How to Create a High-ROI Sales Compensation Plan
Building a high-ROI sales compensation plan is critical for companies looking to maximize their sales performance while ensuring that their investment in compensation is well-aligned with business goals. With sales teams often being one of the most significant cost centers in an organization, it’s crucial to ensure that the sales compensation plan drives the desired outcomes, from revenue growth to long-term profitability. In this guide, we explore key strategies to help you design and implement a sales compensation plan that delivers a strong return on investment (ROI) by focusing on alignment and agility.
Alignment: The Foundation of High-ROI Plans
The first step in designing a high-ROI sales compensation plan is ensuring alignment with your go-to-market (GTM) strategy and broader business objectives. By clearly linking compensation to the company’s strategic goals, you can incentivize the right behaviors from your sales team. Here are several key questions to consider when aligning your compensation plan:
- What customer segments do you want to grow, and by how much?
- Which products are strategic to your business, and how should they be prioritized in compensation plans?
- How does each sales role contribute to your overall strategy?
- Are you focusing on revenue, profitability, retention, or a combination of factors?
- What business behaviors should you be encouraging at each stage of the sales process?
To ensure proper alignment, each sales role’s compensation plan should be based on the factors that they control and can directly influence. For example, account executives may be rewarded not just on bookings but also on invoicing, payments, and the long-term profitability of the deals they close.
Include More Downstream Factors
While it’s common to focus on sales bookings, a high-ROI compensation plan should also account for downstream factors that contribute to the company’s long-term success. These factors could include metrics such as margin, customer retention, and the profitability of specific deals. Including these elements in compensation ensures that sales teams focus on not just closing deals but also securing deals that align with the company’s broader strategic goals.
Don’t Be Afraid of Gates, Qualifiers, and Thresholds
Another important aspect of building a high-ROI plan is incorporating qualifiers, thresholds, or performance gates into the compensation structure. For example, if a new product is strategic but lower in volume, you can create a qualifier that rewards sales reps only after they hit a minimum threshold of product sales. Similarly, you might design accelerators or bonuses for exceeding certain revenue goals. These mechanisms ensure that compensation plans drive sales toward the most critical business objectives rather than encouraging a “spray and pray” approach.
Adjust Goal-Setting and Measurement Periods
In a volatile market or industry, it may be beneficial to shorten the goal-setting and measurement periods for your sales compensation plan. While annual targets were the norm in the past, many companies now adopt quarterly or half-yearly goals to stay agile and responsive to market changes. Shorter goal-setting periods enable businesses to pivot more quickly and align sales incentives with real-time market conditions.
Design for Full Alignment, Then Simplify
While it’s essential to design a compensation plan that aligns with all relevant business objectives, it’s equally important to simplify the plan for easy administration and comprehension. Once you’ve ensured that the compensation plan is fully aligned with your strategic goals, look for ways to simplify any overly complex elements that may not add significant value. This simplification helps ensure that the plan is easy for sales teams to understand and for administrators to manage.
Agility: Where the Rubber Meets the Road
Even the best-designed compensation plans need regular assessments and adjustments to stay effective. This is where agility comes into play—not just in the design of the compensation plan but also in how it’s managed and adjusted over time. It’s critical to build systems that allow for frequent evaluation and refinement of the plan to ensure that it continues to deliver the intended results.
Some of the key questions to ask when assessing your plan’s effectiveness include:
- Is the plan driving the right sales performance, and are the strategic goals being met?
- Is there a proper alignment between performance and earnings across the sales team?
- Are quotas being met too easily, or are they too challenging for most reps to achieve?
Plan Effectiveness Analytics
Using data-driven analytics to measure the effectiveness of your sales compensation plan is essential. These analytics help you assess whether the plan is driving the right behaviors, and they provide insights into how performance is distributed across the sales team. Here are some analytics that can help measure plan effectiveness:
- Commissions vs. Dollar Goal Attainment: This analysis helps measure the cost of commissions relative to the revenue generated, ensuring that the compensation plan delivers a good ROI.
- Distribution of Commissions: This analysis helps identify whether the compensation plan is rewarding the right performers and creating a proper pay-for-performance culture.
- Strategic Product or Segment Growth: Measure whether the compensation plan is successfully driving sales growth in strategic areas, such as specific products or customer segments.
- Quota Achievement Reports: Analyze quota attainment across the sales team to assess whether targets are set appropriately and whether sales performance aligns with company goals.
Conclusion: Aligning Compensation with Business Goals
Designing a high-ROI sales compensation plan requires thoughtful alignment between your company’s go-to-market strategy and the incentives laid out in your compensation plan. By incorporating downstream factors, setting clear performance gates, and ensuring agility in goal-setting, you can create a compensation plan that motivates sales teams to achieve business goals while delivering a strong ROI.
Furthermore, using data to regularly assess and adjust the plan ensures that it remains relevant and effective in the face of changing market conditions. In the end, a well-aligned and agile sales compensation plan is a powerful tool for driving growth, rewarding performance, and maximizing the company’s return on its sales investment.