Choosing the Best Sales Compensation Plan for Your Business

Michael-Hanna by

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Want to get a sales rep’s complete, undivided attention? Bring up their compensation plan. Few things have such a direct, immediate impact both on reps, personally, and on your business as a whole. It’s crucial that you get your comp plan right — not only to ensure your reps are motivated, but to ensure they’re motivated around the right activities that are truly going to move the right needle for your business. Get it wrong and your business could wind up paying the ultimate price.

How do you choose the right comp plan for your business? Yes, you can try diving into competitor research, but as sales strategy consultant Michael Hanna explains, that can often be tough since titles and other factors can vary so greatly. The best approach, Hanna advises, is to start by looking at what you’re trying to accomplish with your compensation plan, and establishing priorities and parameters to work with from there.

The Purpose of a Good Comp Plan

Before you dive in, Hanna says it’s helpful to take a few steps back first and recognize that your comp plan is one thing to you and another to your salespeople.

From company’s perspective, the comp plan exists to:

  • Provide clarity and focus for each role
  • Define success for reps
  • Motivate behavior by rewarding desired results

From salesperson’s perspective, the comp plan exists to:

  • Get them paid. Or, in other words, to help them fund personal goals (that’s why they get so personally invested and involved when it comes to compensation changes and discussion).

How to Determine the Base Salary / Variable Split

With that in mind, Hanna recommends you begin laying out your comp plans by ironing out the base salary and variable compensation for each role.

First, determine the role’s base salary by assessing the following:

  • Level of difficulty
  • Level of autonomy (how much are they out on their own?)
  • Experience required

The higher for each, the greater the base salary will typically be.

Next, determine the variable comp based on your answers to the following questions:

  • How complex is your sales cycle?
  • How much influence do reps have on the buying decision?
  • Is your model primarily inbound or outbound?
  • Is the focus of the role primarily hunting (outbound), farming (growing existing business), or catching (inbound)?

Hanna provides examples of where certain sales roles may fit on the base salary / variable comp spectrum in the graph below:

Sales Compensation Chart

Base Elements of Sales Compensation Plans

Once you have an idea of the total target compensation for the role you’ll want to determine the base elements that will drive your comp model. Hanna highlights the three most common below:

Base Elements of a Sales Compensation Plan>

  • Standard Commission Rate: Reps receive their target earning when they hit their quota.
  • Sliding Scale: This is typically used to help accelerate sales up front. Essentially, you’re offering to increase the commission rate once a rep surpasses a certain amount of deals/revenue. A sliding scale is more appropriate for high volume transactional sales. It doesn’t make sense for sales models focused around a small number of larger deals.
  • Step Function: This is basically in-between your standard and sliding scale models. Reps have to pass certain thresholds to get bumped up to higher commission levels.

Hanna’s advice: Use a standard commission rate unless you have a compelling reason to do otherwise. It’s by far the most common for a reason. When in doubt, keep it simple.

Limiting Elements of a Sales Compensation Plan: Floor & Ceiling

The next decision to make is whether you want to include a floor or ceiling.

Limiting Elements of a Sales Compensation Plan

  • Floor: One method some companies utilize to incentivize stronger performance is to make it so reps will not earn anything unless they pass a particular threshold. This approach is also typically more appropriate for high transaction sales.
  • Ceiling: This is simple, Hanna says. Never use a ceiling. If reps want to make a ton of money for the organization why would you get in the way?

Over-Performance Elements of a Sales Compensation Plan

Deciding how to reward reps for over-performing is a critical element of any comp plan. Hanna breaks down three common approaches below:

Over-Performance Elements of a Sales Compensation Plan

  • Bonus: Reps surpass their quota, they get a lift.
  • Accelerator: Once a rep passes a certain threshold, his or her commission rate will increase. Companies will sometimes implement accelerators to avoid salespeople holding back deals once they’ve already hit their quota. The problem is you can start paying out disproportionately more commission compared to how much revenue the rep is actually bringing in.
  • Retroactive Accelerator: If a rep surpasses quota, the company retroactively gives them a higher commission rate. This can be a very powerful motivator, Hanna explains. It pushes reps to exceed quota and not hold back deals.

How to Establish & Balance Your Comp Plan Priorities

When designing your comp plan you should always keep in mind your bigger-picture sales goals and let those guide you, Hanna says. Sales departments at SaaS companies, for example, may have a primary goal of contributing to monthly recurring revenue (MRR), but may also have a secondary goal of increasing profitability, therefore lowering the average discount.

In that scenario, Hanna explains you could formulate your comp plan around two options:

  • Paying base comp on MRR attainment and a bonus on exceeding 100% of MRR quota
  • Paying base comp on MRR attainment, but basing the rep’s bonus on average discount (ex: if it’s >10% the average discount)

Alternatively, if you want to prioritize a goal around term length rather than profitability, you might consider the following option:

  • Paying base comp on MRR attainment, but also introducing an accelerator based on extended term deals. Ex: For every 2-year deal, the rep will make an additional 25%. For every 3-year deal, an extra 50%.

“By combining compensation modeling elements you can incentivize for secondary results without deprioritizing your primary components,” Hanna explains.

Example Sales Comp Plan in Action

Say you have a BDR whose primary responsibility is to generate new qualified leads. That’s what you’re paying them for.

While quantity may be the primary component of their compensation, you of course also want to balance that with also incentivizing higher quality leads. How can you do it?

Standard option:

  • 70% of target comp based on the number of new qualified leads
  • 30% of target comp based on qualified leads accepted

Alternative approach:

  • 100% of target comp based on number of new qualified leads
  • Introduce an accelerator: If more than 80% of those leads are accepted, the rep gets an additional 25% on those commissions
  • Introduce a decelerator: If less than 40% get accepted, the rep gets docked 25% on those commissions

In the alternative approach, you have a way of maintaining the priority of the primary component — number of new qualified leads — but you’re equally emphasizing the quality of those leads.

“You do have to be careful with decelerators,” Hanna warns. “You never, ever, ever want to claw back commissions. In the case above, it would get subtracted from the next commissions.”

Learn More: Free On-Demand Webinar

Looking for more tips on how to design and implement an effective sales compensation plan? Watch our free on-demand webinar Show Me the Money: Sales Compensation Plans that Won’t Fail.

Sales strategy consultant Michael Hanna shares the keys to keeping your team focused and motivated:

  • Best practices for setting base salary / variable split
  • 7 critical, but commonly overlooked factors for designing and implementing sales compensation plans
  • 10 Compensation modeling elements

Get access to the full presentation video and slides here.

Photo by: Chris Potter