Failure to structure the perfect comp plan for your sales reps could significantly handicap your company’s growth goals. However, a well-designed sales comp plan could be a huge asset to both your growth goals and your sales reps’ financial success. Here we discuss two important factors found in compensation plans for sales reps.
Base salary and commission mix
On one hand we believe every company should have financial skin in the game when hiring new reps but on the other hand your sales rep should not be comfortable with their base salary alone. Most compensation plans for sales reps with a considered sales cycle (not order taking) structure the base salary between 40% and 60% of total plan. Total plan means total earnings at 100% of quota. We’ll use 100k as an example of total plan but of course double or triple our example if total plan is higher.
If at plan equals 100k then a company should invest 40k or 60k as a base salary and payout commissions or bonuses against quota up to 100k. Most companies offer extra incentives for over plan through uncapped earning accelerators. Now the question is what % of total plan should be base salary? There are several factors that go into this design such as experience of the sales rep but the close 2nd factor usually has to do with the length of the average sales cycle. Companies with a longer sales cycle (over 3 months) might lean closer to the 60% salary mark vs a shorter sales cycle that would lean closer to 40%. For longer sales cycles, there is typically more involved when it comes to tracking the sales process and involving members of the internal team to support the sales cycle and therefore a sales rep who successfully quarterbacks the deal and internal team is rewarded for this skill set.
Commission and bonus payout structure
Compensation plans for sales reps should include some immediate financial incentive for “winning the deal” but you also might consider splitting or deferring a portion of the commission to meet company client retention goals. There are typically checks and balances during the contracting process with a prospect and your sales comp plan could also offer a similar safety net for your customers and company goals. Oversold customers can cause significant financial stress to the company not to mention the employees that have to support this buyer’s remorse. Comp plans can account for this through various milestones such as 1) contract win 2) customer “go live” and 3) 1 year. If you foresee an accounting nightmare with too many milestones consider a simple 2-step process.
In summary, the perfect sales comp plan must account for both company and sales rep goals while ensuring a win-win for the customer.