A proper sales compensation plan is integral to both a company and its employees. An organization must focus on creating an effective compensation plan to make their sales representative content and motivated. Joshua Melick however points out that creating the perfect sales compensation plan is not always an easy task. Most entrepreneurs have to go through several iterations of such a plan to ultimately create the ideal one. Maintaining a nuanced and balanced is extremely vital when creating this plan, to ensure competent outcomes.
Sales compensation typically involves a combination of salary, commission, and other incentives to motivate sales reps. The goal of a good compensation plan is to encourage the salespeople to work harder and increase their targets, while also ensuring their loyalty towards the company. Joshua Melick mentions that a well-structured approach needs to be followed by a company for outlining the commission a sales rep receives while closing various sales deals. There generally are two broad parts of a sales commission plan. The first part includes the rules involved in it, while the second one points out the process to implement those rules.
While the exact approach and steps undertaken by a company while creating a sales compensation plan, all of them should try to take certain elements into consideration. According to Joshua Melick, those elements include:
- Quotas: Identifying a target that is achievable for the quota is important for a company. This quota can be measured according to the bookings or first year contract value, and finally be set on a quarterly basis. For best outcomes and lesser confusion, a company must have all sales representatives on the same plan. Most of them should meet or get close to the quota in an ideal situation. However, in case everyone manages to hit the quota, then it can be an indication that the quota has not been set high enough.
- Clawbacks: While sales representatives tend to hate clawbacks, they are extremely important to a company. This basically refers to a process when a previously paid commission is taken back, by deducting the sum from future commissions. Ideally, the clawback period should be three to six months. It can stretch to nine months as well, but anything beyond that shall be unwise. This system keeps reps accountable to bring in good quality deals. It also prevents fraud or bad incentives, and helps in protecting the profits of the company.
- Accelerators: The majority of the compensation plans have three to four steps to accelerate, as the representatives increase their sales. A company should ideally want their 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. A few companies use higher numbers retroactively for such plans, while others follow a tier-based approach.
A smart and structured process has to be followed while creating the sales compensation plan.