Nothing can fire up emotions and passion among your sales team quite like a discussion about the company’s sales compensation plan. In nearly every company I’ve worked with, sales team members always seem to have strong opinions about compensation. Sometimes they love their compensation plan. In other companies, the sales staff hates the compensation arrangement.
As a sales leader, it’s critical that you and your company get your plan right. A bad compensation plan can cost you money. It can drive away top talent and prevent you from recruiting new blood. It can also be a distraction, forcing your sales team to focus on their perceived lack of compensation rather than making the next sale.
When done well, though, your compensation plan can be a powerful asset. It can help you attract and keep the best talent in your industry. And it can give your team the motivation they need to stretch themselves and reach for that next level of achievement.
Of course, implementing the best compensation plan isn’t as easy as it sounds. You may have very real cash flow concerns that you need to manage. You also need to find that balance between keeping your sales team motivated and overpaying for results.
There’s no right sales compensation plan that works for every business. It depends on your industry, your products and services, the length of your sales cycle, and a host of other factors.
There are a few guidelines you may want to follow. Here are five common mistakes I see companies make in their sales compensation plans on a regular basis. Avoid these and you’ll likely be way ahead of the curve when it comes to designing your plan.
Mistake #1: Ignoring the cost of turnover.
When the budget gets tight, it’s easy to look at cost of sales as an area to trim the fat. After all, it’s right there on your income statement. Want to boost margins? There’s an easy solution. Just cut the compensation to your sales team.
Going low on sales team compensation presents its own challenges, though. The primary one is that it creates dissatisfaction among your sales reps and that dissatisfaction can lead to turnover. The last thing you want to do is give your top producers incentive to look for work elsewhere.
In many businesses, the cost of turnover far exceeds any savings that are achieved by holding down sales compensation. Think of everything that’s involved with turnover. You have the cost of recruiting new talent. Your managers will spend much of their time sorting through resumesand interviewing candidates. You may also have to pay a search firm to find solid prospects.
You have an onboarding period for the new rep. During that time the new sales rep probably isn’t driving much in the way of sales. And other sales reps may have to spend some of their time training the new team member.
There’s also the opportunity cost of turnover. When you have a void on your team, that’s one less person generating sales. If you’re in a highly competitive industry, you may have to deal with the possibility of your old rep taking some of your business with him or her when she leaves.
Add all that up and you’ll likely find that the cost of turnover is an expense your business can’t afford. Skimping on sales compensation doesn’t save you money. It usually costs you lots more than you will save.
Mistake #2: Not rewarding top producers.
In my work with top producers, I often see a consistent mindset. They’re proud of their place on the top of the sales chart. They see themselves as being superior salespeople. They know the revenue that they bring into the business. And they expect to be paid accordingly.
The issue that I see in many companies, though, is that their compensation plan treats high performers the same way as average or even underperformers. They have flat commission rates. They don’t have earnouts, a graduated scale, or other bonuses in place. Top performers may make more than others because they’re selling more product, but there are no other ways for them to get extra compensation.
This causes two problems. First, it can create resentment among your top performers, who are the very people you can’t afford to lose. Second, it doesn’t give average performers much incentive to strive for the next level.
Instead, create a tiered system where the commission or bonuses go up for crossing new thresholds. Put bonuses in place for important metrics, like winning new contracts or increasing revenue from existing clients. Rewarding the behaviors you desire will move the business forward. Money drives behavior. Period.
You want your top producers to feel like you recognize and appreciate their efforts. They see themselves as a cut above the rest of the team. You should view them that way too.
Mistake #3: Setting tiers, thresholds, or goals too high.
I’m all for big goals. I encourage all of my consulting and coaching clients to think big for themselves. Set a big goal and even if you fall short, you’ll still be in good shape. There is such a thing, though, as a goal that is too big.
I see this frequently among sales leaders and executives. They think that if they set a huge goal and offer a ton of compensation for reaching it, their sales team will put in maximum effort to try and reach the mark.
That only works, though, if the huge goal is attainable. Setting a goal that’s little more than a pipedream doesn’t do anyone any good. Your sales team knows what’s achievable and what isn’t. In fact, they probably know that better than you do.
Setting an impossible goal will only fuel hard feelings. Instead of appreciating the compensation that they are earning, they’ll view that big goal and compensation number with resentment.
Before you set your goals and tiers, talk to a handful of your salespeople. Get their input on what is feasible and what isn’t. You want to stretch them. You want them to reach for new levels of success. But you don’t want to set them up for failure. Consult with your team to find the balance.
Mistake #4: Making the formula too complicated.
I’ve seen some compensation plans that read like encyclopedias. There are conditions, exclusions, different rates for different products and different payments for customers from different channels. It’s impossible to keep it all straight on paper, let alone in one’s head.
And that’s exactly what you should strive for – a compensation plan that’s so simple that your reps can calculate their payout in their head. The reason is simple. You want compensation to directly influence their decision making. You want them to make the decision to make that last phone call, take that last meeting, knock on that last door so they can earn more money.
For many reps, they need to be able to place a dollar value on their activity. They need to be able to tell themselves – If I close this last deal, that’s an extra $880 next month. There should be a direct connection between activity and reward.
When your compensation plan is convoluted and complicated, your reps aren’t able to make that connection. They know that the more they sell, the more they make. However, they can’t place an actual dollar amount on specific activities, which is what you want them to be doing.
The whole point of offering commission and performance-based compensation is to motivate activity and boost results. But when you have an overly-complex plan, you actually limit the motivational power of the program. Chances are good that yours can be simplified. Look at it with a fresh eye.
Mistake #5: Retreading the same tired plan every year.
How long has your current plan been in place? A year? A few years? A decade or more? I’ve worked with countless companies who haven’t changed their compensation plan since they launched their sales department, sometimes many years earlier.
There’s no one sales compensation plan that’s right for every company. Similarly, there’s no one plan that’s right for every size and stage of a company. A plan for a startup with only one or two salespeople will be much different than a plan for an established company with a nationwide sales force.
Your competition can change. The demand for your product can change. There are countless variables that can impact the performance of your sales team and how they should be compensated.
Every year, take the time to review your plan and see if it still makes sense given where you are as a company. Maybe you need to raise or lower commissions. Maybe you need to shift emphasis to salary rather than variable pay. Maybe you need more bonus opportunities. Who knows? The point is that the only way you can know is to do a thorough review.
I regularly help company and sales leaders review, revise, and design sales compensation plans. If you think your plan could use some adjustments or a refresh, let’s talk about it. I’d welcome an opportunity to analyze your plan and discuss how we can improve it to align better with your company’s vision and goals.
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