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Business Oracle

Sales compensation

Having a proactive sales team can make all the difference in a business. Nick Devine, presents the first part of an eight-step compensation system to help get the best from your sales-people

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If you have responsibility for sales-people or account managers, then you need to understand sales compensation systems. It is a critical tool in your management toolkit.  Get it right, and you can drive the right type of behaviour and performance in your team. Get it wrong, and you end up paying for results that never show up.

If you have responsibility for sales people or account managers, then you need to understand sales compensation systems. It is a critical tool in your management toolkit.  Get it right, and you can drive the right type of behaviour and performance in your team. Get it wrong, and you end up paying for results that never show up.
 
Sales compensation

The purpose is quite simple: comm-unicate your top three priorities to the sales people. For example, if you want your people to work on new business development, your compensation system needs to pay for new business development. If it does not, most of your people will not default to new account development. In this two-part article, I will walk you through an eight-step system to implement a highly effective sales compensation process in your company. 

Priorities and performance

 

The first step in this process is to determine what good performance looks like, and how we will link compensation to the desired performance.

In the chart on the right, you can see I have identified three priorities: revenue, value add, and new accounts. You will also see I have identified three levels of performance: threshold, target, and excellence. 

The target is the starting point; you can see I want £1m in revenue, 33 percent value add and nine new accounts. Excellence is the level I expect my best people to perform at, while the threshold is where I am reconsidering the viability of the salesperson. 

You will also notice that I am splitting the variable commission as follows: 50 percent for revenue, 30 percent for value add, and 20 percent for new accounts. That weighting communicates to staff what the priorities are. 

Normalise sales roles

Sometimes people end up in a situation where they have negotiated different compensation packages for different people, with no underlying logic. This can become problematic when one salesperson finds out another, of similar abilities, is getting a far higher base salary. 

Compensation packages need to be normalised tp each role within the sales team, to avoid employees feeling unjustly treated

Here is a simple way to do this. Normalise your sales and account management roles, and create compen-sation packages and targets to go with each level. 

The higher the package somebody wants, the more revenue and profit they need to generate. And their compen-sation package will need to reflect this.

Account manager and new business sales level I – low base and low target plus variable commissions

Account manager and new business sales level II – medium base and medium target plus variable commissions

Account manager and new business sales level III – higher base and higher target plus variable commissions

Total cash compensation

Next we need to decide what is the total cash compensation for the role; this is sometimes referred to as on target earnings (OTE). It is a combination of the base salary and a variable commission when somebody achieves their target.  

 

Your goal for most business-to-business sales roles is 70 to 80 percent base salary and 20 to 30 percent variable commission. So, for example, £40,000 in base salary with a possible £10,000 commission when you hit target. 

Leverage

Now we need to decide what the leverage of the plan is for a peak performer. Leverage is the multiple of
the commission at peak performance level. For example, if I hit 130 percent of my targets using the plan above, I would want to get paid three times leverage. 

One times leverage is my variable commission when I hit target (£10,000 in the example above). Three times leverage is the same commission multiplied by three (i.e £30,000 in variable commissions). 

We will be back next month with the other four steps in the sales compensation system. Make sure and hold on to this article because you will need it when we return next month.
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