Sales compensation is all about striking the right balance. On one hand, your incentives should motivate reps and steer the right sales behavior. On the other hand, your sales compensation plans must be designed in such a way that it ultimately lets you achieve your revenue, growth targets and drive profitability.
Owing to the staggering economic impact of the pandemic, it’s more important now than ever to get your planning right.
As per a report from Gartner, only 6% of sales heads are convinced of their team’s capabilities in being able to meet or exceed revenue goals.
This is quite challenging as there are many parts to a sales incentive compensation plan. However, if you have the right tools and processes set up, you will gain more confidence and have greater control of your incentive planning.
How to effectively build incentive programs for various industries?
In sales, compensation is key to attracting and retaining people.
“If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don’t have to manage them.” – Jack Welch
Picture this, what if half of your sales team decides to leave the company because of a badly designed compensation plan?
Not a pretty scene.
If your company is finding it hard to work out a balance between its goals and the compensation needs of its staff, it’s probably time to re-look at your compensation plan and structure.
Here’s a quick guide to help you nail a concrete sales comp plan for some of the biggest industries in the world today:
SaaS Sales
Sales compensation is a complex subject for SaaS companies. Here, the job of a sales rep doesn’t end with getting a new customer on board. However, customer retention is crucial as that’s how you maximize your profits.
While designing sales compensation, your goal should be to align sales behaviour with the objectives of the company. And so, the process should begin with identifying what your key business objectives are.
The primary objectives of your business may be to:
- Ensure your customers are happy after making a purchase, so they will remain loyal to you
- Collect cash upfront to ensure liquidity – this is essential in the startup phase of a business where cash is short in supply
- Sign contracts with longer terms
Your secondary objectives could be to:
- Focus on increasing gross margins
- Driving the sales of a particular product that has just been added to your product line
Simply put, it helps to write down and categorize your business objectives so that you can work out the sales compensation accordingly.
There is a lot of thinking that goes behind an incentive plan. However, the plan itself must be kept simple and easy to understand. Sales reps should be clear about how they have to act in order to get the best rewards.
To set specific compensation targets, you may want to fix your quotas using either the Top-Down or Bottom-Up Approach.
Top-Down Approach
In the top-down approach, a company sets a goal for a period of time, say a quarter and then fixes sales quotas in accordance with this goal.
For instance, your goal is to earn $10,000 in a month and you have 5 sales reps in your team. Each of them should strive to bring in $2000 to achieve this target.
If the deal size is $500, then your sales team should close 20 deals by the end of the month.
When quotas are set using the top-down approach, you start with the desired result and then work backwards to arrive at how much your teammates should sell to achieve the target.
Bottom-Up Approach
In a bottom-up approach, a company studies what its sales reps are capable of achieving, goes through historical data and fixes quotas based on those numbers. Find out how many deals each of your sales reps can close in a month. Analyse past data to see what the closed-won rate was and use that information to forecast for the future.
Quotas set using the bottom-up approach are more realistic, balanced and achievable, compared to the top-down model.
Banking and Insurance Sales
Incentive compensation is a topic that generates a bit of controversy in the retail banking sector. Deciding on how you want to compensate branch employees and for what, is key to the success and profitability of the branch.
Start by determining what your strategic profit drivers are.
A lot of incentive plans fail just because they don’t compensate employees to perform activities that profit the branch. Branch managers should be compensated to grow balances and to add to their core customer base. Banks that focus on these factors emerge as winners in the marketplace.
Simplicity is key
Your employees need to understand how their activities will contribute to the higher variable component. The best plans have just 4-5 components like deposit growth, unit sales, loan growth & new household acquisition.
Align individual compensation to branch performance.
Employees are rewarded for their own achievements but in relation to the branch’s profitability. This means that the payouts for a person’s unit sales go up if the branch does well.
Give an accurate report of results
Let your employees know how they are performing. If you are paying incentives quarterly, you should be able to provide a report on it at least by the end of every month.
Insurance agents sell different kinds of insurance by contacting leads and potential customers. They spend a good amount of their time talking to clients, working on presentations and finishing paperwork. They also have other administrative and customer-oriented responsibilities to fulfill.
Commissions for this type of sales are usually based on the base salary plus commissions plan. The percentage of commissions varies depending on the type of insurance the agents are selling.
Design an incentive program for insurance sales agents that is based on one of the below factors :
Output
Such plans are popular as they allow all agents to be eligible for an incentive.
Performance
This is an effective model where agents are paid extra money if they cross benchmarks by a certain date.
Behaviour
This incentive plan is based on specific behaviours of agents that drive revenue.
For instance, you can reward agents every time they exceed the weekly averages for quotes given or appointments set.
Real Estate Sales
Real estate brokers and agents are often self-employed and have the flexibility when it comes to defining their own commission structure.
They are usually paid on a commission basis, and the sales compensation model for real estate agents has remained fairly consistent over the years. The commissions are based on a percentage of the sale price of a property.
The average real estate commission rate in the U.S ranges between 5% to 6% of the property’s sale price.
So if a house gets sold for $300,000, the commissions can range from $15,000 to $ 18,000.
The actual percentage of commissions may vary depending on your region and its housing market.
Let’s understand the commission structure a little better with an example.
A house is sold for $250,000 with a 5% commission as agreed between the seller and listing broker.
This equals $12,500 in total commissions.
The brokers on the buyer’s and seller’s side get 50% each which is $6250.
The splits between brokers and agents may vary quite a bit but going by the 50% number, each agent from either side would get half of $6250 which is $3125.
Retail Sales
Retail sales is the industry in which merchandise like clothing, furniture, jewellery are sold in brick and mortar stores. The success of these stores depends on foot traffic rather than on sales action. As a result, retail salespeople are often paid only a base salary.
However, flat commission rates are paid out in stores with high ticket products.
Here are a few focus points to help you create a successful sales compensation plan and improve motivation levels within sales teams in a retail environment.
Collective sales bonuses
As a customer, have you ever felt pressured at a store by a sales rep to complete a purchase? Your answer is probably yes. If your incentive policy focuses primarily on individual performance, it can foster a negative customer experience during the purchase phase which can affect long-term sales.
So it’s important to build your incentive plan around collective sales bonuses.
Conversation rates
At the end of the day, any kind of retail activity boils down to the number of customers who visit your store and head to the billing counter to purchase a product.
If you have sufficient data on conversation rates, use it as a performance indicator and apply it as a criterion to your variable pay scheme.
Seasonal activity
The retail industry sees high seasonal activity mainly during Christmas and year-end sales. Pay close attention to high sales activity during these times and incorporate it into the calculation process of your incentive plan.
Medical Devices Sales
A sales compensation plan can become outdated due to changes in the market and the business strategy. Companies may find a lot of common signs pointing towards a need to review the current plan.
Medical devices companies should consider the below factors to design an effective sales compensation plan.
- Create a sales compensation design team with people from various functions such as HR, finance, product and sales management
- Review current practices, take into account the expectations of the senior management and perspectives of the participants
- Set the sales goals for the next fiscal year
- Automate incentive pay calculations
Pharma Sales
Today, Pharmaceutical companies are focusing more on retaining key people in sales and are finding ways to leverage sales compensation programs as an effective tool for maximizing the return on their investment in exceptional talent.
Here are some factors to consider while charting out a sales incentive plan for the pharma sector.
- Start with a plan that is flexible and customisable
- Ensure that your incentive plan is fair, balanced and motivating
- Invest in analytics to check the effectiveness of your plan
- Employ predictive analysis and machine learning to design plans that take into account the business conditions in each of the territories
Manufacturing Sales
Sales representatives in the manufacturing industry sell goods of manufacturers to other businesses, government agencies and organisations. Their job security and livelihood are mostly dependent on the amount of merchandise they sell. Sales reps in this sector are usually paid base salary plus commissions.
Providing manufacturing employees with incentives to motivate them to work more efficiently can be a challenge, mainly for small businesses.
An incentive plan that is poorly designed can encourage managers and staff to place their own or their department’s interest above the interests of the company.
Here are few tips on how to design an effective sales compensation structure for manufacturing employees:
- Implement a profits-interest plan. Under this plan, employees are paid a set percentage of the business’s earnings. This is considered as regular income for tax purposes and not as a bonus. You can use this type of payout against earnings as a means to reduce business tax.
- Get creative in your use of incentives. Employees can be incentivised by things other than money. You can give them a paid day off for meeting certain targets or deadlines.
- Work out an incentive plan that compensates all of your employees, not just the management or your top performers.
FMCG Sales
If you are managing an FMCG business or heading its sales strategies, your top priority will be to get products off the retailer’s shelves.
So it’s important to get retailer teams motivated to sell better.
Your FMCG company can use sales compensation plans to do just that. When executed well, they help in achieving a range of different goals. These include:
- Getting ahead of a competitor’s recent sales activity
- Improving sales that were declining in a particular geographical area
- Promoting key products
- Responding well to changes in market conditions
If you wish to increase sales of specific SKUs, you can chart out a sales incentive plan for retailers that will motivate their employees to focus on selling more of those products. Incentives can be aimed at bundles which are products that are sold together as a package.
It’s always a good idea to create a bit of healthy competition between your retailers. So create incentive plans that put them up head to head and bring out the best in them.
B2B Sales
In this industry businesses usually focus on their relationship with B2B clients. However, how you engage and compensate your employees is equally important.
Providing incentives to your sales reps isn’t just about generating sales or giving your teammates a chance to earn a little extra.
Studies reveal that non-cash rewards and recognition could be more beneficial.
Listed below are steps to define an effective incentive program in the B2B sector:
Involve your team in the planning process
To understand what incentives will boost sales and motivate salespeople, why not ask your team? This way you will find out exactly what they want. This act of consulting your team will cause them to feel recognised early in the process.
Create incentive plans that align with the set sales processes and objectives
Not all successful sales compensation plans work in the same manner. Some have sales quotas set on a monthly basis, while others have them for a quarter. Some sales reps work independently while others work in teams. So choose the most relevant incentives.
Design a virtual rewards catalogue for your sales reps
People spend a lot of time on mobile phones and electronic devices. Your employees may use computers, smartphones or tablets for a good part of their day. Why not gamify your company’s incentive system?
Partner with a corporate rewards company to get this done. Your sales team will love watching their points increase and seeing what rewards they can redeem with it.
Rollout the right sales comp plan for your business
Successful sales compensation plans are bound to improve loyalty and help you attract and retain the best talent from your industry. Having said that, you cannot take a ‘one-size-fits-all’ approach here. With your organization’s shifting priorities and the growing needs of your sales reps, it’s important to make timely changes to your sales compensation plans.
We’ve built Quotacal to help you design and structure desirable sales compensation plans. Sign up today to start building that perfect comp plan for your sales team.