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How to Develop a Modern Sales Compensation Plan

Article-How to Develop a Modern Sales Compensation Plan

Alamy Increase your sales
The compensation system must be designed to fit your company, your product and service offerings, your ideal customers, and the expectations you set for your in-home salespeople.

One of the primary issues industry companies are facing in 2021 is finding qualified in-home salespeople.

However, even if you are adapting to this challenge, you need to evaluate your current compensation plan to determine whether it is providing enough value and motivation for your new hires to maximize their performance.

In our client visits and customer conversations, most companies compensate their sales personnel either on straight commission (sometimes with an advance or draw) or on or a “salary plus commission plan”. 

In either case, the compensation system must be designed to fit your company, your product and service offerings, your ideal customers and the expectations you set for your in-home salespeople.

If new hires can be rapidly trained to become productive and earn a significant commission, a “draw account against future commissions earned” can be an effective plan.

However, to best effectuate this, your customers must pay promptly, or your sales personnel will not be sufficiently motivated.

Several of our clients who only hire experienced industry salespeople pay straight commission with an advance paid on sales deemed “acceptable to the company” (a draw against anticipated commissions).

Ask yourself the following, "Does my compensation plan provide sufficient motivation and differentiation from similar positions?” Bear in mind that you not only have to “sell the hire” against your competitors but against other job offerings that offer high earning potential.

Industry companies must carefully examine the commission percentage (which should be built into their selling price), along with the methods by which their salespeople receive compensation. 

Consider the following:

1. A company pays a base salary and has a monthly quota which equals the sales volume which would have to be attained if the salary were measured as a commission. 

As an example, take a $10,000/month salary ($120,000/year)—if the company has a calculated 10% commission; sales of $1.2 million annually would balance the salary.

Consequently, if a salesperson generates more than $1.2 million annually, they will receive an 8-10% commission bump on their sales made after they reached $1.2 million.

Understand that this is a highly basic structure—when we design a compensation system for our clients, we normally allow for bonuses paid monthly, quarterly, and annually (sometimes a combination of all three).

2. Another company advances their salespeople $1,600 per week and pays no commission or bonuses on the first $840,000 of business which balances against a 10% commission ($83,400 versus $840,000). Again, this is typically computed monthly, quarterly, or annually.

Obviously, there are many factors when comparing “base salary” and “commission-only” plans, but despite the differences in the above examples, your calculations must be based on what is paid to acquire a specific amount of business.

Finally, in today’s environment, there are monetary and non-monetary factors that determine the motivation of successful salespeople including (but not limited to):

  • A reasonable base (salary, guarantee, advance).
  • A sales quota that equals the proper ratio to the amount paid as salary.
  • Commission or bonuses for volume in excess of their quota.
  • Contingent bonuses based on higher volume, productivity, profitability (paid annually, bi-annually, or quarterly) as a means of retention.
  • Benefits such as health insurance, profit sharing, and 401K plans (these and other perks may not be applicable to independent contractors).
  • Periodic incentives, such as bonuses, awards, vacations, or similar.

To find, onboard, and retain the best sales personnel in 2021, you need to value your new hires as you would any lead for your products or services.

Combine this with an effective and value-added compensation plan and you will be a step ahead of your competition.

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