Sales incentive compensation is a strategic approach to rewarding sales professionals based on their performance and contribution to an organization’s revenue goals.
Unlike non-quota carrying roles with a fixed salary and company bonus, sales incentive compensation includes a variable component that is directly tied to an individual’s and/or team/company achievements against an assigned quota. This remuneration model is designed to motivate and reward salespeople for their performance which in turn will drive revenue growth.
At its core, sales incentive compensation is about creating a win-win scenario where salespeople are financially rewarded for their success, which in turn contributes to the company’s overall success. A well-designed sales incentive compensation plan goes beyond simply paying commissions; it’s a comprehensive strategy that can influence behavior, drive performance, and shape the sales culture of an organization.
Key components of sales incentive compensation often include:
Base Salary
The fixed portion of compensation that provides consistent cash flow and is in consideration for time spent on non-revenue generating activities.
Variable Salary
The performance-based portion, which may include commissions, bonuses, or other incentives.
On Target Earnings (OTE)
The total expected compensation when a sales representative meets their quota or performance targets.
Accellerators
Increased commission rates for overachievement.
Quotas or Targets
Specific goals that sales reps are expected to achieve.
Performance Measures
Measurable indicators used to evaluate sales performance, such as revenue, units sold, or new customer acquisition.
Sales incentive compensation plans can vary widely based on industry, company size, sales roles, and business strategy. They may be simple, such as a straight commission plan, or complex, involving multiple performance measures, tiered structures, and team-based incentives.
Effective sales compensation plans should be tied to Operations and Strategy. For example, if the company is entering a period of product-led growth then there will need to be Product Specialist and Generalist roles which will in turn require new compensation plans.
Figure1. RevEng’s
Strategy Alignment Model
However, designing an effective sales incentive compensation plan is not a one-size-fits-all endeavor. It requires careful consideration of various factors, including market conditions, competitive landscape, product complexity, sales cycle length, and organizational culture. The goal is to create a compensation structure that not only motivates the sales team but also supports the company’s broader business objectives and financial targets.
In the following sections, we’ll explore why sales incentive compensation is critical for revenue growth, examine a comprehensive model for designing these plans, and delve into the specific components and considerations involved in creating an effective sales incentive compensation strategy.
Why Sales Incentive Compensation is Critical for Revenue Growth
Sales incentive compensation is a critical linkage to driving revenue growth for organizations. There are ten key benefits to effectively tying compensation to your Strategic Goals & Operations.
Motivation and Performance
A well-structured incentive plan motivates sales professionals to perform at their best. When reps see a direct correlation between their efforts and their earnings, they’re more likely to push harder, work smarter, and consistently strive for better results. This increased motivation translates into higher sales volumes, more closed deals, and ultimately, increased revenue for the company.
Alignment with Company Goals
Effective sales incentive compensation aligns the objectives of individual sales reps with the broader goals of the organization. By tying compensation to specific metrics that matter most to the company—whether it’s revenue growth, market share expansion, or customer retention—organizations ensure that their sales force is working towards the right targets. This alignment is crucial for driving sustainable revenue growth.
Attracting and Retaining Top Talent
In the competitive landscape of sales, top performers are always in high demand. A compelling sales incentive compensation plan can be a powerful tool for attracting the best sales talent in the industry. Moreover, when top performers see that their efforts are fairly and generously rewarded, they’re more likely to stay with the company, reducing turnover and maintaining a high-performing sales team.
Driving Desired Behaviors
Sales incentive compensation can be strategically designed to encourage specific behaviors that contribute to revenue growth. For instance, if a company wants to focus on acquiring new customers, the compensation plan can offer higher rewards for new business. Alternatively, if the goal is to increase customer lifetime value, the plan might incentivize upselling and cross-selling activities.
Adaptability to Market Changes
A flexible sales incentive compensation plan allows companies to quickly adapt to changing market conditions. By adjusting incentives, companies can redirect their sales force’s focus to areas of emerging opportunity or away from declining markets, ensuring that revenue growth remains on track even in dynamic business environments.
Promoting Healthy Competition
Well-designed incentive plans can foster a spirit of healthy competition among sales team members. This can create a high-energy, high-performance culture where sales reps continually push each other to achieve better results, driving overall revenue growth for the organization.
Encouraging Innovation and Problem-Solving
When sales reps have a stake in the outcome of their efforts, they’re more likely to think creatively about how to overcome obstacles and close deals. This can lead to innovative sales strategies, improved customer relationships, and ultimately, increased revenue.
Enhancing Customer Focus
By incorporating customer satisfaction or retention metrics into the compensation plan, companies can ensure that their sales teams are not just focused on short-term gains but are building long-term, profitable customer relationships. This customer-centric approach can lead to sustained revenue growth over time.
Providing Clear Performance Feedback
Sales incentive compensation plans provide a clear, objective measure of performance. This transparency allows sales reps to understand exactly where they stand and what they need to do to improve, facilitating continuous performance improvement and revenue growth.
Cost Control and ROI
While it might seem counterintuitive, a well-designed sales incentive compensation plan can actually help control costs while driving revenue growth. By ensuring that higher compensation is tied directly to increased revenue, companies can maintain a healthy return on their sales compensation investment.
Sales incentive compensation is not just about paying sales reps; it’s a strategic lever that can significantly impact an organization’s revenue growth. By motivating the sales force, aligning individual efforts with company goals, attracting and retaining top talent, and promoting behaviors that drive sustainable growth, an effective sales incentive compensation plan becomes a critical tool in achieving and exceeding revenue targets. As we move forward, we’ll explore how to design such a plan using a comprehensive growth model.
The RevEng Go-To-Market (GTM) Growth Model provides a comprehensive framework for designing and implementing effective sales incentive compensation plans. This model recognizes that sales compensation doesn’t exist in isolation but is part of a broader ecosystem that drives revenue growth. The model consists of three interconnected levels: Corporate Level Elements, Operational Elements, and Comp Plan Level Elements.
Let’s explore each of these levels in detail:
RevEng Sales Compensation Growth Model
Corporate Level Elements
These elements form the foundation of the sales compensation strategy and align it with the overall business objectives. Key components include:
Customer Segmentation: Understanding different customer groups and their unique needs helps in tailoring sales approaches and compensation structures.
Talent Strategy: This involves defining the types of sales roles needed and the skills required for each, which informs compensation levels and structures.
Budget and Financial Goals: The overall financial targets and constraints that shape the compensation plan.
Operational Efficiency: Ensuring that the compensation plan can be efficiently administered and managed.
Regulatory and Compliance Considerations: Adherence to legal and industry-specific regulations in compensation design.
Operational Elements
These elements focus on how the sales organization operates and executes its strategy. They include:
Sales Process: The defined steps and stages in the sales cycle, which influence how and when sales activities are compensated.
Client Engagement Model: How sales teams interact with customers, which can impact the structure of incentives.
Job Role Design: Detailed definition of responsibilities for each sales role, informing eligibility and structure of compensation plans.
Comp Admin and Governance: The policies and procedures for managing and administering the compensation program.
Territory Design and Quota Setting: How sales territories are defined and quotas are assigned, which directly impacts individual compensation potential.
Systems and Tools: The technology infrastructure supporting sales operations and compensation management.
Comp Plan Level Elements
These are the specific components that make up the sales incentive compensation plan. Sales Incentive Compensation design requires a deep-dive into each of these areas. The design process is both deep and wide across these components.
Role Eligibility: Determining which roles qualify for incentive compensation.
Pay Architecture and On-Target Earnings (OTE): Defining the overall compensation structure and target earnings for each role.
Pay Mix: The ratio of fixed (base salary) to variable (incentive) compensation. Pay mix is a critical compensation element to “get right” because it ties to the level of persuasion within a role and will determine the amount of remuneration at varying levels of over-performance.
Performance Measures: The specific metrics used to evaluate and reward sales performance.
Pay Curves: How incentive pay increases (or decreases) based on performance levels. A well-designed pay curve will motivate and reward top performers while maintaining the compensation budget.
Accelerators: Increased incentive rates for overachievement. Accelerators are derived from both benchmark data for actual pay for top performers and internal quota attainment data.
Performance and Payout Periods: The timeframes for measuring performance and distributing incentive payments.
Crediting Rules: How sales are attributed to individual reps or teams. While crediting may seem simple, it can be complex, especially in at-risk revenue models, i.e. media or consumption based models and have a direct impact on motivating reps.
The RevEng GTM Growth Model emphasizes the interconnectedness of these elements. For example, changes in customer segmentation (a Corporate Level Element) might necessitate adjustments to the sales process (an Operational Element), which in turn could impact the performance measures used in the compensation plan (a Comp Plan Level Element).
By considering all these elements in a holistic manner, organizations can create sales incentive compensation plans that are not only motivating for the sales team but also aligned with broader business strategies and operational realities. This comprehensive approach ensures that the compensation plan drives the right behaviors, supports overall business goals, and adapts to changing market conditions.
In the next section, we’ll delve into the practical aspects of how to design a sales incentive compensation plan using this model as a foundation.
How to Design a Sales Incentive Compensation Plan
Designing an effective sales incentive compensation plan is a complex but crucial task. It requires a deep understanding of your business, your sales roles, and your market. Here’s a comprehensive guide to designing a sales incentive compensation plan, incorporating the key elements mentioned:
Guiding Principles
Before diving into the specifics, establish guiding principles for your compensation plan. These principles should align with your company’s values and strategic objectives. Common guiding principles include:
Market Competitiveness: Ensuring the plan is attractive compared to industry standards.
Simplicity and Transparency: Making the plan easy to understand and communicate.
Fairness: Ensuring equitable treatment across different roles and territories.
Alignment with Company Goals: Driving behaviors that support overall business objectives.
Flexibility: Allowing for adjustments as business conditions change.
Sales Comp Plan Eligibility Requirements
Determine which roles are eligible for incentive compensation. Typically, roles that directly impact sales outcomes are eligible. Consider the following criteria:
Direct customer interaction and influence on purchasing decisions.
Ability to impact sales results through individual effort.
Measurable and attributable contribution to revenue or other key metrics.
Roles like Account Executives, Business Development Representatives, and Sales Managers are usually eligible, while purely administrative are generally not.
Benchmarking On-Target Earnings (OTE)
Benchmark OTE against industry standards to ensure competitiveness. This process involves:
Identifying comparable roles in your industry and market.
Gathering salary data from reliable sources (e.g., industry surveys, compensation consultants).
Determining your desired market position (e.g., 50th percentile, 75th percentile).
Setting OTE ranges for each role based on this analysis.
Remember to consider factors like experience level, geographic location, and company size when benchmarking.
Pay Mix
Determine the appropriate balance between base salary and variable compensation. This mix typically varies by role:
Entry-level roles: Higher base salary (e.g., 70/30 or 80/20 mix)
Experienced sales roles: More aggressive mix (e.g., 60/40 or 50/50)
Strategic or complex sales roles: Balanced mix (e.g., 70/30 or 60/40)
The right pay mix should motivate performance while providing appropriate financial stability. For example, a lower base pay and higher variable pay, like 30/70 may seem like a win-win for a company and a high performer; however, the 30% base pay would result in very small cash flow for the rep. Pay mix is set at the role level, based on the level of control and level of persuasion the role has over the sale; however, other considerations like sales cycle, cash flow, and budget can factor.
Plan Measures
Select performance measures that align with your business goals. Common measures include:
Revenue: Total sales generated
Bookings: Committed future revenue
Profit margin: Profitability of sales
New customer acquisition: Number or value of new accounts
Product mix: Sales of specific product lines or services
Use a combination of measures to drive balanced performance, but limit the number to maintain simplicity. Where possible a sales incentive comp plan should only have one measure, i.e. one role focuses on one sales motion. When more than one measure is needed, compensation plans should be limited to 3 measures with no measure having less than a 20% weighting.
Pay Curve
Design a pay curve that shows how incentive pay relates to performance. Key considerations include:
Threshold: The minimum performance level where incentives begin.
Target: The performance level where target incentive is earned (usually 100% of quota).
Excellence: The performance level considered exceptional (often 120-150% of quota).
The shape of the curve (linear, non-linear, stepped) can significantly impact motivation and behavior.
Accelerator Rates
Implement accelerator rates to reward overachievement. Accelerators typically kick in above 100% quota achievement. For example:
The best practice is for accelerator rates to be derived from company performance data and benchmarks for how we want to pay our top performers. For example, if the top decile Account Executive achieves 150% of their quota and the benchmark data shows that at that level of performance, the Account Executive would earn 250% of their target variable then the accelerator rate is 3x.
Accelerators should be generous enough to motivate exceptional performance without creating undue financial risk for the company.
Performance Period and Payout Period
Determine appropriate timeframes for measuring performance and paying incentives:
Performance period: Often monthly or quarterly for transactional sales; may be annual for longer sales cycles. Generally managers and above roles are semi-annual or annual.
Payout period: Typically monthly or quarterly to maintain motivation.
Align these periods with your sales cycle and cash flow considerations.
Crediting and Related Terms & Conditions
Establish clear rules for how sales are credited:
Define when a sale is considered “closed” for compensation purposes.
Establish rules for splitting credit on team sales.
Determine how to handle renewals, upsells, and multi-year deals.
Document these rules clearly in your plan’s terms and conditions.
Additional Considerations
Quota Setting: Develop a fair and motivating process for setting individual quotas.
Territory Design: Ensure equitable opportunity across different geographic or account-based territories.
Clawbacks and Guarantees: Define policies for recovering compensation on canceled deals and any guaranteed payments for new hires.
Cap: Decide whether to cap total incentive earnings, considering both motivation and financial prudence.
Special Incentives
Consider incorporating special incentives to drive specific short-term behaviors or results:
SPIFs (Sales Performance Incentive Funds): Short-term bonuses for specific achievements.
Contests: Time-bound competitions with non-cash rewards.
Recognition Programs: Non-monetary rewards for top performers.
These should complement, not complicate nor compete with, the core compensation plan.
Implementation and Communication
Once the plan is designed, focus on effective implementation:
Develop clear plan documents and training materials.
Communicate the new plan thoroughly to all stakeholders.
Train sales managers on how to coach to the new plan.
Ensure your systems can accurately track and report on the plan metrics.
Plan for regular reviews and adjustments as needed.
Continuous Evaluation
Finally, remember that a sales incentive compensation plan is never truly “finished.” Regularly evaluate its effectiveness:
Monitor key performance indicators and gather feedback from sales reps and managers.
Analyze the plan’s impact on sales behavior and business results.
Stay informed about market changes and competitor practices.
Be prepared to make adjustments to keep the plan aligned with evolving business needs.
By following these steps and considering all these elements, you can design a sales incentive compensation plan that motivates your team, aligns with your business goals, and drives sustainable revenue growth. Remember, the best plans balance the needs of the sales team with the strategic objectives of the organization, creating a win-win scenario for all stakeholders.