When it comes to retaining top sales talent and increasing revenue prospects, having competitive and effective sales compensation and commission plans becomes extremely important. Joshua Melick points out that a sales compensation plan basically outlines the base salary of the sales representatives of a firm as well as the company’s commission and incentive program. Incentives are crucial elements that drive salespersons to make more sales, and subsequently, increase the company revenue. Hence, putting a focus on their incentives and compensation is extremely important for a business, to see to it that the employees are encouraged to put their best foot forward.
Broadly speaking, an effective sales compensation plan has two parts, which are the rules and the ways to implement them. According to Joshua Melick, usually, the rules are more important than the numbers. A sales compensation plan would play a key part in driving the sales team’s performance and helps them increase revenue. A sales compensation plan typically details about all aspects of the earnings of a sales representative, such as their base salary, commission, and any incentives or benefits they may be eligible for.
There are several factors one must consider when developing sales compensation plans for their business according to Joshua Melick. Here are a few of those factors:
- Set quotas: Setting the ideal quota is the most vital element of a sales compensation plan creation. One must select a target that is achievable, but not too easy. Measuring the quota as per first year contract value and then setting them quarterly can be a good move. In the ideal situation, most of the sales reps should meet or get close to the quota. However, if everyone manages to reach it, then there might be a chance that the quota is not high enough. Conversely, if no one gets a hit, then the target might be too high.
- Set a floor: Sales representatives have to hit a certain number before their commission kicks in. Base representatives and their base salaries often cause more damage to the company bottom line, than the large sum of money given to the top sales reps. The base salary expense ideally is covered by not paying commission on the dollars below the threshold.
- Clawbacks: Even if the sales representatives do not like clawbacks, they are important to a business. A “clawback” is basically a situation when a previously paid commission is taken back. This is done by deducting a percentage of money from future commissions. Usually, a clawback period of 3-6 or 9 months at the most can be good enough. This is done to keep the sales representatives accountable and encourage them to consistently bring in good quality deals. It also prevents fraud or bad incentives and protects the company.
The three pointers mentioned above can be quite helpful for any business owner who is developing a sales compensation plan for the first time.