Creating a proper sales compensation plan is vital for a business. However, creating is not always an easy task. Joshua Melick mentions that the sales incentive compensation plan largely underlines the details of the commission structure that sales people earn, and most entrepreneurs usually have to go through several iterations of such a plan to ultimately create the ideal one. The goal of such a plan is to incent the right behavior, which means that it helps salespeople to understand the approach to take to increase the sales of a business.
An incentive compensation plan is important for outlining the commission a sales rep receives when they close various sales deals. Joshua Melick mentions that there usually two parts to an effective commission plan, which includes the rules involved in it and the manner to implement it. The rules are ideally more important than the numbers involved. The majority of the salaries start with a 50/50 split between base pay and incentive pay. As a result, if people say that they have a $150k OTE (On Target Earnings), it will imply that they have a $75k base and then $75k in commission. On the whole, the commission should be what the rep will see in case they manage to hit their quota
As per Joshua Melick, here are a few steps one may follow in regards to creating their sales compensation plan:
- Setting quotas: This stage involves finding a target that is achievable for the quota. One can measure a quota as per the bookings or first year contract value, and ultimately set them on a quarterly basis. It would also be a smart move to have all the sales representatives on the same plan. Most of them should meet or get close to the quota. However, in case everyone manages to hit the quota, then one must understand that it has not been set high enough.
- Setting a floor: Sales representatives have to hit a certain amount before the matter of commission comes to play at all. The bad representatives and their base salaries often cause damage to the bottom line of a company; instead of the big checks, they may write to the top sales reps. Not having to pay commission on the dollars below the threshold tends to cover the base salary expense.
- Creating accelerators: Most plans have three to four steps to accelerate the as representatives increase their sales. A company would want the representatives to feel like just one or two deals more can help them to move up to the next tier with a greater commission percentage. Certain plans use this higher number retroactively, while others are more tiered.
- Pay upfront: A business should always pay commission in the month or quarter when the deal was signed. Getting creative and spacing out payments is not ideal, as it may create cash flow concerns.
Remembering the steps mentioned above can significantly help people to formulate a robust sales compensation plan.