7 Excellent Sales Compensation Best Practices to Follow

This blog covers the seven best practices regarding sales compensation. These include setting the right pay mix, finding the right sales quota, avoiding capping commissions, offering incentives and basing them on sales roles, encouraging the right sales behaviors, and reviewing your plan regularly.

Wondering how you can attract and retain the crème de la crème of sales reps?

The answer is threefold!

The first two elements are a great product and a healthy work environment.

The third, and arguably the most important, is a kickass sales compensation plan that:

  • Provides your reps ample opportunity to rake in the moolah.
  • Helps you make good on your company goals.

In this article, let’s look at seven best practices to help you create a sales compensation plan that can do just that.

Top 7 Sales Compensation Best Practices

Before we jump to the best practices, let’s quickly revise what a sales compensation plan is.

A sales compensation plan is a formal document that outlines when and how much you pay your salespeople. Each sales rep will have their own sales compensation plan. And each plan covers all components of compensation, including base pay, variable pay, bonuses, benefits, etc.

To learn more, check out our detailed guide on sales compensation plans.

Now, let’s look at the top seven best practices that you should keep in mind while creating the sales comp plans for your reps:

1. Determine the pay mix ratio

You should set your pay mix depending on the rigors and challenges of each sales role.

The more involved the rep is in the sales process, the higher the variable component ought to be. As a general rule of thumb:

  • Sales reps in younger firms generally have more aggressive pay mix ratios (around 50/50 or 60/40).
  • Reps selling more established products with longer sales cycles usually have lower pay mix ratios (about 70/30 or 80/20).
  • Sales managers have the least aggressive pay mix ratios of all since they have a wide range of responsibilities, not all of which are target-driven.

2. Find the right sales quota

Depending on your sales cycle and sales activity, there are various types of sales quotas you can set (activity-based, revenue-based, volume-based, etc.).

But no matter which one you choose, the guiding principle remains the same: You need to set quotas that are achievable yet competitive.

If your quotas are too high, your reps will lose motivation since they won’t be able to hit their targets and earn commissions. Set them too low, and your reps won’t bother putting in any extra effort once they meet the quota. This translates to lesser revenue.

To set realistic quotas that align with your company objectives, it’s always a good idea to peek into the past. See what sort of targets your reps were working with earlier, and how effective — or ineffective — those quotas were.

Pro tip:
About 60% of your team should be making quota. If it’s lower than that, you probably need to be more lenient. Higher than that, and you should tighten the screws a bit.

3. Avoid capping commissions

Limiting the commissions your reps can earn is a sure-shot way of killing the efficacy of your sales compensation plan.

Let’s say you’ve capped commissions at 120% of the quota. And let’s say a rep with a quarterly quota of $500,000 has sold goods worth $600,000 in the first two months. This means that the rep has absolutely no incentive to sell anything during the third month.

In other words, that’s thirty days without a single deal from one of your hot-selling reps!

To avoid this, implement uncapped commissions. They allow your reps to earn as much as they want as long as they keep selling. This might sound pricey, especially if you’re a young, cash-strapped firm, but as long as you structure your incentives smartly, you should be fine.

Pro tip:
If you want to limit commissions without capping them entirely, you can consider adding decelerators to your plan. Decelerators are reduced commission rates. The higher the quota attainment post 100-120%, the lower the commission rates.

4. Offer incentives

Setting quotas is one part of the job.

But what about the incentives your reps stand to earn once they hit those quotas?

You could set the most well-planned quotas ever. But if the incentives aren’t enticing enough, your reps won’t bother trying to hit their targets. Worse still, they might leave you for a firm that does a better job of rewarding reps that do.

Your commission plan, which includes your commission structure, is key in this regard. How much do you pay your reps, and at what milestones, are crucial in determining the efforts your reps put in for each deal.

Here’s an easy 9-step process to help you set a brilliant sales commission plan.

5. Base incentives on sales roles

Instead of using the same compensation plan, try building plans based on the requirement and responsibilities of a particular role.

For example, an account executive (AE) handling Fortune 500 clients at a multinational firm will have a very different commission plan compared to a rep doing similar work at an up-and-coming startup. The AE at the big firm will likely have bigger quotas but more conservative commission rates, while the startup rep will have smaller quotas and higher commission rates.

Similarly, compensation plans for sales managers should encourage team building, while those for their reps should focus on revenue generation.

6. Promote the right sales behaviors

Sales compensation is all about getting your reps to work in a way that is beneficial to them and you.

How can you ensure this?

Well, for one, your sales compensation model should be perfectly in sync with your business goals.

If more revenue is what you need, you should compensate reps according to the money they bring in. But if your aim is to reduce churn (the rate at which you lose customers), offer better rewards to reps who help you achieve that goal.

Pro tip:
Language is often overlooked in sales compensation plans. Always stick to using simple words that get the point across as clearly and concisely as possible.

7. Communicate your plan well and review it regularly

Sometimes it could be that your reps are unclear about certain aspects of the plan. Other times it could simply be resistance to change.

No matter what, you need to ensure that your reps have understood every aspect of your plan and they’re with you 100%.

Secondly, you also need to regularly track your plan to vet its performance. To make your job easier, you can use tracking tools to can automate some sales functions and generate custom reports.

And if you ever find yourself wondering if your plan is, ask yourself:

  • Are incentives driving the right behaviors? Or are some of our reps veering off course?
  • Can our reps easily calculate commissions any time they want?
  • Are we on track to hit our overarching company goals? Or are we being shortsighted or have lost focus along the way?

Parting Words

Sales compensation is a dynamic enterprise that’s forever evolving. And practices that are relevant today may not be as relevant tomorrow.

Moreover, new trends might emerge that can challenge the status quo and change the way firms compensate sales reps.

That said, the seven best practices listed above are tried and tested, and have stood the test of time. So I strongly suggest using them to vet your existing sales compensation plan for any loopholes, or as a starting point if you’re setting out to build an entirely new one.

Make payouts right every time with ElevateHQ

Move from manual to automated and error-free commission calculations with our platform.

schedule demo banner image