportunity for salespeople to raise queries about their commission statement every month.
That said, fewer and fewer products are “sold as seen.” Products increasingly make a virtue of their ability to be customized and adapted to a person’s unique needs and preferences. This requires relationship-building and technical skills rather than simply negotiation and closing skills. Companies also want repeat business, ideally within the next 12 months. Commission-only models don’t always encourage people to build long-term relationships; there’s every incentive to maximize returns now, rather than waiting for potentially more significant payouts later.
Base Salary Plus Commission Models
The base salary plus commission model is much more common for many quota-bearing sales roles. In this model, there’s a base salary component – for example, 50% of the On Target Earnings (OTE) for the role and a commissionable component based on achieving specified revenue goals. These commission rates will be significantly lower than the commission-only models – for example, around 5–15%, depending on the product or service. Typically, higher-margin product revenues attract higher commissions than lower-margin services revenues.
Base salary plus commission models encourage salespeople to build rapport and relationships with customers over the long-term, so they can afford to close a transaction when the customer is ready, rather than when the salesperson is desperate to make quota that month. It also recognizes that many transactions are more complex with services and training needed to achieve the total value of an investment in a product or offering. Sometimes complex customization requirements are required. These need technical, personal, and commercial skills, as well as the standard negotiation and closing skills.
Revenue Recognition Models
Revenue recognition models can also be used as part of a compensation model. In many sales organizations, not all revenue is equal.
For example, over a 12-month period, a single customer could produce multiple revenue streams that somehow need to be managed. This could be product or licensing revenues, services revenue, training or education revenues, and technical support or product maintenance revenues. While all these revenues will count towards a company’s bottom line, an account manager isn’t always paid on all these revenues through the sales year.
Companies will reward sales effort, so revenues like product and services will be recognized for commission purposes, if at different commission rates. But revenues such as technical support revenues or even education and training revenues may not be if a company feels that it’s their profile and reputation that “sells” these products, rather than the account manager’s efforts and expertise.
Revenue recognition issues matter because they dictate how a salesperson is targeted, paid, assessed, and even employed. Suppose a salesperson isn’t paid on a piece of revenue. In that case, they’ll be less likely to focus on any issues related to it – like dealing with customer inquiries or problems, unless it impacts a revenue stream on which they are directly paid.
One solution for a company is to ensure someone owns a specific revenue stream from a customer and is rewarded for managing it in some way – either on a commission or bonus basis. It might be the account managers or others from sales operations, training operations, or finance operations to ensure that customer issues are addressed when they need to be. All these relationships need to be mapped so that on a single account, the associated revenue “owners” are identified and paid per a model that encourages them to take responsibility for a specific piece of a customer’s revenue stream.
An alternative might be where an account manager and others split the revenue recognition so that two or more people are paid on a revenue stream, to a maximum of 100% of a possible commission. This has the advantage of encouraging all the customer-facing members of an account team to work together, although it can be challenging for sales operations teams and sales managers to manage a complex incentive model like this.
The other alternative is having some revenues that receive no commission or bonus recognition. This might be the most cost-effective option for the business. But it also means that there won’t be an individual who practically “owns” an element of customer revenue. If issues or opportunities emerge, there’s no one to capitalize on them or manage them.
Whichever approach a business takes, the nuances of revenue recognition need to be understood and captured, as they very often tie into how a business presents its results to its shareholders every quarter.
Bonus models for salespeople not directly “comp’d” on revenue can be as flexible as well and adapted based on how your customers buy your products and services and the direction you want to take your business. This’ll vary by sector and industry, but some customers will buy based on a short trial, but maybe online, helped along the way by a business development executive. Alternatively, it may be through a third-party business partner. Other prospects will need information about a more complex product or service and perhaps attend a couple of webinars before they’re ready to engage more fully with one of your salespeople – a process that can be facilitated by a well-trained and motivated business development executive. However your customer buys from you, you want a sales engagement model that mirrors it. This means that your incentive plan – and the objectives you set your sales teams –needs to mirror and leverage that buying model to maximum effect. It may be your reward volume of engagement over the quality of engagement, or vice-versa, depending on what your business needs.
Clearly, all this effort needs to be balanced with the demands of the business. If you balance these conflicting requirements better than your competition, you’ll likely outperform them too.
Let’s look at how you might create a framework that lets you do exactly that.
How to Create the Right Incentive Framework for Your Business
Ok, so you’re interested in the idea of crafting a sales incentive plan that’s designed around how your customers buy from you in a way that’ll work for your business.
What steps should you follow to achieve this?
1. Use Hard Data – and Lots of It
It’s never been easier to access valuable business and market data in commercial history. This’ll be a challenge for some but an opportunity for others. It can enable you to capture and correlate information about how your customer buys from you. It helps you understand how they use your website, how they work with your sales channel and business partners, and how they work with your direct sales operation.
You can explore which different personas are typically involved in the early, middle, and late stages of the sales cycle. You can learn what information they need and when and what types of proposals are most successful and close the fastest. You can gain clarity on how long each element of the sales cycle takes, the duration of the average sale, and what negotiation techniques are most effective a closing a business. There’s much more you can find out, but you can see the detail into which you can go.
This information will be found in your finance systems, CRM platform, and marketing and e-commerce systems. You can also take data from external data sources to enhance your own data to see the growth hotspots in your existing customer base and potential new ones. This could help you formulate new sales territories and target markets that can take your growth to the next level.
2. AI is Your friend
With all this data at your fingertips, it’s easy to be overwhelmed by the vast volumes of information you could make use of. Most people aren’t data scientists and have no wish to learn how to be one. The best alternative is to turn to AI capabilities to begin to make sense of all the data, see the patterns in it, and understand who your customers are and how they buy from you.
With some core concepts in place, you can start to build on these insights and task your AI platform to focus on specific areas, themes, and dynamics that can take your business forward.
3. Build Your Compensation Models
With an excellent grasp of how your customers buy from you and how they make their decisions, combined with your own business needs, you’re in a position to start building your optimal sales compensation plan framework.
From your revenue intelligence datasets, your customer behavior insights will help you define and refine your commission structure and rates and your bonus models that align completely with your customer buying models and your business needs. The same insights can be used to develop and enhance your sales training and recruitment processes and standards, as well as manage your sales team.
You can use the same insights to set up, define and refine the bonus models for your non-quota-carrying sales team.
4. Integrate Reward Planning into Your Territory Planning
Your sales commission plan doesn’t exist in isolation. An optimized sales commission model needs to be aligned with the optimal territory and quota plan to ensure that the commission plans will work in reality.
You can use the same data and AI capabilities to plan, define, and refine your sales territories, whether account-based, sector-based, or account-based. You can even incorporate subsidiaries and apply account-mapping and rep-mapping capabilities that’ll help you split up the various account management responsibilities if your plans require this.
5. Play with Your Data
With a good understanding of your sales commission plan, quota, and territories, play with the results to see which offers the best option for your business. Is it more profitable for you to focus on your existing accounts, or is maximum growth your key objective now? What’ll be the best balance of direct, indirect, and online sales? It doesn’t need to be a matter of speculation, conjecture, or guesswork. Use graphical models to share ideas, results, and insights that you can combine with your own hard-won experience to find the optimal incentive model that gives you the lift your business needs.
Learn more about the power of effective compensation plans by reading our eBook, How to Create Better Compensation Plans in 2022.