The 4 things you need to know when building a Sales Compensation Plan

Written by Kevin Baumgart,

Building a sales compensation plan? Here’s what you need to know…

Sales commission can be a tricky practice to dial in. I get it though. Most shops haven’t created sales commission plans before. If you’re looking at hiring new sales talent or trying to motivate current team members to go out and sell, it’s probably a good time to dial in sales compensation. 

Here are a few key items to keep in mind as you sculpt your sales compensation plans:

  1. How much should you pay?

This is different for every shop. In order to understand how much to pay a salesperson, you should complete an analysis to figure out what amount of revenue they need to bring in and then base the commission percentages off of that. 

Commission should always be tied to quota, or how much they need to sell. Paying on every dollar they sell(or every dollar of profit) isn’t the worst strategy, but I want them to always be thinking about their monthly number and motivated to close that amount every month. 

Either way, I think there should be a base salary/hourly component and then a variable commission based payment as well. I see a 60/40 (salary/commission) or 70/30 (salary/commission) as most common in our industry.

  1. Commission should be tied to the role and the behaviors you’re trying to motivate.

Great example that I’ve seen work in shops is this: We have an inside sales person/account manager/order taker that might have the chops to go out and sell and we’d like to motivate them to do so. Why not incent those behaviors by paying a higher commission percentage for bringing in net new opportunities? I’ve seen this work really well in shops. I’ve also seen this not work well as they might neglect current customers to focus on new sales/commission. 

Important to note that the best performing sales organizations that I’ve seen in shops have specialized roles. For example, outbound sales focus 100% of their time on closing new clients and then transitions the relationship over to the inside team/account managers. Account managers focus 100% of their time on supporting and driving revenue from their current customers. I’ve seen this separation of duties have a huge impact on revenue. 

  1. Metrics matter.

We talked about quota. Simply put a salesperson's quota is either the amount of profit or revenue they need to bring in during a time period (usually monthly.) It should be clear to the company and the employee what these numbers are. We live in a cyclical business and have seasons where more sales happen. Quota should follow this. We should heavily track both input and outcome metrics. Income metrics being activities like calls, emails, in-person visits or LinkedIn messages. Outcomes being meetings held, new jobs quoted, deals closed, revenue brought in, etc.

The beautiful thing about sales is that it’s a numbers game. Typically, the more activities or inputs, the more sales we get. This takes a diligent approach however. You have to live in the data, communicate it well and work with the team on a weekly basis to track performance and drive behaviors. 

  1. Communication is key.

Like everything in dealing with people and teams, communication is key with compensation. For strong sales people, compensation is one of the most important parts of their work. Solid communication around the plans, changes to the plans, timeframe, KPI’s tied to them, etc. are all really critical.

We should also regularly evaluate the effectiveness of the compensation structure. Are the behaviors we want to drive improving? Is the plan fair for the team member and for the company? We should be monitoring this on a quarterly basis and making changes if needed. 

Earlier in my career, I was interviewing for a head of sales role and toward the end of the hiring process as we were talking compensation the CEO said, “I’ll promise you right now that we will mess this comp plan up. Either it’s going to be too rich for us, or it’s going to be too rich for you. But, I’ll also promise you that we will make it right.” This stuck with me and I’ve repeated it to many sales people that I hired along the way. As we build out these compensation plans for new or existing team members, I think it’s a good message to keep in mind. 

Good selling!

At Supacolor, "We help you make it." And in that vein we wanted to inform and introduce our partners to Kevin Baumgart and SetSales. Kevin has helped hundreds of decorated apparel providers of all sizes with sales coaching, consulting and support. 

A topic that Kevin often works with shops on is how to measure and compensate sales people in the industry. If growth and increasing revenue is an area of focus for you in 2024, reach out to Kevin here. He'd be happy to help.