Building effective sales commission plans is an essential part of motivating sales teams and driving revenue growth - Well-designed commission plan not only incentivize sales reps to perform, but also steers their goals with the overall strategic objectives of the organization.
We'll explore the key factors to consider when building sales commission plans, including understanding the sales landscape, product factors, human factors in sales, so can create commission plans that drive sales success.
Targets are a function of capacity
This is the most important part of this entire article - The target you set an individual is a reflection of what you think is capable of being achieved. Based off:
Average Deal Size x Average Conversion Rate x Average Number Opportunities
If getting to the target requires inflating any of these metrics beyond what you see as the company average, you're headed for a really bad time.
Ultimately, the key part is the average number of opportunities that someone can handle, over the course of a year (broken down by month) - This is their truly their capacity
Their target then comes from how many of those can they reasonably expect to close, and at what average price point.
We go on.
Understanding Your Sales Landscape
Sales commission plans need to come with a deep understanding of your sales landscape, including considering market conditions, sales capabilities, and product factors that can impact the performance of your sales team.
Before setting sales quotas and designing commission plans, it is essential to assess the current market conditions. 2022 was challenging to most and 2023 hasn't been particularly much better. Planning targets based on historic target amount is just not the way to go.
Factors such as competition (which evolves quarterly), demand for your product or service, economic conditions, and industry-specific trends should be taken into account. Not taking these into account typically ends in setting unrealistic sales quotas that can negatively impact your team's morale and the company's financial performance.
Another critical consideration when designing commission plans is evaluating your sales team's capabilities. Assessing your team's skills, technology, sales process efficiency, and other critical assets will help you set realistic quotas that are achievable, but you need to strike the correct balance between outbound sales and revenue closing capacities. Overestimating their capacity can lead to frustration and demotivation, while underestimating their potential can leave money on the table, or even worse leave you with sales reps completely unable to hit target.
Capacity is a massively under-represented mechanic when it comes to both commission planning and sales capacity planning, so make sure to get the balance right so you can set challenging yet achievable sales quotas that drive performance.
The Product Factor in Sales
Your product & services play a significant role in determining the structure of your sales commission plans, and requires consideration of the product life cycle, product portfolio complexity, and pricing strategy.
Product Life Cycle and Sales Quotas
Every product goes through different stages of the life cycle, including introduction, growth, maturity, and decline, and your sales quotas should align with these stages. During the introduction and growth phases, aggressive sales quotas may be set to penetrate the market rapidly, whereas when the product reaches maturity and decline, it is essential to adjust the sales quotas to reflect the changing market realities.
Product Portfolio Complexity
As you grow and sales are expected to balance the role of prospecting, pipeline management as well as a potentially technical sale, it becomes crucial to consider the technicality of what you're selling and adjust quotas accordingly.
Complexity has a very real impact on the number of opportunities that an individual sales rep can handle, and so it's worth getting under the skin of what can turn a sales process into a complex sale and how you can mitigate.
We've previously talked about how product complexity can affect onboarding times, as well as how sales engineers can help sales in dealing with it.
Product Pricing Strategy
Pricing strategy also influence sales commission plans, with premium pricing resulting in lower volume quotas but higher revenue quotas, while competitive pricing strategies may require higher volume quotas to attain similar revenue. By aligning your commission plans with pricing strategy, you can ensure that sales teams are motivated to achieve.
The Human Factor in Sales
When designing sales commission plans, it is essential to consider the skills, experience, motivation, and morale of your sales team (Do we need to repeat the last bit?). The human factor plays a crucial role in the success of not just your commission plans, but your overall sales capacity plans.
Sales Skills and Experience
The skills and experience levels of your sales team needs taking into account when setting commission targets, especially if you have a green team. New or less experienced salespeople may find high quotas daunting, leading to frustration and likely turnover. On the other hand, seasoned sales team members might require challenging quotas to maximise potential. Striking a balance that pushes your team without overwhelming them is crucial for maximizing their performance.
Motivation and Morale
Unrealistic sales quotas can have a devestating impact on employee morale, leading to high(er) stress, burnout, and low job satisfaction. Unattainable quotas are really the worst.
On the other hand, achievable quotas can motivate and inspire team members and drive competitiveness, and so are an important tool for motivating and inspiring sales teams. Ensuring that your quotas are within a reasonable range helps maintain a positive and productive sales environment.
Regular Review and Adjustment of Sales Quotas
Setting sales quotas is not a one-time activity (and neither is capacity planning), and you should regularly review and adjustment of sales quotas are necessary to ensure that they align with your strategic goals and the realities of your sales environment. By staying responsive to changing market conditions, sales strategies, and feedback from your sales team, you can continuously optimize your commission plans for maximum effectiveness.
The major word of warning - If you respond by raising quotas in the middle of a financial year you can (and should) expect an exodus your sales teams. It should be used as a mechanism to keep targets within reach, not to keep the goalposts moving backwards.
Use a format that works
Commission plans can be complex, and so can working in spreadsheet to try and build them. That's why we've built a free and easy to use template that you can grab that gets you started, so you can build Account Executive (AE) Sales Compensation Plans, as well as ones that cover Sales Development Representatives (SDR)
Building effective sales commission plans requires careful consideration of lots of factors, and by understanding capacities, sales landscapes, product factors, and human factors, you can create commission plans that motivate your sales team, align with your business goals, and drive revenue growth.
We're Clevenue, and we've made planning your sales teams easier that you could ever have imagined it, combining advanced models and live data to show you where you'll really land revenue-wise with your team and current performance.
If your commission planning is part of your overall sales team planning, you should check out our platform for sure.
Q: What are the main elements involved in building effective sales commission plans?
A: The main elements include understanding your sales landscape, taking into account product factors and human factors, and setting realistic targets. The targets should be a reflection of what the individual is capable of achieving based on the Average Deal Size, Average Conversion Rate, and Average Number of Opportunities.
Q: How should I set the targets for my sales team?
A: Targets should be a function of capacity, i.e., the average number of opportunities that a person can handle in a year. This number, multiplied by how many deals they can reasonably close and the average price point, gives you their target.
Q: What factors should I consider about the sales landscape while planning commission?
A: When planning the commission, you should consider market conditions (including competition, demand for your product, economic conditions, and industry trends), sales capabilities of your team, and product factors that can impact performance.
Q: How do product factors influence sales commission plans?
A: Product factors like product life cycle, product portfolio complexity, and pricing strategy have significant roles in determining your sales commission plans. You must align your sales quotas with the product life cycle and pricing strategy. Moreover, the complexity of the product can affect the number of opportunities a sales rep can handle.
Q: How does the human factor affect sales commission plans?
A: The human factor involves considering the skills, experience, motivation, and morale of your sales team. The experience level of your team should be taken into account when setting commission targets, as less experienced salespeople might find high quotas daunting. Motivation and morale are also significant, as unrealistic quotas can lead to stress and low job satisfaction.
Q: How often should I review and adjust sales quotas?
A: Sales quotas are not a one-time setting and should be regularly reviewed and adjusted to align with your strategic goals and the realities of your sales environment. However, avoid raising quotas in the middle of a financial year as it could lead to a loss of sales team members.
Q: What tools can help me build effective sales commission plans?
A: Commission plans can be complex to build, especially using spreadsheets. Therefore, it can be helpful to use templates or software that are designed to assist in building commission plans, such as the Account Executive (AE) Sales Compensation Plans and Sales Development Representatives (SDR) template that we've built