Many organizations face a difficult time in defining a compensation plan for sales people that aligns the interests of the company and the people. Even more so, when it’s a startup trying to work on subscription revenue model.
The basic objective of any sales compensation plan is to align the sales behavior with the company objectives. To get the best results, let’s find out what these objectives could be.
Winning new accounts.
Booking new recurring revenue.
Signing contracts for longer period.
Maximum upfront cash collection.
Achieve maximum renewal rate.
Drive expansion revenue with existing customers.
Signup accounts that are willing to be references.
Do not allow too much discount to win deals.
Use small deal size to win the account and then expand once you are in.
Designing Sales Compensation Plan
The plan should be simple enough that it could be understood easily and be obvious enough to delineate the behavior for maximum reward. There should not be more than 3 drivers for sales commission.
New Sales: Commission on new sales is usually the biggest part of sales compensation. It is usually based on the monthly recurring revenue or the annual contract value. A good practice is to pay the commission on realization of cash. Unless the total amount is paid upfront, commission is not paid on the total contract value of multi-year contracts.
Expansion Sales: Expansion sales through upselling and cross-selling should also be promoted. And since it involves less cost to get expansion sales than new sales, the commission rate could be lower.
Renewals: It usually involves much lower commission than new sales.
If your organization has the typical Hunter/ Farmer roles, make sure that the plan is customized for the specific roles.
One of the goal of the compensation plan is to reward the top performing sales reps, compared to the average ones. Under performing sales people are usually costly for the company while high performing ones are very profitable. If the sales exceed the assigned quota, the ROI takes a jump as the base salaries remain fixed. This really bumps up the profits.
Having tiered commission rates is one of the most effective ways of rewarding the winners. The commission rate gets higher after the quota is exceeded. The first category is one which has generally been historically achieved (for e.g. 100-110%), second category has a smaller gap (110-125%) and the third category is one which is really hit by very few sales reps (>125%). This really drives the performance.
Make sure that the highest category is not something that is considered unattainable. It has to be within reach, but just above the grasp. Something that will motivate higher performance.
Also, never put a cap on the commissions. Why would you want to punish a sales rep for hitting 200% of their quota.
For penalizing under performers, you can have commission rates that start low.
Non Cash Awards
Exemplary performances can be rewarded with paid holiday trips, stock options etc. It also helps in recruiting top talents if the HR can talk about a few employees who were awarded trips and have made big money.
For team oriented sales teams, performing teams could be rewarded with group parties and dinner outings after achieving quarterly targets. This can help build spirit and camaraderie.
The sales compensation plan need to evolve as the business evolves. If the customers are churning out very fast, the top priority should be retention and renewal. For selling a product that is not moving, the commission rate could be increased. But make sure that change is not rolled out abruptly that shifts the focus completely.
Hope following in these footsteps will help you attract the best sales reps and drive great performance from them.