A Guide to Sales Compensation for Your Shop

Published On: August 12, 2024

A Guide to Sales Compensation for Your Shop

Key Considerations for Shop Owners

Creating a sales commission plan can be a daunting task, especially if it’s your first time. Whether you’re looking to bring in new sales talent or motivate your current team to boost sales, now is the perfect time to refine your sales compensation strategy. Here are some essential points to consider:

1. Determining the Right Pay Structure

How Much Should You Pay?

The ideal compensation varies for every shop. Start by analyzing the revenue a salesperson needs to generate, then determine the commission percentages based on that figure.

Commission should always be tied to a quota – the sales target they need to meet. While paying on every dollar sold or every dollar of profit isn’t a bad approach, it’s crucial to motivate your team to hit their monthly targets consistently.

A balanced compensation plan typically includes a base salary or hourly wage combined with a variable commission. A 60/40 or 70/30 salary-to-commission ratio is common in the industry.

Tailoring Commission to Roles and Desired Behaviors

Commission should reflect the role and encourage the behaviors you want to see. For instance, if you have an inside salesperson or account manager who has the potential to bring in new business, incentivize this by offering a higher commission for net new opportunities. This strategy can effectively motivate your team, but be cautious as it might lead them to neglect existing customers in favor of new sales.

Successful sales organizations often have specialized roles: outbound sales focus solely on acquiring new clients, then transition them to the inside team or account managers, who focus on maintaining and growing these relationships. This separation can significantly boost revenue.

2.Importance of Metrics

Understanding Quotas

A salesperson’s quota is the profit or revenue target they need to achieve within a specific period, usually monthly. These targets should be transparent to both the company and the employee. Given the cyclical nature of the business, quotas should align with sales seasons.

Track both input metrics (activities like calls, emails, in-person visits, LinkedIn messages) and outcome metrics (meetings held, new jobs quoted, deals closed, revenue generated). In sales, consistent activity typically leads to higher sales, but this requires a diligent, data-driven approach. Regularly track performance and communicate with your team to drive the desired behaviors.

3.Effective Communication

The Role of Communication in Compensation Plans

Communication is crucial when it comes to compensation plans. For top-performing salespeople, compensation is a significant motivator. Clear communication about the plans, any changes, timelines, and key performance indicators (KPIs) is essential.

Regularly evaluate and adjust the compensation structure to ensure it drives the desired behaviors and is fair for both the employee and the company. Monitor the plan’s effectiveness quarterly and make necessary adjustments.

Reflecting on past experiences, it’s important to remember that compensation plans are not set in stone. As one CEO told me during a job interview, “We will probably get this comp plan wrong initially, but we will make it right.” This sentiment is valuable to keep in mind as you develop and refine compensation plans for your team.