Sales Compensation Management (SCM) involves designing and implementing a system to reward and incentivize sales representatives based on their performance. Learn everything you need to know about sales compensation management, from what it is to how to drive it effectively.
Effective sales compensation management is crucial for businesses looking to attract and retain top sales talent, increase sales productivity and revenue, and improve overall business performance.
As per research, "Effective incentive compensation management is based on an understanding of basic human motivation on the importance of trust, self-esteem, social recognition, and improved chances to fulfill one's potential."
This is why acing your SCM plan is key!
In this article, I’ll cover what is sales compensation management and share seven effective steps to implement SCM successfully.
What is Sales Compensation Management?
Sales Compensation Management (SCM) refers to the process of designing, implementing, and administering a compensation plan for sales employees. This can include designing commission structures, setting sales quotas, and providing bonuses or other incentives.
The goal of SCM is to motivate and incentivize salespeople to achieve specific business goals by providing financial rewards for their performance.
The compensation plan typically includes a combination of base salary, commission, and bonuses, with the exact structure depending on the organization's sales strategy and objectives.
For example, some organizations may prioritize new customer acquisition and set higher commission rates for salespeople who bring in new business, while others may focus on growing revenue from existing customers and incentivize cross-selling or upselling.
But before we jump guide, here are some key sales compensation terms that you should know:
- Sales Quota: A specific target or goal set for a salesperson or team to achieve within a given period. It is typically expressed in terms of revenue, units sold, or other measurable metrics.
- On-Target Earnings (OTE): Refers to the total compensation a salesperson can expect to earn if they meet their sales quota or target. OTE includes both the base salary and variable compensation, such as commissions and bonuses.
- Sales Accelerators: Are additional compensation or rewards given to salespeople when they exceed their sales quota or target. They’re designed to motivate and incentivize salespeople to perform at a higher level.
- Sales Decelerators: Refers to penalties or reductions in compensation that salespeople may face if they fail to meet their sales quota or target. They encourage salespeople to maintain high levels of performance and avoid complacency.
- Commission Clawbacks: Refers to the practice of recouping previously paid commissions or bonuses from a salesperson's future earnings. This may occur if the salesperson's sales are later found to be fraudulent or if the company experiences significant financial losses.
- Sales Performance Incentive Fund (SPIF) or Sales Contests: Are short-term incentive programs designed to motivate salespeople to achieve specific sales objectives or goals. These incentives may include cash bonuses, prizes, or other rewards for the top-performing salespeople.
7 Key Steps for Effective Sales Compensation Management
Here’s a 7-step guide for effectively managing sales compensation to incentivize and motivate your salespeople:
1. Explore different types of sales compensation plans
Sales compensation plans are essential in motivating and retaining salespeople. They play a crucial role in incentivizing sales reps to achieve sales targets and drive revenue for the organization.
Pro tip: Selecting the right sales compensation plan will depend on the organization's business objectives, sales team structure, and sales targets.
2. Set targets
Setting targets ensure that sales reps have clear goals to aim for and that their performance is aligned with the organization's objectives.
Here are some tips on how to set effective sales targets:
- Use historical data to set realistic targets that are achievable and challenging for sales reps. You can also use external benchmarks to ensure that the targets are competitive.
- Align with company objectives to ensure that the sales reps are working towards the same goals as the company.
- Make the targets specific, measurable, achievable, relevant, and time-bound (SMART) to help sales reps focus on achieving the desired outcome.
- Consider the sales cycle and the time it takes to close deals within the sales targets.
- Involve sales reps in setting targets and their buy-in.
- Provide incentives and rewards for achieving the set targets.
3. Keep it simple
Effective sales compensation management can be a complex task, but keeping it simple can lead to better outcomes.
Here's how you can keep it simple:
- Define clear and simple objectives that are easy to understand and track.
- Use a simple structure that clearly defines the compensation components, such as base salary, commission, and bonuses.
- Provide pay transparency into the sales compensation plan by making it easy for salespeople to understand how their compensation is calculated.
- Focus on key metrics that are critical to your company's success.
- Monitor and adjust the sales compensation plan to keep it effectively aligned with your company's changing needs.
By keeping your sales compensation management simple and straightforward, you can drive the right behavior from your sales team.
4. Involve the right team members
To have effective sales compensation management, involve key stakeholders from sales, finance, and HR teams.
Why?
Sales team members can provide insight into incentives, finance can ensure feasibility, and HR can ensure fairness and compliance. This will lead to effective sales plans that align with company objectives and drive growth.
5. Align compensation with performance
The key to effective sales compensation management is to align compensation with performance. This means that the compensation plan should reward salespeople for achieving their targets and exceeding them.
The benefit?
When salespeople are rewarded for their performance, they’re motivated to work harder and smarter to meet or exceed their targets.
Here are some tips for effective sales compensation management:
- Set clear performance targets: Salespeople need to know what they are expected to achieve in order to perform well. Set clear, specific, and achievable performance targets for each salesperson.
- Reward high performers: The compensation plan should reward salespeople for achieving their targets and exceeding them. This could be in the form of commissions, bonuses, or other incentives.
- Regularly review and adjust the compensation plan: The compensation plan should be reviewed regularly to ensure it is still aligned with the organization's goals and the sales team's performance.
- Communicate the compensation plan clearly: Salespeople need to understand how their compensation is calculated and how they can earn more money. This can help avoid misunderstandings and motivate salespeople.
- Provide training and development opportunities: Investing in training and development for salespeople can help improve performance and earn more money through the compensation plan.
6. Determine on-target earnings
Determining on-target earnings (OTE) is an important part of effective sales compensation management. It includes base salary, commissions, bonuses, and any other incentives that are part of the compensation plan.
To determine on-target earnings for salespeople:
- Clearly define the role of the salesperson, including their responsibilities, sales targets, and any other performance metrics that will be used to evaluate their performance.
- Determine the base salary and make it competitive and reflective of the salesperson's experience and skills.
- Set the commission rate and base it on industry standards, sales targets, and the level of difficulty in achieving them.
- Create a bonus structure and incentivize high performance while being fair and attainable.
- Calculate the on-target earnings, which is the total amount the salesperson will earn if they achieve their sales targets and hit their performance metrics.
Pro tip: Determining OTE allows salespeople to have a clear understanding of their earning potential. The reps will also be motivated to achieve their sales targets and performance metrics.
7. Don’t cap compensation
When designing a sales compensation plan, it’s important to consider whether or not to cap compensation. A cap on compensation refers to a limit on the amount of commission or bonus that a salesperson can earn, regardless of their sales performance.
While caps may seem like a way to control costs, they can actually be counterproductive and lead to demotivation among the sales team. Other ill effects of capping compensation include discouraging risk-taking, limiting growth potential, and greater turnover.
Instead of capping compensation, design a plan that rewards top performers for their efforts. This can include incentives for exceeding sales targets, bonuses for closing larger deals, or commissions that increase as sales performance improves.
In Summary
Effective sales compensation management is crucial for motivating and incentivizing salespeople to achieve their targets and increase revenue for the organization.
And the key to effective sales compensation management is to:
- Align compensation with performance.
- Determine on-target earnings (OTE).
- Review and adjust the plan in real time.
- Avoid capping compensation.
All in all, effective sales compensation management requires a comprehensive understanding of the sales role, industry standards, and the organization's goals, along with clear communication of the compensation plan and ongoing training and development opportunities for salespeople.
Schedule a demo with ElevateHQ today and understand what your sales commission plans are actually delivering!
