How to Develop a Sales Compensation Plan in 8 Steps

The goal of a sales compensation plan is to provide an incentive for your team members to sell more in order to increase the company’s overall revenue.
The plan should include several components including training and development, performance review mechanisms, recognition events with prizes, incentives and bonuses related to individual goals achieved within the program.
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The “sales commission structure template excel” is a sales compensation plan that has 8 steps. The plan will help you to develop a sales compensation plan in 8 steps.

Sales compensation plans provide you the groundwork for how you’ll compensate salespeople. A well-thought-out system guarantees that your staff understands what they need to do to succeed and inspires them to work at their best. Follow our step-by-step guide to create a sales compensation plan for your company, from calculating baselines to setting objectives and quotas to executing your plan.

1. Decide on a sales compensation method.

In terms of technique, there are many ways you may use when developing a sales compensation plan. Depending on the sales culture, industry standards in terms of normal pay rates or procedures in that vertical, and the age of the firm, each organization will be unique. The table below highlights the many ways available, as well as the benefits and drawbacks of each:

While this is the first step, you may wait until after stages two and three, when you have a better understanding of the financial ramifications. Furthermore, if you are a relatively young organization with inconsistent financial data, you will most likely want to complete all of your projections before deciding on a technique.

Check out our guide on sales performance management for tips on how to get the most out of your team, whether you’re using one of the performance-based systems or a salary. You’ll learn about how various firms handle performance management and how to effectively encourage your sales team.

2. Figure out where you’ll break even.

Determine how much income you’ll need to meet your operating costs. This is the first stage in determining your overall sales income objective and individual quotas, which will be covered in the following sections.

Salaries are a fixed expenditure, so they’ll be straightforward to include into your calculations. However, if you wish to experiment with commissions or incentives, they would be variable costs dependent on sales and milestones achieved. Two break-even studies are shown below, one for all fixed expenditures and the other for variable expenses.

Calculating the Break-Even Point: Structure of Salary-Only Compensation

Salaries: $60,000 x 3 Sales Reps = $180,000 + 8% employer payroll tax = $194,400 $6,000 for supplies and equipment Expenses for marketing and advertising: $3,000 $15,000 for office space Expenses for legal counsel: $2,500 Expenses for tax preparation and accounting: $1,000 $2,000 for productivity software $5,000 in insurance $228,900 is the total break-even threshold.

Salary + Commission Compensation Structure = Break-even Calculation

Salaries: $30,000 x 3 Sales Representatives = $90,000 + 8% $97,200 in employer payroll taxes $6,000 for supplies and equipment Expenses for marketing and advertising: $3,000 $15,000 for office space Expenses for legal counsel: $2,500 Expenses for tax preparation and accounting: $1,000 $2,000 for productivity software $5,000 in insurance Break-even threshold for pre-variable costs = $131,700 20 percent commission: $131,700 * 20% = $26,340 Employer’s additional payroll tax: $2,107 $160,147 is the total break-even threshold.

3. Set Sales Objectives

It’s time to define a sales objective, or overall income goal, after you’ve determined your break-even threshold. The break-even point plus targeted profitability is your entire sales objective. For example, if you want the firm to produce $100,000 in profit after expenditures, add $100,000 to the $229,900 (if salary alone) or $160,147 (if salary Plus commission) in the preceding section.

Alternatively, you might set your objective based on a profit margin percentage, such as a 40% profit margin. Multiply the break-even point by the percentage in this scenario, as shown in the examples below:

• Only salary: $229,900 x 1.40 = $321,860 sales target
• $160,147 + 1.40 = $224,205 sales target

4. Distribute Sales Quotas

Setting sales quotas is as easy as taking your sales objective and dividing it by the number of sales representatives if your company is entirely production-based. For example, if you split the $321,860 sales objective by three sales people, you’d create separate sales goals of $107,286 in revenue for each person. When establishing quotas, however, we recommend that you consider each rep’s experience and specific skill sets.

Deal-based quotas, in which you specify a minimum amount of new clients or customers each salesperson must bring in, may be simpler to implement. Finally, if you know your sales pipeline conversion rates, you may create activity-based quotas, in which you establish a minimum number of calls, emails, appointments, or leads created for a certain time period, such as weekly, monthly, or quarterly.

Let’s assume you know you’ll need four new agreements every month to meet your income targets. According to conversion stats, every sale closes after 200 cold calls to fresh prospects. As a result, in order to meet your four-deal sales objective, you’d set your minimum monthly quota at 800 cold calls each month.

Customer relationship management (CRM) software may help you with this by assisting and streamlining your efforts. Individual or team sales activity may be tracked using CRMs like HubSpot, making it easy to keep your team on track with activity quotas and revenue targets.

Report on HubSpot’s activities (Source: HubSpot)

5. Determine the Compensation Rates

The goal is to figure out what kind of salary, commission rates, and/or sales incentive structures you’ll need to include in your sales compensation plan. This phase also offers considerable flexibility in terms of when it should be completed. Certain businesses, such as real estate and insurance, for example, have industry norms in terms of conventional commission rates. This will have been established in step one in this case.

These figures might potentially have been determined during your break-even analysis. You may experiment with the figures to see how they effect your break-even point and if the sales targets you’ve established can offer fair remuneration to your sales staff while still being realistically achievable.

During your financial analysis, you may discover that if you reach a specific revenue level, you and your company may advance to the next level. In such instance, you could want to include a bonus in your sales compensation plans that pays a person (or the whole team) a certain amount of money if they exceed a certain revenue threshold.

To attract sales rep prospects, one strategy to establish your rates is to combine realistic expectations with a reasonable pay level. Let’s imagine you already know you want to adopt a Salary + Commission model because of the balance it provides. You believe that an overall pay of $80,000 is reasonable for the sort of sales work that this position will require.

Furthermore, you feel that, based on historical data, the typical sales person can generate $300,000 in revenue per year and that $30,000 is a reasonable starting wage to provide. As a result, your commission rates would be 16.6 percent (50,000/300,000). Any sales rep who achieves above-average results will be rewarded with above-average commissions.

6. Make a payment schedule

You’re ready to design a payment schedule once you’ve determined basic salary, commission rates, and bonus structures. This is mostly for administrative considerations and to manage representatives’ expectations about when they would be paid. Decide when the commissions or bonuses will be paid. Here are a few things to think about while planning your payment schedule:

• When the transaction is completed: After a new contract is closed or a client/customer is onboarded, the commission or incentive is paid at the end of the following paycheck month. While this method is beneficial to salespeople, it poses a danger to your firm if customers fail to pay.
• When the customer pays: After the customer or client makes their first or continuous payments, the commission or bonus is paid during the following paycheck period.
• After the month, quarter, or year has ended and/or the threshold has been met, the commission or bonus is paid during the following payment period (for bonuses). This technique is better for the company, but it may irritate sales agents if they have to wait for their salary.

Pro tip: Run your payroll using accounting software like QuickBooks Online and make sure your sales compensation schemes are properly maintained. This platform’s payroll processing tools allow you to keep track of workers, contractors, benefits, and payroll taxes. QuickBooks Online also connects with a number of prominent customer relationship management (CRM) systems, including Insightly, Zoho CRM, and Salesforce, to name a few.

Payroll in QuickBooks Online (Source: QuickBooks)

7. Share Your Strategy

You must establish and be ready to explain your strategy for recruiting, liability, and motivating reasons as part of sales management. We advocate laying out the strategy in new recruits’ employment contracts and staff handbooks for easy access. Plan group and individual meetings with salespeople to explain the new system, answer any questions they may have, and react to their concerns while introducing a new structure.

Pro tip: Use your CRM to keep track of your performance and commissions. Popular tools like Performio allow you to monitor individual performance, examine commissions due on a dashboard, and readily view estimates for sales commission expenses as transactions go through the sales process. Performio is recognized as the top commission tracking CRM solution for 2022 because of these factors.

Dashboard for monitoring commissions with Performio (Source: Performio)

8. Execute & Evaluate Your Plan

Following through with paying the right wages and/or performance-based compensation is one of the most critical components of how to design a sales compensation plan for your firm. Sales leadership include conceiving, creating, and implementing motivating approaches, all of which should be addressed in your strategy.

As you operate your company and manage your sales staff, keep an eye on whether the compensation system you developed is enticing to your salespeople, fair to your company, and financially sound. If something isn’t quite right, reassess your plan’s structure and repeat these stages until you discover something that works better.

Let’s imagine you’re in charge of a sales compensation plan and you see that sales people are departing because they aren’t sufficiently motivated. You discover that the lack of motivation is due to low commission rates, which make it unprofitable for salespeople to put out their best effort. This would be an excellent opportunity to rethink the structure and make adjustments such as raising commission rates or switching to a bonus system.

If a redesign of your strategy is required, proceed with caution in how the system is altered. It becomes a delicate topic when a person’s salary or pay structure is altered, since this may cause cultural, turnover, or legal liability difficulties.

For example, suppose you decide to go from a Salary + Commission to a Salary + Bonus sales compensation plan. That substantial shift will need caution, including providing enough warning of the change, structuring incentives so that representatives earn as much as or more money based on existing measures, and maybe easing into the transition by offering cash compensation early to cover any possible income gap.

Statistics on Sales Compensation Plans

Take a look at the numbers below to see how other companies are approaching sales compensation schemes and some of the greatest difficulties they face:

Conclusion

You can expand your company by understanding how to create a sales pay plan that gets the most out of sales agents while keeping them happy in their jobs. Analyzing your financial data, using good management techniques, knowing how to attract sales people, and investing in the correct software tools to make your compensation plan easier to implement are all necessary steps in designing and executing a successful plan.

“commission incentive plan” is a term that is used to describe the compensation plan for sales employees. This article will explain how to develop a commission incentive plan in 8 steps.

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