Sales plans with bonuses and accelerators when objectives are met or exceeded are classics for sales teams. Company results are delivered through the work of sales individuals, and many companies have adopted variable compensation plans to motivate and engage sales teams.
There are multiple approaches to handling sales targets, and they can be complex to put in place and manage over time. For a direct organization with a fixed number of salespersons, a variable sales compensation allows for reducing the total sales compensation when the market is down. Sales compensation becomes an adjustable variable for market fluctuations. On the opposite, when the market is up, sales programs with accelerator incentives allow for targeting higher volumes.
For some salespersons, there is sometimes evidence that their compensation plan must be negotiated with their management. Not negotiating the salary compensation is sometimes perceived by them as a risk of being perceived as losing or inefficient in the competency where they are expected to excel, and naturally, many reasons come into play for negotiating one’s variable plan. Sales target discussions can be tough and complex for the manager of those individuals.
What makes a sales compensation plan successful? What factors should be taken into account? How to manage successful and deceptive situations?
Multiple questions must be asked by the management team throughout the process:
Building a successful sales compensation plan is part of a strategy to limit turnover. A salesperson who leaves takes their competencies, customer knowledge, and sales practices—possibly built over years—which are lost to the company and will take months and considerable effort to replace. Leaving for the competition is the worst-case scenario.
The salespersons you want to remove are those who damage your company’s reputation, work poorly with other team members, and whose actions result in unsatisfied customers. These salespersons must be identified and separated from the team. They may set poor examples for their fellow salespeople, and their actions are often destructive over time.
With a well-designed compensation plan, salespeople are kept motivated. They understand their sales targets and are willing to learn and develop skills and competencies. They collaborate successfully with their colleagues and collectively achieve success, providing help and support across the team. A positive environment is cultivated over time, developing confidence in oneself, in others, and in management, where their success is also the success of their customers and their company.
Acceptance of the sales compensation plan is a key objective. It should not only be the case during positive times when the market is up, but also during more challenging times when many may not reach their individual targets.
Multiple factors must be considered when developing a sales compensation plan, as these factors typically evolve over time. Unfair or unrealistic engagements may be difficult to remove or adjust, and salespersons may resist removing what they perceive as previously negotiated items. It is important to carefully consider those compensation elements that are challenging to remove once perceived as established.
Objective and motivational targets
Sales compensation must be built on objective targets. These almost always include sales targets, volume, revenues, and sometimes price factors when applicable. Profitability is difficult to include, except for top management, as it is usually unwise to share margin elements that could create an undesired bias in sales arguments. To allow for a profitable mix, a price/discount approach should be preferred.
Objective targets can also encompass specific objectives unique to a salesperson, such as winning particular important customers. By setting individualized targets, the objective is to ensure that the salesperson is not compensated solely based on financial results, but also for specific and objective targets that garner attention and highlight the individual’s unique contributions. When delivering the annual sales speech and congratulating a salesperson for their results, it is often beneficial to mention the effort expended in winning difficult customers and expanding the company’s customer base.
Management by Objectives is the part of compensation not related to financial performance numbers.
Clear and Measurable Targets
It can be tempting to give multiple independent targets, but when there are too many, you may lose the salesperson who will only focus on some and disregard the others. It is usually recommended to ensure that compartments of the compensation are clear and each contributes significantly to the overall compensation. For that reason, three different compartments for a variable compensation plan are often considered a maximum.
Additionally, targets must be easily measurable. This may not always be simple to implement. For instance, if sales occur long after orders are taken, and metrics are related to conversion from orders to sales, a part of the sales incentive will wait for the sales transaction to occur.
Fair Targets
Sales are particularly sensitive to fairness. They compare themselves to others and review past plans. A clear understanding of the market potential, past targets, and achievements is essential.
Fairness is built on multiple variables that can often be objectivized. When sales territories are individualized, an estimate for the market potential is needed. Understanding potential wins is important to assess the share of the sales target for a region or country across a sales team.
When building sales territories, factors that balance sales territories can benefit setting sales targets, such as:
Territory potential – including all factors to objectivize the market potential.
Territory complexity – Not all salespersons face the same challenges when customers are grouped in a city or are large with orders worth multiple times the average order, or when long distances must be covered to visit those customers.
Territory experience – A junior salesperson will need time to learn their customer base and their company tools and processes. A ramp-up time must be considered. Sales targets must be adjusted according to the practices of your company.
Territory performance – Suppose you move a salesperson with an excellent track record at X% market share to a territory where market share is Y%. Will you set a local target share at X%? Of course not. Some territories can be extremely successful with customers repurchasing from your company. Salespersons who benefit from those environmental conditions with high share are happy to continue being successful. Their sales targets reflect the high potential of those territories. Overall territory performance guides setting sales targets, but those must be individualized to the salesperson’s experience.
Territory environment – No salesperson works in total isolation; they work with other employees from other functions in sales or not. Consideration for changing the environment may be wise to make. For instance, account managers and product specialists often work hand in hand; a change of one of the two may impact the other.
Fair Management Targets
The sum of individual targets is often different from the management target for the total country or region. A fair target would be that these are exactly equal. But in reality, they are not, and a slight difference is built-in, which fortunately remains very low. A couple of percentage points are considered. This acts as a slight buffer to ensure the total sales team can be congratulated for a team performance. It is rare and unwelcome for the country or region to miss a target when the vast majority of the sales individuals meet their target.
However, overall, management should have “skin in the game” with approximately the same total target as their salespersons.
Visibility for individual performance
Individuals must be able to visualize their performance and assess their variable compensation plan at any time. Attention must be brought to situations where a salesperson at the end of a compensation period considers that objectives cannot be met and delays order entry until the next period to facilitate meeting their targets for that future period. The same attention applies to the salesperson who is achieving record performance and also considers delaying order entry to reduce the risk of receiving a higher target for the following period. All these situations are well known by experienced managers.
Fair Measurement for Achieved Targets
Significant issues arise when orders are canceled or when issues arise after delivering to customers, such as order entry problems or undue commitments, resulting in significant erosion of price and profitability. There is no other option for management than to reflect the true performance in the salesperson’s compensation plan by canceling the effect of such deals. Severe actions may be considered to avoid such issues from being repeated.
Concretely, management may decide to support and facilitate some customer deals to, for instance, build a local reference, but the sales team should not be impacted in their sales compensation by those top-down decisions. Sales should also not be impacted by poor delivery, transportation issues, delays, issues with installation, etc., where they have no responsibility. Salespersons who do not comply with company roles on discounts and sales practices must also be addressed appropriately.
Company Reputation
Some companies consider reputation and long-term performance critical for their success and that of their customers. Unfortunately, some salespersons may consider short-term deals more important even if they negatively impact company reputation through poor practices. Sales compensation plans should protect the company from such unwanted behaviors.
Individuals must be able to visualize their performance and assess their variable compensation plan at any time. Attention must be brought to the situation where a salesperson, at the end of a compensation period, considers that objectives cannot be met and delays order entry until the next period to facilitate meeting their targets for that future period. The same attention applies to the salesperson who is achieving record performance and also considers delaying order entry to reduce the risks of receiving a higher target for the following period. All these situations are well known by experienced managers.
MBO – Management by Objective
Management by objective may be a good approach to instill personalized objectives or to reinforce certain practices. When deploying a CRM – Customer Relationship Management – system, recommended practices may be reinforced through appropriate metrics.
Setting a variable compensation plan comes as the last step of a long process used to determine the opportunity and the product offering, the distribution organization including the organization of the sales team, roles, and the total headcount to address the market. The marketing plan is the first step to assess growth opportunities. Place – from the marketing mix – is the last step to organize the Go-To-Market approach.
Learning on Market Growth Opportunities
Your sales organization is a key resource to learn about the market challenges and opportunities. They are the spearhead for understanding the market and competition, and their voice counts very much. Understanding competitive moves is a daily activity, but not the only one, and the market is a clear focal point for them.
However, very often, the market ups will be silenced when market downs are exaggerated, especially when sales compensation is discussed. With market ups and the help of accelerator plans, sales can gain a lot, multiplying their variable plans when numerous opportunities suddenly and unexpectedly arise. Similar to finding a gold vein, the whole sales team gets very excited and motivated to win.
Not being prepared for a massive surge of new opportunities is a major issue. The competition may be well prepared, and plans, hiring, or refocusing other teams must be considered long before.
In short, be careful that the sales team’s best approach is to negotiate externally with customers and also internally with their management. Learn to listen to them and build alternate plans with them, not against them, to address various sales situations. Well-prepared teams are developing win-win scenarios, while others – blind and unprepared – struggle to address unpredictable market situations.
Compensation plans – Same % Growth for All?
With year-over-year stable sales organizations, it can be tempting to adjust all of the individual salespersons’ targets by the same percentage to achieve total growth over the whole market. However, this approach can be very wrong.
Local markets can evolve differently across a region, making it challenging to identify areas experiencing growth. In some markets, buyers may be more inclined to invest in certain segments over others, leading to local market increases. Having salespersons struggling in smaller markets while others appear highly successful in larger territories is not desirable.
Business visibility can also vary among salespersons. Some may only create opportunities in the CRM system when a deal is very mature and close to being won, while others may mark every single opportunity, even at an early stage. Poor reporting practices can make the former seem to have a small territory but be very successful with high market share, while the latter, who are more transparent, may seem to have low market share. Which scenario do you prefer? Creating business visibility is crucial. Leveraging alternate sources to identify the real market is essential.
Building Visibility – Individualized Waterfall
Good visibility on market assigned, market attained, and win rate can be obtained by developing an individual waterfall view where each can identify their visibility and market share score. Such visibility is essential for effective one-to-one discussions between managers and salespersons, account managers, or sales specialists.
The market waterfall is the most effective tool to support a discussion on market visibility. It requires few data points: total estimated local market (quantified in currency terms and often estimated from territory management tools), total volume of declared opportunities, total volume of opportunities won or lost (excluding abandoned or postponed), orders volume, and possibly sales volume when orders and sales numbers differ significantly.
Building this waterfall is critical for managing a sales team. Understanding which individuals struggle to increase an already high market share compared to others who sit on a large market volume but with low market share is a clear eye-opener.
Learning from the Sales Persons Themselves
For stable market situations, with an optimized sales organization and a long-standing sales team, the market share across territories should not vary significantly unless territories are unbalanced, which is generally the first and most important issue to address. Another issue may be that some salespersons are not as performant as one would like them to be. However, it is often much better to retain a salesperson who has company and product expertise, knows their customers, and consistently achieves their targets. They are the ones who often bring multiple other valuable competencies to the organization, such as resilience, calmness, and a positive attitude. They are often the ones you can consider pairing with younger salespersons in the organization.
There are many articles that can be found on the internet. They generally confirm many of the points just mentioned. The need to connect the sales plan incentives to the objectives of the company, and secondly, to ensure that keys for quality are in place.
Salesforce provides some useful keys for sales compensation plan design:
https://www.salesforce.com/blog/sales-compensation-plans/
This article from SaaStr can provide food for thought:
https://www.saastr.com/a-framework-and-some-ideas-for-your-first-sales-comp-plan/
A good sales incentive is essential to keep a sales team motivated; it can also serve as the glue between different functions that together contribute to the success of the company. Many companies offer tools today to support and facilitate decision-making for a sales team. Ensure that incentive metrics are visible and drive the correct behaviors from all sales individuals and support functions, also with a variable plan.
Building a sales compensation plan comes as the last step once market opportunities are identified, products/solutions are aligned to those opportunities, and a Go-To-Market strategy is decided upon. Efforts to make it successful are critical to ensure costs are kept under control and sales teams remain flexible to adjust to market ups and downs.
Good visibility on market assigned, market attained, and win rate can be obtained by developing an individual waterfall view where each can identify their visibility and market share score. Placing compensation is the final step of sales force activation; ensure to build the whole set of appropriate metrics to drive short and long-term expected behaviors, eyes wide open.
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A sound approach to setting sales targets is to first identify actual sales performance within each territory, which requires precise measurement of territory metrics. This is a critical starting point before assessing past performance and setting new targets.
Few businesses can offer uniform sales targets with a single sales plan for all salespeople. Therefore, efforts must be made to ensure fair comparisons between individuals.
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The Market Waterfall provides a comprehensive view of the market journey, from the total market perspective down to what is successfully captured at each step. 
This tool is particularly beneficial when working through distributors, as it allows for independent data collection and analysis. It offers key insights to facilitate discussions on market presence, visibility and competitive positioning.
For organizations with a direct salesforce, the Market Waterfall provides an opportunity to evaluate performance against expectations, assess CRM utilization for visibility, analyze sales coverage, expertise, and alignment with market opportunities. In these discussions, it is crucial to involve both Sales and Marketing teams to foster collaboration and alignment.
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Use this waterfall tool to evaluate the waterfall chain for one single segment or multiple ones.
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