It is now six months into the selling year and at this point many companies are looking at how their compensation plan has been impacting sales and considering if any changes need to be made now or if a new plan needs to be designed for the next selling year. Your compensation plan can have a huge impact on if your company achieves it strategic goals for the period or not. Any decision to adjust a compensation plan is important decision that can have far reaching effects.
But how do you know if you need to make a change? Here are five indicators that your comp plan needs updating.
1. New accounts aren't the majority of your sales
If your sales people prefer to only call on their current accounts to increase business with those clients rather than prospecting for new clients, it means you comp plan is not designed to incentivize the right activity. The goal is to pay for the behavior you want to see, if you want your sales team to focus on new sales then you need to have the plan set up so that they make more when they sell new business than when they do renewals or add-on business. New business will always be harder to find and close, and the only way a business grows is through adding new accounts, so paying a premium for new client sales is appropriate.
2. The math is all wrong.
Great sales managers understand their sales team's metrics, conversion rate, close rate, cycle times, etc. But they also need to understand their sales compensation metrics. And the key metric you need to understand is total sales compensation as a percentage of gross profit. The magic number is 25. If your sales force's compensation is greater than 25%of your gross profit you should investigate adjusting your plan. If it is less than 25% there are two questions you need to ask your self.
- Are you growing at a satisfactory rate?
- Has the percentage of sales force cost compared to gross profit been declining over the last few years?
If the answer to both of these questions are yes, your compensation plan is mathematically fine. If you answered no to either of these questions you may need to look at making adjustments.
3. Your sales team members don't understand the plan.
Ask your sales people to explain the comp plan to you. If they have difficulty explaining any or all parts of the plan, you can be sure that it isn't motivating them to sell more. If your reps can't figure out what they are going to get paid at any time, you need to make the plan more straight forward.Think marketing slick not contract.
4. Your tops sales people don't hit the top commission tier.
Yes you need to have a top tier that is challenging to hit. If it takes a couple months for your top rep to hit the top tier, that's fine. But if none of your reps have ever hit it, or if it has happened a total of one time, your team will actually be demotivated by that. That goal has become unattainable. Once your team stops believing they can achieve the top tier, the comp plan stops driving behavior.
5. Your rainmaker blows the top tier away.
So this is exactly the opposite of what we just talked about. In this situation, let's say your top commission tier maxes out at $100,000. Your rainmaker regularly sells $120,000 or more but gets paid the same rate as everyone else. Why should your rainmaker keep over achieving? Set up a new tier for your top performer. Watching him work to hit the new tier and achieving it will motivate the other team members to figure out how to up their game.
Great comp plans motivate your sales people to do more. If you aren't getting the right results you either need new sales people or a new comp plan. A new comp plan is always easier and less expensive to implement.