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How to Create a Sales Commission Plan + Free Tool

sales commission plan

Crafting a compelling and effective compensation plan for your sales can be pretty daunting, especially if you're wiping the slate clean and starting fresh. Kicking off with the right approach however empower your sales personnel to drive revenue and get you to your goals.

This guide covers the process of developing an effective sales commission plan, offer insights into sales pay and planning, and should help you understand the importance of capacity planning, cost projection, and financial planning as part of the overall sales planning process. Oh and we've got a free template to help you get started started also.

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Why You Need to Get Sales Commission Plans Right

Sales commissions are why sales people get out of bed - It's where they make their money, and it's the most important part to get right (and quite often the area that more often than not is built incorrectly). It's the motivator that gets sales going, which is pretty key if you want a team that's driving towards you company's revenue objectives.

The structure and complexity of sales commission plans can vary widely, depending on numerous factors including the nature of the product or service, sales cycle, target audience, and the company's sales strategy, and so it's important to get it right and make sure that it works for both you and the reps.

Get it wrong however, and you'll not only quickly lose the trust of your teams, but you'll also start to lose them to other companies, with your best and most confident staff first - They're backing themselves, so why wouldn't they?

Sales Pay Planning: The Art of Balance

Sales commission plans are a delicate balancing act of many factors, so it's important to properly understand the implications of every decision you make. Sales will scrutinise every part of the plan, so make sure that everything you do is deliberate:

Building a Robust Compensation Plan & Support Framework

When building a comprehensive compensation plan, you don't just need to consider the plan itself, you need to consider how you're going to support your reps towards hitting goal and their visibility of progress. Here's what you need to consider:

Base Salary and Commission Ratio

The ratio of base salary to commission is a fundamental aspect of your compensation plan. It's essential to strike a balance between fixed pay and variable incentives to motivate your sales team. In SaaS, you'll often find structures that are anywhere between 60:40 all the way to 40:60 of basic to commission, and in some industries a role can be entirely commission based, however for a lot of businesses this approach probably won't work, especially if you're trying to attract the right talent.

The balance should also be driven by the type of revenue generated by the rep, especially when considering whether reps are responsible for a degree of account management & expansion, or if they are entirely net new business.

The key is to ensure that your pay structure encourages the right behavior and aligns with your company's culture, goals, and feedback mechanisms, whilst also remaining competitive within your market. If not, you can fully expect to lose your better reps driven by earning potential which can serve to drag down the overall performance of the teams.

Individual or Team Achievements

Compensation plans can account for both individual accomplishments and team or company achievements. An approach to dual recognition can lead to a more collaborative environment and encourage collective efforts towards business objectives. It can however act to demotivate higher performing reps who might outperform the team average, as it leaves open the door for earning more if they were solely commissioned on their own activity.

Team targets may be more appropriate in earlier roles, or as additional spiffs or kickers attached to a commission plan, but especially in the case of revenue closing roles you should focus on revenue commission as being the primary and dominant component.

Territory Planning and Quota Setting

Effective territory planning and quota setting are fundamental to a successful compensation plan. The challenge lies in setting realistic quotas that match your sales team's potential and the market opportunities, and many companies rely on outdated data when setting quotas, which can limit opportunities and hinder accurate sales projections.

Careful consideration should be made when setting out territories & their attached commission plans as a rep opening up a new market may not immediately be capable of generating the same level of revenue as someone on a more established market.

This can be especially true when working in a verticalized business, where there is a primary market where the business originally found market fit - In these cases you should consider having adjusted quotas and commission plans so that reps are equally motivated, and removes the risk of "golden goose territories" existing.

Your compensation plan should account for the separately for the different roles within your sales team, their respective base salaries, and quotas. This should also provide a promotion path through the business that acts as a performance incentive, without this in place, it can be difficult to motivate those who hit the ceiling through consistently hit target.

Individual Plan Adjustments

Each plan should have variable achievement tiers with individual commission rates for each tier. The commission plans typically follow the same approach: adjustable based on a stepped commission plan, accelerators and decelerator based, or a simple flat commission percentage.

Each has its own uses - Flat commissions enable easy to understand payouts, and simple OTE structures, however it risks paying out bonuses to underperforming reps in a way that might not make financial sense,

Because of this, stepped commission structures can exist where commission payouts are essentially "unlocked" through attainment. This caps the payouts until they hit an agreed level.

The final is where there is essentially a flat payout, but with decelerators penalising anything below a level (similar to stepped), but paying out at an accelerated amount for everything over - The key difference with this one is that especially in accelerators, it's a pay enhancement on additional revenue over target, not an automatic increase to everything.

For first time commission plan builders, understanding these distinctions and clearly laying it out is essential not only from making it clear to reps, but from a finance and legal perspective.

Sales Development Representative (SDR) Targets

SDR targets can be more complex in some areas, especially when calculating targets. By setting an OTE to pipeline ratio, and basic data like average contract value and conversion rates, you can not only create commission plans but also set targets that make sense for their cost.

For SDRs, the best approach is to have soft targets on activities, and hard targets covering outcomes. The important thing with SDR targets however is to make sure that the targets and payouts aren't reliant entirely on closing revenue.

Ultimately an SDRs job is to source revenue, it's up to the abilities of the AE to close it. Any sense that bonuses are being dampened by poor sales handling of the leads they generate will not likely go down well, and so it's a delicate balance to tread.

On Target Earnings (OTE)

Every commission plan should come with an overall OTE for the role of Salary and Bonus, on 100% of target. This should work back to the OTE for the role that the salesperson signed up to do, so it's important to ensure that it's correct well ahead of providing a plan to an AE.

Ramp / Onboarding Targets

When ramping into a business, it's best practice to provide a ramp target that allows an AE to maintain their OTE and they onboard into your business - Let's not forget that if you've bagged great hires, they'll be moving from currently being at their OTE and unlikely to sign without something in place.

To secure the best candidates, you can expect to either already have an answer for how targets and commissions will be ramped or some form of commission guarantee for the first quarter or two.

Sales Revenue Planning: The Big Picture

Whilst the plan itself is complex, they are naturally coupled to a target. The targets that a plan is attached to is where the complexity dials up considerably, and can make or break a plan. Here's what you need to be considering:

Market Conditions

Assess the current market conditions before setting sales quotas and designing commission plans. Factors such as competition, demand for your product or service, economic conditions, and industry-specific trends should be taken into account. If you know a target is going to be tough to hit, and existing reps aren't anywhere near target, then it's unlikely new hires will hit.

This means that actual earnings will be below the advertised OTE, something which sales reps are becoming increasingly wise to through platforms like RepVue.

Sales Capabilities

Evaluating your sales team's capabilities is another critical consideration when designing commission plans, and your assessment of what is a feasible target. You need to look at your team's skills, enablement technology, sales process efficiency, and other critical assets to give you an idea of what is possible to help you set realistic quotas.

If working on new goals, there should be strong consideration before increasing targets around all of the above, with justification for what has changed and how it can contribute to hitting the elevated goal.

Without a clear link between a % target increase and an equivalent increase in support to hit goal, or volume of leads & opportunity, be prepared for your target increase to look like a pay cut.

Product Factors

Your product and services play a significant role in determining the structure of your sales commission plans. You should consider the product life cycle, product portfolio complexity, and pricing strategy when designing your commission plans, where like before there should be sensible evolution forwards.

If product is struggling more in the current market, facing increased competition or lacking demand, it might be time to reassess what is expected of sales.

Capacity Planning: A Key to Successful Sales Planning

Capacity planning is an essential part of successful sales planning, as it involves understanding the average number of opportunities that a salesperson can handle over a given period, and how many of those they can reasonably expect to close. This information helps set realistic targets for your sales team.

Without a robust approach to capacity planning, it can be difficult to create commission plans that aren't either unattainable or accidentally costly to the business.

Whilst getting the comms plan wrong by setting targets too low can be costly to a business in terms of payouts and potentially even overhiring (as a company target could be split between fewer reps), setting targets too high can be incredibly demotivating and lead to rep attrition, with your best reps looking elsewhere to maximise earning potential.

Cost Projections & Forecasts

Through effective capacity planning, you can build more accurate cost projections based on projected revenue and attainment. Whilst your starting point is always naturally 100%, you should have a fair understanding of what underserving your sales teams can look like and the ultimate affect on your Customer Acquisition Cost (CAC).

The ability to effectively model and scenario test the financial impact of your plans and wider strategic decisions becomes critical the more capital efficient the business needs to be. The combination of marketing costs, staffing costs and strategic spend & hiring decisions can lead to many different routes to target, as well as different levers to be pulled.

Sales capacity planning software (like Clevenue) can go a long way to helping you to understand which levers you need to pull, as well as how much each pull can cost.

Regular Review and Adjustment of Sales Quotas

Setting sales quotas is not a one-time activity. Regular review and adjustment of sales quotas are necessary to ensure that they align with your strategic goals and the realities of your sales environment. However, avoid raising quotas in the middle of a financial year as this could lead to a loss of sales team members.

Especially for roles like Sales Development Reps (SDRs / BDRs), performance dashboards or scorecards can help both sales reps retain visibility of their progress towards goal and their managers stay aligned and identify areas for improvement. Well-designed dashboards provide a straightforward, visual way to understand the numbers, eliminating frustration and increasing trust within the team, however you need to be mindful that any dashboards are appropriate to the role.

For junior sales roles like SDRs these dashboards can contain soft targets of activities that lead towards target, like call & email volumes - These can work as early indicators if the reps is targeted on generated meetings and potentially closed revenue. For senior sales roles like AE's however you'll find that this would be deemed as micromanaging, and would more than likely harm the relationship between the rep and the business.

Ultimately if someone's responsibility is to close revenue, their focus is more on their pipeline and closed won revenue, and so visibility of progress and conversations should steer towards that rather than "softer" KPIS.

Getting started - Our free compensation planning tool

When it comes to building a spreadsheet model for commission plans, getting started can be one of the most difficult bits. To make things easier for you we've built one of the most robust commission planning templates going, that should cover everything that's just been covered.

Conclusion: Crafting an Effective Compensation Plan

Building an effective compensation plan requires careful consideration of various factors. From understanding the sales landscape and product factors to considering the human factor in sales, each aspect plays a crucial role in creating a compensation plan that motivates your sales team, aligns with your business goals, and drives revenue growth.


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