Having an effective sales compensation plan is critical to your business success.
Your plan will vary according to your industry, your culture, the goals you want to achieve and the stage your business is at.
The best compensation plan is one that is easy to understand and allows the salesperson to know exactly where he stands in terms of his performance, in real-time.
The 3 most common plans are:
- Salary only.
- Base Salary + Commission.
- Commission Only.
Most businesses will adopt a combination of Base + Commission so that’s what we’ll focus on today.
Here are the main considerations:
Your objective
Are you looking to aggressively expand your client base or open up a new territory? Are you focusing on steady growth from existing customers and incoming inquiries? Are you a start up with limited resources?
Your compensation plan should align with your objective. For example, if you intend to aggressively expand your client base, your compensation plan need to be equally aggressive in order to attract the right kind of salespeople.
Acquisition Costs & Lifetime Value
Acquisition Cost is the cost of ‘buying’ a lead and a customer.
If your salesperson earn RM2k per month, meet 20 new prospects every month and close 2 customers. It costs you RM100 per lead and RM1000 per sale.
(This is a simplified illustration without considering other expenses to give you an idea.)
Lifetime value is the value of a customer to you over the period of time they do business with you.
If a customer purchase 1k products per month and stay an average of 12 months, the customer’s Lifetime Value to you is 12K. Knowing these figures allow you to formulate how much you can spend to”buy” a customer profitably for your business.
For example, we have a client who pay their salespeople 100% of the first month sales generated from new customers. They are able to do this because their customer lifetime value is high, at 24-36 months and their product costs are low. So they made the decision to aggressively focus their salespeople on new customers acquisition and hired a different team to provide customer service.
Inbound Sales, Outbound Sales or Farming?
Inbound sales – a salesperson’s job is to attend to incoming inquiries, or passive leads.
Outbound sales – a salesperson’s job is to hunt for new leads and generate new customers.
Farming – a salesperson’s job is to grow business with existing clients (getting repeat orders and additional sales).
Knowing what you want your salespeople to focus on will help you formulate a compensation plan that reward the right activity appropriately.
Highest commission is usually paid for outbound sales, which is the most difficult part of a salesperson’s job.
For example, some of our clients use this simple formula: X + X + Y.
Let’s say X is 2% and Y is 1%.
A salesperson gets 2% (X) commission for farming and inbound sales, 4% (X + X) for outbound sales and 5% (X + X + Y) if he exceeds his sales quota.
This simple formula rewards the level of difficulty appropriately, with emphasize on developing new business.
How long and complex is your sales cycle?
If your sales cycle is complex and long (IT solutions, projects involving tenders, medical equipment, etc), you’ll usually pay a higher base salary compared to businesses with shorter and more straightforward sales cycle (walk-in retail, distribution of products, etc).
How much knowledge & skill required to sell your products/services?
The more knowledge & skills required to sell your products/services, the higher the base salary component vs the commission component. For example, a telco equipment sales rep usually enjoys a higher base salary than a photocopy machine sales rep.
Sales Success is the Salesperson’s sole effort or a team effort?
The more direct influence a salesperson has on sales success, the higher the commission component. If it is a team effort environment (salesperson generate leads, technical team to demo, senior management to negotiate financial terms of sale, etc), a team incentive program will be more appropriate.
Collection
Some businesses with short sales & payment cycle pay commission upon sale and deduct the commission if they fail to collect the following billing cycle. The more aggressive businesses take this approach because they want their salespeople to focus their attention to selling.
Some pay only upon collection. These are the more conservative businesses or businesses where they expect the salespeople to complete the entire sales cycle.
You have to determine which is best for your culture.
Sales Activity Tracking
Tracking is a MUST if you implement a compensation plan. In fact, it is a must even if you don’t. Not only will tracking your numbers tell you and your salesperson exactly where he stand, your numbers will also:
- Show you whether a sales/marketing strategy is working.
- Help you to identify which step(s) in your sales cycle you need to tweak or fine-tune to maximize results
- Enable you to predict future performance.
These are some of the basic things you need to consider to create an effective sales compensation plan that works for you. Need help to create one? Register NOW for our FREE Business Optimization Clinic, valued at RM699. We guarantee you will get at least 1-2 ideas you can implement immediately, even if you do not engage our services.
Have a profitable week ahead!
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