Sales programs energize and encourage your team to keep going. This article aims to help you and other business owners develop a modern sales program and motivate your sales team to help you fulfill your business’s mission.
Sales has become more complicated in recent decades and the game has changed with the proliferation of the internet, automation, electronic devices and software like natural language processing (NLP).
Even in today’s data-driven world, it’s difficult to overcome the problems inherent to any sales program - problems which can legitimately constrain a salesperson’s influence and motivation. Simply setting sales goals is especially difficult and further complicated by multiple sales channels (including digital) and competing products. If goals are too easily achieved, salespeople tend to under-perform or even, ‘game the program’ and do what’s needed to drive the most pay. If goals are too complicated, too high, or out of their control, salespeople tend to give up and the rumor mill starts – and the perception of your sales program is unfair and may distract or even create dissonance among the team.
This article is intended to help you introduce a competitive incentive plan that rewards sales and performance that is aligned with the direction of your company.
Keep It Simple. Incentive plans are supposed to be motivational. To be motivational these plans must be simple, easy to administer and transparent. Consider the following guidelines in your sales program;
Focus on outcomes and remember money drives behavior!
Create a clear relationship between compensation, roles and responsibilities;
Measure your competitors’ programs and ensure your compensation is competitive. According to the Bureau of Labor Statistics (BLS), the median pay for a sales manager is $121,060;
Complement sales-based incentives to drive collaboration and good business practice;
Make it SMART (specific, measurable, attainable, relevant and time-based);
Model the plan for people who can and will overachieve (e.g. 107% of goal);
Offer superior performers the opportunity for premium earnings (e.g. accelerators);
Build quotas and measure payouts with a credible and straightforward process;
Ensure accurate and timely payouts!!
Virtually all sales plans are written and documented. The sales compensation plan should be available and accessible to your salespeople. Your leadership may use it as a tool to communicate the sales strategy and goals and to motivate the sales staff to sell. Following are a few essential elements to include:
Strategy and the reason why the sales plan exists should answer the following; What is the business trying to achieve? What does the business expect to accomplish?
Performance Measures and benchmarks to help guide the sales force in terms of their focus.
Payout Formula, which may be the most essential component, should simply articulate how salespeople will be paid in terms of commission.
Governance and how your company plans to resolve questions or conflicts over sales compensation that are not covered in the plan.
Salary Only plans are rare yet are more predictable for the business and for the salesperson. The simplicity of salary only salespeople allows the business to predict hiring needs and enjoy lower employee turnover. The salesperson also may experience less stress given that their compensation is not based upon sales and their ability to meet sales quotas. Yet without incentives, salespeople are usually less motivated.
Incentives (Commission) Only plans are also rare and solely based upon sales. If a salesperson sells nothing, their compensation is zero. These plans do not create loyalty or aligned goals among the salesperson and the company.
Salary + Incentive plans are the most common. Salespeople receive a fixed annual base salary and incentives. To start, consider splitting compensation equally between base salary and commission. If you’re hiring an accomplished sales leader, consider the industry standard of 60% salary and 40% incentive-based. A less aggressive ratio (e.g. 70% Salary and 30% Incentives) may be used to sell a highly complex or technical product. The fixed annual salary provides the salesperson guaranteed compensation regardless of their performance.
Ideally, salary should be estimated based upon the factors that salespeople can control or influence. For instance, rewarding for customer satisfaction incentivizes employees to be truthful in their promises to customers and also provides an incentive for sales employees to ensure the commitments to the customer are properly communicated to the company. Rewards for bringing in more profitable customers or for retaining customers long-term helps associates focus their efforts on the types of sales that create the most value for the company. It’s best, from an ethics standpoint, if someone besides the sales team collects and reports on these metrics.
Mix measures the sale of new products or services or maintaining a defined proportion of sales for a given product. Not all of products and services are created equal. Margins vary; so does maintenance and the cost to serve. Whatever the case, measuring and managing to ‘mix’ quotas encourages salespeople to sell the right products and services and in the appropriate quantities.
Account simply measures the addition of new accounts, the growth of existing accounts or the retention of existing accounts.. This is useful if your company is targeting a new industry or sector.
Gross Margin is commonly used in service or project-based companies and measures the gross or contribution margin of a sale to promote income generation and discourage selling under cost. This measure reduces the reliance on discounts to close sales. Discounts, like rebates, are an unsustainable business practice. Imagine returning to that same customer only to tell them that their discount no longer applies and the price for your services have increased.
Territories are used when sales teams are responsible for clearly defined geographic territories and are paid on territory sales versus individual sales. Paying salespeople for attainment increases fairness when there are differences in opportunities across territories. Each team focuses on a specific territory or region and total sales are split among the salespeople responsible for that territory. To attract reps to this plan and grow your sales teams, you'll want to offer an attractive commission and a well-developed territory. While prospects will be protected from poaching by other sales teams, reps within a specific territory can't follow customers who move outside of their territory.
Other Non-Sales Measures. Contribution based goals work best as part of the performance management process but are generally not recommended for determining incentive pay. Activity measurement can motivate an increase in the quantity of the desired activity but a decrease in the quality.
Contribution-Based. Sales based goals are not the only way to motivate salespeople. Digital sales channels are reducing salespeople’s impact on sales and challenging companies’ ability to measure impact. This makes traditional goal-based incentives less effective for sales management. Consider a commitment-based incentive in addition to the sales-based incentives. For example, measure a salesperson’s contribution to the team and/the company’s marketing (e.g. whitepapers, blogs, speaking engagements, etc.).
Team-Based. If your salespeople work in teams with long sales cycles, consider a commitment-based incentive in addition to the individual sales-based incentives. For example, instead of only individual sales, measure the long-term team performance or the individual’s contribution to the sale (e.g. leads, pre-sales, joint sales, new salesperson training, etc.) or customer retention. Be careful not to distract from the salesperson’s responsibilities, quota or compensation and proceed with caution.
Behavior-Based. Many companies have structures in place to receive ethics complaints, but not all companies have effective systems for handling those complaints. During a recent sales scandal at Wells Fargo, calling the ethics hotline was, reportedly, like submitting a letter of resignation. A good reporting system is sponsored and promoted by executives, rewards honest and sincere reporting, and responds appropriately to complaints.
Payout Formulas. Actual Sales / Quota = Attainment
Quotas are set on a recurring basis and used to establish a salesperson’s goals. To start, consider a "bottoms-up" approach where your team estimates the market opportunity and each territory or salesperson quota. Inputs will vary but generally consider;
Sales Volume and Average Value Average Deal Size
Qualified Leads (per Month)
Percentage of Qualified Leads that Close
Prospect to Sale Duration or Duration of Time to Close a Sale
Average Revenue Per Salesperson
Quotas must be realistic. Unrealistic targets tend to result in undue stress on sales associates, increased turnover, and unethical behavior. In the case of Wells Fargo, if 5,300 of your employees start cheating, it’s a good sign your expectations are too high.
Seasonality. Most businesses are seasonal or experience slow sales in the first two quarters of a year, with the remaining two quarters making up for the difference. Consider assigning quota weights that account for such seasonality. For example, your company might assign a 30-40% of the seasonal weight to the first two (2) quarters and a weight of 60-70% to the last two (2) quarters of the year. This way, the sales person has a fair chance to meet their goals, despite seasonal differences.
Attainment is the actual percentage of quota sold by a salesperson and for a specific period. Industry standard is seventy-percent (70%), meaning a salesperson must actually sell seventy-percent (70%) of their quota to become eligible for the sales-based incentive. Following is an example;
Annual Sales Quota = $2,000,000; Commission; 10% of Sales
Actual Sales = $2,500,000; Attainment = 120%;
Q1 Quota = $500,000; Sales = $1,000,000; Attainment = 200%
Q2 Quota = $500,000; Sales = $100,000; Attainment = 20%
Q3 Quota = $500,000; Sales = $100,000; Attainment = 20%
Q4 Quota = $500,000; Sales = $1,000,000; Attainment = 200%
Annual Sales = $2,200,000; Annual Attainment = 120%
Annual Sales = $2,200,000 * 10% Commission = $220,000
Ranges. Rather than setting quota on a single number, consider “Attainment Ranges”. For example, rather than a specific goal of $2 million for a salesperson, set an “Attainment Range” of $1.8 to $2.2 million. Once a salesperson meets seventy-percent (70%) of the quota or $1.4 million of the $2 million, the salesperson is paid 70% the sales-based incentive. Ranges are particularly useful for startups or companies who are less confident about the accuracy of quotas and have a larger “success range” with a slower rise in incentive payout. To avoid demotivating your team, don’t set the range too broadly or too low!
Accelerators are bonus payments that reward exceptional performance or when a salesperson exceeds quota. For example, the salesperson would be paid 15% accelerator on sales of 125% of quota. Following is an example;
Quota = $2,000,000; Commission; 10% of Sales
Actual Sales = $2,500,000; Attainment = 125%;
Attainment + Accelerator = 140% or 125%+15%;
Adjusted Sales = $2,800,000 or $2,000,000 * 140%
Adjusted Sales $2,800,000 * 10% Commission = $280,000
Short Sales Cycles require short time frames and limit the potential damage in companies with short sales cycles (higher transaction volume and lower value or revenue per sale). Consider monthly reviews with quarterly quotas and payments. This way, a salesperson can have a bad month yet meet their quarterly quota and receive the full payment.
Long Sales Cycles don’t benefit from a shortened time frame. Long Sales Cycles are common among large deals, team based sales and deals that take a while to close. Consider quarterly reviews with quarterly quotas and payments to allow enough time for sales to normalize.
Determine whether you need to make changes. After the results of the analysis are clear, the team should give thought to whether the sales compensation plan needs to be updated – in terms of goals, quotas, or pay ratios. Updating the sales compensation plan mid-stream is common in business today. "We've seen a fairly consistent trend that on average nearly two-thirds of organizations are changing their sales compensation plans each year," Stoeckman says, citing WorldatWork's latest survey. That change may come even more frequently when business cycles change. Business goals when the economy is moving into an upturn are different than when the economy is going through tough times.
Your first compensation plan won't be able to cover everything. Issues will be found, whether it's what constitutes a new account or what happens when several different people claim credit for a sale. There are going to be things that come up during the course of the year that are not covered or are a matter for interpretation. You will need to spell out the way those are going to be resolved. It may be a committee or a chain of command. When a sales person brings a question to the sales manager, nine times out of 10 they will be able to resolve the situation, but when they're not, there needs to be some means of resolving the issue. A committee might have representatives from sales, human resources, and finance to arbitrate.
Contests. To temporarily change behavior, consider contests and one-time rewards which can either be financial (e.g. cash prize) or non-financial (e.g. recognition, vacation, dinner, etc.). To keep everyone’s attention, conduct one contest at a time and for a short period of time (e.g. a month or a quarter). Too many contests or contests longer than a quarter will dilute the urgency!
Decelerators are unpopular as they penalize under-performers. For example, if a sales person meets 60% of their quota, the incentive compensation would reduce correspondingly (e.g. 60%). Decelerators may protect against excessive incentive costs when goals are set low, especially for large deal sales with long sales cycles. A per-deal value or revenue cap may limit unwarranted incentive payouts for a large windfall that salespeople do not significantly influence.
Promote the Right People. Not all salespeople are good managers and not all managers are good salespeople. Recognize this fact and ensure the people you promote are motivated by the responsibilities and compensation included in their new role!
The most difficult task is implementing your sales plan. The success of your sales plan depends on how you involve key stakeholders (e.g. key sales people), when you involve key stakeholders, the motivation for the sales plan and the value offered to your sales people.
No plan is perfect, and your priorities are constantly changing. Your customers and salespeople are naturally looking for new loopholes. This guide will help you get started as you work to understand what will suit your sales team. Some may value cash over incentives or a flexible remote work policy instead of more vacation days. At the end of the day, do your best to set them up for success and keep them motivated!
Thank you for reading! Contact Us if you need additional approaches or help implementing a sales plan.