Sales Compensation Strategy 101

Setting the compensation strategy for the entire organization is no small task, especially when certain groups may warrant their own separate compensation strategy, as they have differing goals and objectives.

One such group is the sales team. Sales teams are usually focused on specific goals and outcomes related to revenue generation and/or profit levels. Salespeople frequently have compensation plans that reflect the fact that their actions are closely tied to achieving these specific revenue and profit objectives.

As such, it may make sense in many organizations to have a different compensation strategy specifically for the sales team.

Sales compensation strategy 101

When designing the compensation strategy for the sales team, there are some basic things that must be assessed:

  • What are the organizational goals in terms of sales and profitability? These goals may be expressed in many different ways. For example, the organization may have a goal of making a specific profit percentage or having a specific amount of market share for their product. Or they may have a revenue goal for both existing customers and new customers. Or they may have any or all of the above. The point here is that when setting the sales compensation strategy, it must clearly be tied to the organizational sales objectives, both short- and long-term.
  • How does the organization make sales? How does each individual salesperson impact the organizational goals? These answers may vary, depending on the organizational setup and how the company gets its revenue. Is the revenue primarily from existing customers? From new business? How long is the sales cycle? How many people are involved in customer relationships that impact the sales results? By answering these types of questions, you’ll be able to determine which type of compensation structure might make the most sense. For example, if the sales come primarily from new business, the business is driven by one-on-one interpersonal relationships, and the sales cycle is very short. It may make more sense to create individual sales incentives that reward new business. On the other hand, if the sales cycle is quite long and there are a lot of people involved in the process, it may make less sense to provide individual incentives, since each person has less direct impact on the outcome.
  • What are your competitors doing? Who are you competing with for sales talent? Just like any other type of compensation plan, sales compensation plans need benchmarks. If your organization pays a flat salary to salespeople but other organizations with similar sales requirements pay a high commission, that could mean you will lose talented salespeople. Or if you’re making your salespeople work for difficult-to-earn commissions and the competition is providing a secure, high base pay, it can go the opposite way, too. Put this point together with the last—align the sales compensation strategy with the sales process, but also look at what your competitors are doing, as their actions may give you clues as to where you can improve.

By answering these types of questions, you’ll be well on your way to determining what type of sales compensation strategy makes the most sense. There’s no one-size-fits-all answer. Each organization must determine what balance of base pay and at-risk pay makes sense for its situation and sales process.