Grats—you’re ready to grow and/or scale your sales team. As your team grows, as your customers change and as your growth objectives become a bit more clear, it can be challenging to create a bullet-proof sales comp plan that is both simple and understandable.
You have probably heard horror stories about a sales comp plan that was not well thought-out that directly hurt the bottom line or encouraged fraudulent activity. (Think: Wells Fargo). A bad plan can also attract non-target customers and put a dent growth.
Also, sales teams will quickly work through the soft spots in your plan—and that’s the challenge of building a good one. How do you develop a comp plan that aligns your sales force with your company strategy, and meets the objectives of all: the company, the individual rep, and the management team?
Darn good question. Here are the 5 steps I walk my clients through.
Step 1: Identify the Core Few Objectives for the Sales Rep
First, to make a strong comp plan, the management team should agree on what they truly want the reps to focus their TIME and ENERGY on each and every day. Said another way, “What is it that we want the sales reps to do every day?”
The answer sounds simple, SELL! But it’s more complicated…Get very granular and clear here.
- Do you want your sales reps to close new deals or are renewals equally comped?
- Does a long-term contract have more value to the company than a short-term contract?
- Do you want them to collect accounts receivable? (e.g. are they comped on cash collected or on billings?)
- Do you want reps to also increase product utilization/usage by your clients?
- Do you want the rep to focus on new clients or expand the footprint within a client?
- How important is it for your reps to cross-sell all your products and services?
- Do you want your reps to focus on a specific type of target client (e.g., size, stage, industry)?
- How is a client impacted if they buy and they cancel soon? How should that impact the rep? Should a high cancellation rate negatively impact the rep?
Get your management people together and hash out what you want to sell, to whom, and how. Prioritize using sticky notes on the wall.
Step 2: Set the Target Earnings for Reps
After you figure out your sales objectives, what should your reps make each year if they execute according to the plan? And how much of a rep’s compensation is fixed versus variable?
Our client companies use different names for this, usually “Total Earnings at Plan” or “On Target Earnings” (OTE). It sounds like this: if a rep meets their quota of $X and achieves other key variables, then they should earn $Y. Determine what you want your reps to make (total comp) which is done by looking at market compensation in your industry. Then construct the activity components, discussed above, that you want to see executed by the reps.
Consider what level of productivity is achievable. If your sales comp plan says on average that a rep should sell $5 million a year in your product, do other sales people in your industry sell $5 million a year? How many customers does that represent? You must have a sense for productivity to effectively create the OTE target.
Be fair. If a solid sales rep can’t achieve their OTE, they will lose motivation quickly, try something off-strategy, or possibly quit. Make sure the plan can keep them motivated. There’s options like “kickers” or “accelerators” to help do this. You could have monthly commissions that are very linear. You might have monthly commissions with quarterly and annual bonuses if they hit certain objectives. There’s a zillion variables here, but in all cases, setting a solid target earnings structure is step 2.
Step 3: Consider Overachievers and Underachievers
The third step is to talk about the slope of the compensation curve: what happens when a rep overachieves or underachieves? Again, this is your management team in a room hashing this out, saying, okay, if a rep hits 80% of the objectives, should they earn 80% of OTE or only 60%? Or maybe it’s less severe, like 85%.
Hash out your philosophy of what a rep should earn on the downside. This often varies based on your history and stage. If you are an early-stage company with very little revenue history, for example, then maybe a huge accountability slope is not attractive to hiring new sales reps because it’s too risky.
On the upside, what if your sales reps overachieve your target? What if they hit 130% of plan, 130% of OTE or more? Is there a cap on total compensation?
You can put other things in your plan, too, like a ramp-up period for a new rep. How long does it take them to get up to speed to sell the product and have customers? Maybe it takes six months for them to get cranking to 90% productive. You can address that in your comp plan.
In the next article, I’ll cover step 4, create and pressure-test a mini-model, and Step 5, create a terms sheet and glossary before the legal team arrives. Click here to continue.