Avoid the 5 Worst Pitfalls When Designing Sales Compensation

Authors: James Dalluge Reese Bacon

No industry is immune to the challenges of a labor market where competitors pay top dollar to attract and retain employees. Remote work options increased competition for talent by significantly expanding the pool of potential workers — including for sales positions. A survey by sales management software firm Xactly found sales organizations experienced a 58% higher employee turnover rate in 2021 than in the 12 months prior.¹ Sales software provider Hubspot reports an 18-month average sales representative tenure with a turnover rate of 35%² — compared to 13% for all other job classifications.³

Designing and implementing an attractive sales compensation plan is vital to retaining top talent; however, compensation is only one of many factors that sales leaders need to consider. Effective sales comp plans balance affordability and motivation — creating a win-win scenario.

Lack of market predictability challenges traditional sales compensation models

A mix of base salary and variable incentive pay represents the most important element in sales compensation design. This base-incentive balance dictates the sales role focus and payment timing, among other components. Yet, the unpredictability of external influences — social, political, global — that impact the economy and labor market can complicate the administration of even the most well-designed incentive plans.

Add to this challenge the uncertainty associated with the post-COVID environment, in which setting sales goals and quotas becomes more complicated as businesses find their new normal at varying speeds. Many organizations lack an organizational strategy or compensation philosophy that considers the unique nature of today's market.

5 tips for designing sales compensation

Both overall strategy and compensation philosophy work together to ensure the design of the sales compensation plan aligns with organization objectives in response to the most common challenges. We offer the following insights for avoiding the five worst pitfalls of sales compensation plan designs.

1. Understand the fit between the sales role and organizational strategy

Successful sales compensation plans balance organizational objectives with employee career goals. If you lack a complete understanding of how the sales role fits in your organization, you won't know which behaviors or outcomes to reward. And if you don't know what your sales team values, you won't know how to reward them.

Start with a statement of what the organization is trying to accomplish — such as growing its customer base, maintaining and upselling current clients or launching a new channel or line of products. Building on a clear understanding of organizational goals, determine whether the sales role and compensation strategy support those goals. Talk to your sales professionals to learn what matters to them and what motivates them. Too often, the sales role significantly becomes misaligned with the organization's — or the employee's — goals.

Review sales practices and success measurements to identify areas of misalignment with the organizational strategy. Realigning the sales role may mean the loss of a sales team member. While painful in the short run, the highest sales productivity typically comes from a strong alignment of organizational strategy, sales strategy and employee career goals.

2. Tailor the sales model and comp plan to fit the market

Failure to understand the market inevitably leads to poor decisions about compensation. There's no one-size-fits-all approach to sales compensation. You must understand the sales model, for example — to what degree the model uses an account-based, relationship, enterprise, inbound or outbound approach — and align your compensation plan accordingly. For instance, if your comp plan for a relationship sales model rewards team members based on the number of new clients, that measure could signal a significant misalignment between the plan and the model.

Also, consider the personas of each salesperson, commonly categorized as "hunter" or "farmer." The goals and rewards for each likely will vary. Hire sales professionals with a persona that best aligns with your sales model. Asking a "hunter" to nurture and grow existing accounts may not fit their primary motivation. Conversely, asking someone who enjoys nurturing existing clients to relentlessly cold call may frustrate them, and you're unlikely to retain that employee for long.

Use benchmarking to determine how your compensation plan compares to the market. Most companies rely on third-party data based on job title or position. Buy from reputable sources instead of relying on self-reporting databases. Make sure you can compare apples to apples, which can be challenging given the numerous possibilities for how roles are structured and operate daily, even within a particular industry. Focus on the total cash compensation amount primarily, because different organizations uniquely mix their pay between base salary and incentives.

Finally, consider where your organization is in the market today and where you want to be. We recently assisted a small manufacturer looking to compete in a much larger market. Our team built career paths with multi-tiered account manager positions, providing incentives to motivate salespersons to move up the tiers and grow the business.

3. Avoid complicated compensation plans

Keep it simple. Salespeople who can't easily understand how they'll be compensated are less motivated and engaged. Many organizations over-engineer their compensation plans with too many measures of meaningless weight. We recently worked with an employer whose plan included 18 metrics, with some weighted as little as 1%. As a result, some sales professionals "shopped the plan" — focusing on easy-to-meet metrics rather than those more aligned to the strategy. Design your win-win compensation plan to make financial sense for the organization without capping an employee's earning potential.

There's no one right sales incentive formula. However, limiting the plan to two or three clearly defined measures tailored to the sales model and organizational objectives keeps the field focused on what's most important and controllable.

4. Incentivize desired outcomes

Too often, employers design sales comp plans to incentivize behavior, not outcomes. For example, compensating the sales force based primarily on the number of prospect calls says nothing about the quality of those calls and may not lead to future revenue.

Suppose the organization aims to encourage customers to renew at a higher-priced tier. If the compensation model rewards only the number of renewals, there's no incentive to upsell the higher-priced offering. In this scenario, the best model might be a flat amount paid for each subscription and a percentage bonus based on sales revenue. Define the desired outcomes and build plan incentives that reward the outcomes and not the behavior you hope will lead to the outcomes.

5. Align the pay mix with the salesperson and the organization

The pay mix should align with the sales role and organizational objectives. For example, sales roles defined by team effort, relationship management and non-selling activities typically call for a pay mix with a heavier emphasis on fixed-base pay. Conversely, sales roles defined by leveraging market opportunities and sophisticated sales skills in a highly competitive market call for a pay mix weighted more heavily on variable pay. Be sure to consider the salesperson's preferences and prior experiences, but be aware of potential misalignment with the role as defined by the organization.

The pay mix should reflect the sales cycle and payout timing. Incentive-driven comp plans should pay frequently — weekly or monthly — to minimize cash flow problems for the salesperson. Alternatively, annual incentive payments work better for roles with a strong service component or where selling cycles extend over multiple years.

Right-sizing a sales compensation plan calls for change management. Some organizations pursue a phased-in approach to help retain high performers. Others opt to rip off the bandage and risk the loss of sales team members. We recently used financial modeling to guide a food manufacturing company to shift the weight of incentive pay from 50% to 20%. The client opted to rip off the bandage — wanting to bring in new sales professionals more aligned with their compensation philosophy.

Lastly, the pay mix must be fair and equitable. Fairness necessitates consistent application of the plan design, whereas equity considers each person's skills and performance. Whether simple or nuanced, the sales compensation plan should align with the organization's compensation philosophy and approach to total rewards.

Leverage experience and expertise to ensure desired outcomes

The economics of today's labor market impacts companies differently. There's no single best practice approach to designing a sales compensation plan. Our team helps organizations develop tailored, compliant sales compensation plans that align the sales role, incentives, pay mix and sales cycle with organizational strategy and goals. A win-win comp plan benefits employees and helps the organization attract and retain sales professionals.

Using experience across all sectors and organizational sizes, we leverage high-quality market data and financial modeling to tailor a compensation plan to your organization's culture, compensation philosophy and strategy.

Gallagher's Compensation and Rewards Consulting team can guide you in developing the right-fit sales compensation plan to help your organization face the future with confidence.

For more information, visit ajg.com/us/total-rewards or contact us.