Is Your Comp Plan Overcomplicated?

You’re in charge of managing sales compensation plans, and things are starting to look a little too elaborate.

Take a deep breath. Much like online recipes, comp plans can be streamlined and refined for simplicity and clarity — and you don’t need to churn your own butter to make it happen. Revising your sales compensation plan is as simple as understanding the basics and defining exactly what you want your company’s comp plan to accomplish.

Take your pick

Good news! Comp plans come in all shapes and sizes, which is convenient when you’re seeking a sales comp strategy to complement your company goals. Common compensation strategies may include:

• Base salary plus commission. This is the most popular compensation model. Reps receive a salary supplement to the commissions that incentivize their sales performance. Base plus commission strategies are easy to manage, and they combine elements of motivation with stability and financial security.
• Base salary plus bonus compensation. This model works well for sales teams that consistently hit their targets. Base plus bonus plans offer enhanced predictability without sacrificing motivation.
• Commission only. With this model, a sales rep’s income is entirely based on their performance. Compensation rates range from 5% to 45%, depending on the industry, market activity, and the level of rep engagement required to make a sale.
• Gross margin commission. Gross margin plans calculate rep compensation based on company profits rather than individual sales numbers. A gross margin strategy motivates sales teams to collaborate in selling the most profitable products and discourages discounting to reach sales targets.
• Absolute commission. An absolute, or set rate, commission plan pays out when reps reach specific targets. They may receive a certain amount for each new customer or a percentage of the profit on upsells and cross sells.
• Straight-line commission. A straight-line commission plan pays sales reps according to what percentage of their quota they achieve. If a rep reaches 60% of their target sales, they receive 60% of their commission; if they sell more than 100% of their quota, payouts are rated accordingly.
• Activity-based commission. Activity-based plans take a long-term approach to sales compensation. These plans track incremental sales activity — including client calls, sales meetings, and other customer interactions — and reward sales reps for progress toward a sale.

A delicate balance

Simplicity is critical to a successful sales compensation plan. When comp plans get lopsided or unwieldy, reps find it harder to define the sales approach that will optimize their compensation, and it will be harder for everyone to calculate payouts quickly and accurately. Spreadsheets and manual data entry contribute to comp plan chaos and complexity. Errors add up, and your sales team spends a lot of time untangling the numbers — time better spent on generating sales.

Compensation plans should be just complex enough to drive the sales performance your company needs to achieve its goals — and simple enough for new sales reps to fully understand by the end of onboarding. A pared down comp plan is accessible, accurate, transparent, and easy to comprehend. So, the simpler, the better.

Weighing options

Grasping the basics well enough to design an effective comp plan is step one. Deciding which design is up next. To ensure you end up with a simple, effective plan, consider these strategies for comp plan design and development:

• Limit comp plan elements. Develop an incentive plan with no more than three distinct elements. Any more than three, and it starts to get tough for reps to prioritize sales activities. Keep goals and explanations short, sweet, and straightforward.
• Align compensation with company goals. When you devote your efforts to comp plan simplicity, every element is vital. Aligning your comp plan with company goals will drive sales team engagement and performance.
• Benchmark against industry data. The most elegantly crafted comp plan is subject to failure without top sales talent. Benchmark incentives against industry best practices and internal insights, and design a plan to address sales team recruiting and retention.
• Plan an effective rollout. Communicating your comp plan clearly is critical to its success. Work out the bugs before you present to your sales team, and convey each plan element in simple, straightforward terms.

Motivation incentives are more effective when sales reps thoroughly grasp how their compensation works — and simple comp plans are simply easier to understand.