A well-designed commission plan is essential for motivating and incentivizing sales teams to achieve their targets and drive revenue growth for a business. Keep reading to understand how to build a commission plan in 12 logical steps with multiple actionable tips.
The key components of any successful commission plan are:
- Clear and measurable performance metrics.
- Fair and competitive commission rates.
- Effective communication and documentation of the plan.
According to this study by Pew Research Center, 63% of candidates quit their jobs due to low pay and no opportunities for advancement.
That’s why it’s critical to find the right balance between incentivizing sales performance and ensuring that the commission structure aligns with your organization's overall goals and values.
This article explores how you can build commission plan that delivers on all accounts.
Let’s dive in.
12 Key Steps to Build a Sales Commission Plan in 2024
Let’s take a look at the 12 key steps for creating a commission plan:
1. Gather data
Building a commission plan involves gathering relevant data to establish a system that motivates employees and aligns with business goals.
Here are some ways you can use to gather data and improve your commission plan:
- Determine the business goals such as increasing sales, improving customer satisfaction, or increasing profits.
- Identify key performance indicators (KPIs) you want to incentivize your employees to achieve, such as the revenue generated, number of sales closed, or customer satisfaction ratings.
- Gather employee feedback by asking about what motivates them, what they feel is fair, and what changes they would like to see.
- Research commission plans used by similar businesses in the industry to get insights on what works and what doesn't.
- Analyze sales data to determine what drives revenue growth and create a commission plan that rewards behaviors that lead to sales growth.
- Develop a pilot commission plan to test on a small group of employees.
2. Tie KPIs to your goals
A KPI is a measurable value that companies use to track how well they’re performing to achieve their overall objectives.
They tend to be specific and measurable, allowing you to gauge how well your company is performing.
For instance, if a sales rep wants to close more deals, then an ideal KPI could be “new leads in the pipeline” instead of something like “total time spent on outreach”.
Similarly, you can create certain KPIs for each role:
- Account executive: Client acquisition rates, brand awareness, etc.
- Sales manager: Net promoter score, client retention rate, etc.
- Account manager: Time to resolution, customer upsell revenue, etc.
But remember not to go overboard with the number of goals and KPIs you’re tracking.
So how many goals or KPIs should you ideally set?
You should have 2-4 KPIs for each goal.
Additionally, you can create visuals for these KPIs.
The benefit?
- Team members can quickly gauge their progress.
- It can provide early warnings for potential problems.
- Offer a transparent framework for everyone on the sales team.
3. Establish role levels
To establish an effective commission plan, follow these steps:
Step 1: Define sales team roles and responsibilities.
In this step, identify different sales roles in your organization, such as account executives, sales representatives, or sales managers, and define their responsibilities and expectations.
Step 2: Establish layers of hierarchy
The totem pole is probably one of the most common forms of small-business structure.
But… what does it mean?
Every department and position falls under its leader, creating an easily identifiable chain of command.
However, this can result in problems like:
- Unnecessary costs as each department might need a manager or a director.
- Ineffective communication due to teams being divided into departments.
- Slower decision-making because of hierarchical dependencies.
To overcome such challenges, you can limit the number of hierarchies, conduct regular meetings, and more.
Step 3: Set commission rates for each role.
Next, focus on how will the shared achievement roll up across the levels. This can depend on the fully blended sales cost and what percentage of people in the hierarchy share from the common pool.
Step 4: Set performance goals tied to commission rates.
Step 5: Monitor performance and make adjustments as necessary.
To continuously improve your commission plan:
- Solicit feedback.
- Stay up-to-date with industry trends.
- Regularly review and update the plan.
4. Set targets and quotas
If done right, sales quota can be a complete game changer for your business.
It can help you:
- Clearly outline responsibilities for each team member.
- Establish a company-wide standard.
- Create a fair commission plan for all.
- Provide a morale boost as work is divided into smaller chunks, and tackling each goal can offer that much-needed push.
So how can you set a sales quota that’s aggressive yet achievable?
Depending on your sales cycle length and sales activity, there are various types of sales quotas available.
Base your sales quota on the following:
- The previous performance of the same reps or other reps.
- The total number of sales.
- Activities conducted by the rep, like outbound email, phone calls, etc.
- How much product your team can sell.
5. Determine total on-target earnings (OTE)
This step includes calculating the total amount of compensation or TTCC (target total cash compensation) that sales reps can earn if they achieve their sales targets.
This percentage of sales to OTE is dependent on:
- Stage of the company.
- Cost of product building.
- Goals, profitability, growth, and more.
Typically, SaaS companies can spend 10-30% on sales costs.
To give you an idea, here’s what AEs in the USA earn based on the size of the organizations:
- SMBs: 500K - 1 million.
- Mid Market: 1 million - 1.5 million.
- Enterprise: 2 million and above.
To build a commission plan and determine the total on-target earnings (OTE), follow these steps:
- Identify the sales targets for the role, such as revenue or the number of new clients, and set specific goals for each period, like monthly, quarterly, or annually.
- Decide on commission rates for each target achieved by the sales representative. For instance, you may set a commission rate of 5% for sales of up to $50,000.
- Calculate the total on-target earnings (OTE salary) by multiplying the expected commission rates by the desired sales targets for each period. For example, if a sales representative has a commission rate of 5% for sales up to $50,000 and their target is $500,000 for the year, their OTE would be $25,000 (5% x $500,000).
Read: Commission override
- Once you have established the commission plan, regularly review its effectiveness and make adjustments as necessary to improve it. Consider factors such as changes in the market, competitor activity, and feedback from the sales representatives.
Pro tip: To improve OTE, you can adjust sales targets, increase commission rates, introduce tiered commission structures, offer additional incentives, and provide training and support.
6. Decide on a pay mix
Deciding on a commission plan and pay mix for your sales team can be a critical part of motivating and retaining top performers.
To decide on a pay mix strategy:
- Determine what specific sales goals you want to achieve, whether it's increasing revenue, expanding your customer base, or improving profitability.
- Decide on the pay mix that works for your business, taking into account factors such as industry standards, the competitiveness of your market, and the experience level of your sales team.
- Identify the key performance metrics that will drive your sales goals, such as revenue, customer acquisition, or average deal size, and determine the commission structure for each salesperson.
- Decide on a commission rate that will motivate your sales team to meet and exceed their targets. You can choose to have a flat commission rate, a tiered commission rate, or a combination of both.
- Establish clear targets and goals for each salesperson, and ensure they understand what they need to achieve to earn their commission.
- Continuously evaluate your commission plan and pay mix to ensure they remain effective in driving sales performance. Finally, collect feedback from your sales team to identify areas for improvement and adjust the plan accordingly.
7. Choose your measurement methods
When building a commission plan, choosing the right measurement methods is crucial. This helps ensure that the plan is fair and motivating for both the salesperson and the company.
To choose the right measurement methods, follow these steps:
- Define your goals.
- Consider your industry and products/services.
- Identify key performance indicators (KPIs).
- Choose appropriate measurement methods for each KPI.
- Test and adjust as needed.
The end goal of this step is to determine how to measure and track sales performance, such as the revenue generated, new customers acquired, or customer retention rates.
8. Choose a type of compensation plan
When building a commission plan, there are several types of compensation plans to choose from.
Here are some factors to consider when selecting a plan that aligns with your business objectives and incentivizes your sales team:
- Consider the duration of your sales cycle.
- Determine your sales goals and set commission rates accordingly. You can also consider offering higher commission rates for sales that exceed your goals. This motivates your sales team to push beyond what is expected.
- Understand how the type of product or service being sold can also impact your commission plan.
- Understand your profit margins and consider how much you can afford to pay in commissions.
- Consider the size of your sales team and how commissions will be distributed.
- Look at what your competitors are doing and consider how you can use your commission plan to differentiate yourself.
- Finally, consider your company culture and how your commission plan aligns with it. If your company values teamwork, consider offering bonuses for team sales rather than individual sales.
Pro tip: Always choose a compensation plan that aligns with your business goals, such as a straight commission, tiered commission, or quota-based commission plan.
9. Decide when to provide compensation
This strategy involves understanding the sales cycle of your business.
It includes understanding the time it takes from the initial lead generation to the end of a sale. Analyzing this timeline will help you determine when to pay the commission.
For example, you may choose to pay commission only when a sale is closed, or you may choose to pay commission when a lead is generated, but this will depend on your business model.
The end goal is to determine when to pay out commissions, such as on a monthly, quarterly, or annual basis.
10. Plan compensation for onboarding and training
The main objective of this step is to consider providing additional compensation for sales reps during their onboarding and training periods to incentivize their learning and development.
Here's a commission plan for onboarding and training:
- Offer a base commission (for example, a percentage of their salary or a flat rate to employees who successfully complete the onboarding and training process.)
- To incentivize employees to perform better, offer performance-based commissions such as completing the training process within a specified time frame.
- Offer a referral commission to employees who refer their friends or colleagues to the company and successfully onboard and train them.
- Provide a retention commission, which can be awarded after a certain period of time has passed (e.g., 6 months or a year).
- Offer a team commission to encourage collaboration and teamwork during the onboarding and training process.
11. Communicate your plan effectively
It's important to communicate the commission plan to your sales team clearly. This includes the commission structure, goals, and timing of payment.
By communicating the plan effectively, your sales team will have a clear understanding of what's expected of them and how they’ll be compensated.
12. Continuously analyze, improve, and repeat
Building a successful commission plan takes time and effort, and it starts with regularly analyzing and improving your plan.
To create a system that helps your sales team achieve their goals and drive revenue for your business, follow these steps:
- Implement a tracking and reporting system to monitor the sales team's progress and earnings. This can be done through software, spreadsheets, or other tools.
- Continuously analyze and improve your commission plan and make improvements as needed. Look for areas where your sales team is struggling and adjust the plan to help them succeed. You should also periodically review and adjust commission rates to ensure they remain competitive.
- Repeat the process of analyzing, improving, and repeating your commission plan regularly. This ensures that your sales team stays motivated and continues to perform at a high level.
Read: Check out retail sales commission types
In Conclusion
Creating a commission plan is half the job done, the second most important part is regularly evaluating and adjusting the commission plan. This will ensure it remains relevant and effective in a constantly evolving business environment.
By investing time and resources into developing and maintaining a strong commission plan, you can reap the benefits of a motivated and high-performing sales team.
If you are looking for sales commission software that empowers you to achieve less with more, ElevateHQ is for you.
