When growing your business, setting up and managing compensation plans for sales reps can be a daunting task. The temptation to add too much complexity too fast can sacrifice the strategic benefit of simplicity and clarity. The goal at the beginning should be to start with a solid basic plan structure that can evolve and adapt as your sales team grows and specializes.
As you work through the fundamentals of setting up your core sales compensation plan, be sure to give proper consideration to each of the following attributes of your compensation plan.
Total Target Compensation (TTC): The amount of money a sales rep can expect to earn should they reach expected performance targets.
Base Salary: A component of the reps TTC which represents their periodic base salary check. Most sales reps will earn at least a portion of their TTC as base salary.
Target Variable Compensation (TVC): The variable portion of a sales reps TTC that is tied to sales performance.
Performance Measure: A critical element of the plan which ensures alignment between corporate strategy and the goals of the individual sales rep. This is the metric that defines a sales reps contribution.
Goal (Quota): The reps target level of achievement in order to make 100% of TVC. There should be a ‘stretch’ element to setting the target, achieving goal should not be easy, remember that sales commission is not a company entitlement.
Base/Variable Mix: The ratio of base salary & target variable compensation; typically expressed on a scale of 100, for example 75/25 (Base/TVC).
Area of responsibility (Territory / Key Account / etc.): The definition of a sales reps region of responsibility is often referred to as their territory.
Core elements of a sample Sales Compensation Plan.
With the foundation set, the core sales compensation plan is poised to evolve as you grow
- Expansion is number of Sales Roles: As the sales team evolve, sales roles will generally shift from being dominated by generalist roles to more specialized roles. This will impact considerations that go into your territory strategy and possibly the weightings applied within each plan. As sales roles expand, so does your number of unique sales compensation plans.
- Multiple Plans: Plans can be added as the roles and responsibilities expand. This often happen as the sales force becomes segmented with teams focused on specific areas such as new account growth, account management, special product/business line focus, key account sales, Industry sales specialists, etc.
- Multiple Performance Measures / Goals: As the business matures and sales reps specialize, goals can multiply as well. Plans may evolve from a single plan component to multiple (e.g. Revenue and # of new accounts, etc.). Remember that it is important to keep goals limited and focused with more than three performance measures a sign that the plan may be getting to complex and risk watering down its effect.
- Territory fragmentation; While the definition of a sales persons responsibility is often geographic in the early stages of the sales force maturity curve, as sales roles multiply and the team grow, territory definition often fragments to span not only geography but also may span product & business lines, customer types (new/renewal), industry types, etc.
- Payout mechanics; As plans evolve, payouts mechanics often morph from a single payout rate (TVC/Quota) to a tiered payout structure that encourages reps to exceed quota with accelerated payout rates at higher levels of goal achievement.