MaRS Library Successful sales compensation plans: Setting the foundation
Developing sales compensation plans requires a keen understanding of your business objectives and what motivates your staff, as well as advanced financial skills. Sales incentives are one of the most complex areas of compensation and they generally have a significant impact on company results.
To set the foundation for a successful sales plan, startups need to focus on the following three areas:
1. Establishing the right design team for your sales compensation plans
- Sales and marketing—to define the sales goals, process, and territories if applicable
- Finance—to analyze the strategic and administrative financial aspects. This may include creating “what-if” scenarios, conducting return-on-investment calculations, analyzing affordability and exploring the payment process
- Talent management—to assess the market value of skills, identify driving behaviours, determine the right job design and develop the hiring plan
Involving your legal, IT and/or customer support teams in this process may add value as well.
2. Linking your sales compensation plans to your business plan and sales goals
It is critical that a sales incentive plan drive both desired behaviours and results. By reviewing the business plan with your sales team, you can clearly outline the sales objectives that support the company’s direction. To create the appropriate links between the two, you need to:
a) Understand the sales process
Before developing a sales compensation plan, define and articulate your sales process. Consider the following sales aspects for your startup:
- Who will you sell to? (E.g., in a B2B environment, this might involve end-users, decision-makers or a gatekeeper)
- How will sales territories be defined? (E.g., this maybe be designated by geographic region, product, service or distribution channel)
- How long will a typical sale process take? (One hour, two weeks, three months, one year—or longer?)
- Who from your team will be involved in each sale?
- Should the incentives focus on revenue, profit or strategic milestones?
b) Balance and prioritize business objectives
The sales team will naturally focus on the short-term goals that will result in the quickest and easiest payback. Your startup must balance this thinking to ensure that long-term business goals are also considered.
Short-term goals may involve:
Long-term goals may involve:
- Strategic changes to the customer or dealer base and/or the sales process
- A product evolution, with an introduction of new or updated products or services
- Sustained cash flow and profitability
- Retention of the sales team
- Improved market share and shareholder value
c) Maintain a focus on revenue and profit
Always keep an eye on both revenue and profitability. For example, if your sales team has the flexibility to change pricing, ensure that this is carefully controlled and monitored regularly.
Once a sales compensation plan is established, regularly check how it is working and whether it is delivering the value it should. To do so, look at the direct and indirect costs of earning revenue. Consider whether sales quotas are being achieved and whether sales align with strategic goals as well as revenue goals.
Over time, continue to ensure your sales compensation plans can attract, retain and motivate a strong sales force.
3. Ensuring compensation levels are competitive, but not too lucrative
Being able to attract, retain and motivate good salespeople will be heavily influenced by how well your compensation plans work. Ensuring competitive compensation levels when a quota is met is a key element that is often overlooked by early-stage companies.
Seek out relevant data from similar companies in the regions where you hire your salespeople. This will help your startup grasp what it will take to attract and retain staff. Understanding how much leverage is appropriate is also important.
If you pay too far above average, or make quotas too easy to attain, you risk keeping marginal staff and paying too much for what they deliver.
If you pay too little or make quotas unreasonable, you risk turning over good team members too frequently at a time when continuity and relationships are key to building your startup’s sales.
For more information on sales compensation plans, see:
- Successful on-boarding: Integrating new employees.
- Earning of services revenue: Financial events series, part 14 of 29.
- Designing the right incentives for your staff.
- Understanding my management style for recruiting and building teams.
- Allocating stock options for an employee stock option plan (ESOP).