This post is for two groups: those of you who have never created a sales comp plan before and now need to (And don’t worry, I was in that group at one point); and those that have a comp plan, but you’ve realized that it’s not right. If you’re in that last camp, you might have even had multiple iterations. It’s too complex. A mess. Or something is just not working. Sound familiar? Keep reading for Josh Melick’s ideal Sales Compensation Plan.
First, let’s define “Sales comp plan”. When using this term, it’s short for Sales Incentive Compensation Plan. Basically, the details of the commission structure that sales people earn. Funny enough, when we shorten the name we drop the most important word - Incentive. First and foremost, a comp plan’s primary goal is to incent the right behavior. Salespeople are “coin operated” as they say -- so make sure it’s clear how and why they will get their coins!
Two Components of Sales Plans
There’s two parts to an effective comp plan. The numbers of the comp plan, and then the rules - how you implement it. The rules are often more important than the numbers. We’ll discuss both.
Most sales salaries start with a 50/50 split between base pay and incentive pay. So if you say a $150k OTE (On Target Earnings), that means a $75k base and then $75k in commission. And generally that commission should be what the rep will see if they are “On Target”, i.e., hitting their quota. You see some companies playing games where that amount requires more than the target or there may be “potential” to hit $150k but it's actually not the target. Don’t do that.
Here’s the simple steps to follow for a sales comp plan that you - and your sales staff - will get behind.
Here’s a common example:
Whew -- I think I covered the basics. As mentioned, many of these are more “rules” than commission structure - like Draws, Clawbacks, and payment schedules. They impact the math, take home pay, and most importantly the bottom line of the company. Think through all of these details to make them fit your business!
Let’s Talk More Advanced Comp Plans
Net Bookings / Gross Bookings: Some plans add additional features using gross vs. net bookings. There’s plenty of areas where plans can get tough to align, for example, maybe one lead source is way more expensive than others. Some products have very different gross margins. To try to fix some of this, some companies use plans with multipliers that adjust bookings amounts so that then the commission numbers are simpler. Take that low margin product and pay commission at 50% of bookings. Expensive marketing leads take a 25% bookings deduction. Or the opposite, too: get the client to pay upfront and get a 10% bookings “bonus” on the deal. This is all advanced stuff, but I like doing this over having the commission details change. The math is the same, but this is often a simpler way than making different products have different commission percentages. The accelerator schedule stays the same, but the inputs vary based upon that multiplier.
At my startup, Broadly.com, we used this system to have sales reps “pay” for the leads coming from marketing. On cold outbound deals we paid full commission, but leads coming through marketing had reductions in line with the marketing costs of those leads. It worked really well.
Wow, that was a lot! Good luck. Sometimes you need to get lost and then simplify your way into something that works. And don’t forget to double check your math - know what your sales teams cost you, how much of the deal they get, what it looks like when reps hit quota, miss quota, or far exceed quota. Always give your best reps more upside, and protect against the low end. These are all features of great comp plans. There’s plenty more I can cover - maybe next time I'll write up some mistakes I’ve seen and a bit more on advanced topics.