How to Build Compensation Plans That Drive Results
A well-designed sales compensation plan can be one of the most compelling drivers of business success. By motivating your sales team to achieve results, aligning incentives with company goals, and ensuring employees feel fairly compensated for their efforts, a good compensation plan offers huge possibilities in leveraging high performance. However, it is far from easy to build such an effective plan.
A compensation plan that is not aligned with business strategies, is too complicated, or is communicated ineffectively can lead to confusion, frustration, and degraded morale.
This guide covers how to build compensation plans that will engender trust, drive your team, and focus on specific, tangible results. By avoiding common pitfalls, clearly communicating, and regularly reviewing and refining the plan, businesses can construct a compensation structure that aligns incentives with desired outcomes and optimizes sales performance.
Avoid Common Compensation Plan Pitfalls
One of the most common mistakes is failing to align the compensation plan with the company’s GTM strategy. Many organizations implement a compensation plan as a formality without considering how it will influence behaviors and drive business outcomes. A successful compensation plan must be designed with specific business goals in mind.
The best approach is to work backward from the desired outcomes, determining which actions should be incentivized, and then building a plan that encourages those behaviors.
Another common mistake is making the compensation scheme overly complicated. While it may be tempting to include many variables and performance metrics, too much complexity can confuse both administrators and sales representatives. Over-engineering the plan makes it difficult to manage and can lead to payout calculation and reporting errors, undermining trust in the system. When sales reps do not understand how their commissions are calculated, they may lose motivation or feel disconnected from the process.
For example, a sales representative once stood up at a company-wide meeting and said, “I have an MBA, and I can’t figure out my comp plan!” This demonstrates how a convoluted compensation plan can cause confusion and frustration. Keeping the plan simple ensures that sales reps know exactly what actions they need to take to maximize their earnings.
- Align with GTM strategy: The compensation plan should reflect the business’s strategic goals and incentivize the right behaviors.
- Avoid over-complication: Keep the plan simple so sales representatives and administrators can easily understand and manage it.
- Be transparent: Clearly document how payouts are calculated to instill confidence and motivate the team.
Inspire Trust and Drive Results through Better Communication
A well-designed compensation plan can fail if it is not communicated effectively. Sales representatives must clearly understand how the plan works, how their actions affect their earnings, and how their efforts contribute to the company’s goals. Clear communication is essential to motivating sales teams and keeping them focused on the right targets. Transparency helps build trust between sales teams and management, which is critical for long-term success.
One common mistake companies make is not effectively communicating the reasoning behind the compensation plan. Sales reps need to understand why the plan was designed the way it was and how it ties into the company’s overall strategy. Without this context, the plan may feel arbitrary and disconnected from day-to-day business. Clear communication helps sales reps understand how their efforts affect their compensation, keeping them motivated to improve performance.
It’s also crucial to gather regular feedback from the sales team to identify any misunderstandings or areas for improvement in the plan. Sales reps are often the first to notice problems or suggest changes that could make the plan more effective. Incorporating their feedback into the plan design shows that the company values their input, fostering ownership and commitment to achieving sales goals.
- Clearly communicate the plan: Sales reps should understand how their compensation is linked to their performance.
- Gather and implement feedback: Regularly ask for input from your team and adjust the plan based on their feedback.
- Explain the “why”: Help sales reps understand how the plan fits into the company’s strategic goals.
Keys to Maintaining an Effective Compensation Plan
A successful compensation plan is not a one-time project; it is a continuous process that needs to be reviewed and refined to keep up with the company’s evolving needs. Scenario-based modeling is one way to keep a compensation plan effective. This allows sales reps to see how their performance at different levels affects their earnings.
For example, a “what-if” calculator could show reps how much they would earn if they closed a certain number of deals or reached specific milestones. This not only motivates reps to strive for more but also helps them understand how their efforts translate into compensation.
Equally important to a successful compensation plan are data-driven insights. Regularly assess whether the plan is producing the desired outcomes. For example, you can analyze the performance of individual sales reps, teams, or regions relative to their quotas. These metrics will help identify where the plan is working and where changes are needed.
If certain sales targets are consistently missed, it may indicate that the compensation plan does not incentivize the right behaviors or that the targets themselves need to be adjusted. Additionally, many companies are shifting toward a “total revenue model,” where compensation plans include other departments like marketing, customer success, and operations, not just sales. As more teams contribute to driving revenue, it’s essential to ensure that the compensation plan reflects their contributions and aligns their incentives with overall business objectives.
- Use scenario-based modeling: Provide tools like a “what-if” calculator to show reps how higher performance can increase their earnings.
- Regularly evaluate the effectiveness of the plan: Use performance data to assess whether the desired outcomes are being achieved, and make adjustments as needed.
- Expand the plan to other departments: Align compensation for non-sales teams with their measurable impact on revenue.
Conclusion
Designing and maintaining a results-driven compensation plan requires careful planning, clear communication, and regular review. By avoiding common pitfalls, ensuring alignment with company goals, and making sure sales reps understand how their efforts translate into compensation, you can create a framework that motivates your team and drives business success.
Remember, a compensation plan is not a static document—it should evolve with your business, incorporating feedback and data-driven insights to stay effective in a constantly changing market. With the right approach, your compensation plan can be a powerful tool that aligns sales performance with business objectives, helping both the company and its employees reach their full potential.