What’s the best way to incentivize sales reps? How much is too much, and how much is too little? You’re not the only one with these burning questions on your mind. You don’t want to overpay and undermine your profitability, but you also don’t want to underpay and risk losing your best sales reps to a higher-paying competitor. This guide will share time-tested techniques—provided by CharTech sales training expert Alex Rogers—for finding the right incentive ranges for your sales teams.
Contrary to popular beliefs, you should pay out on a percentage of profits, not gross sales. This protects you against having to pay commissions on unprofitable deals. Plus, it also keeps your sales reps from going after a nightmare client just to make a commission goal. Know what a profitable customer looks like, what sort of agreements will result in profit and what don’t. It can be hard to figure all these metrics out on your own. Fortunately, you don’t have to. There are plenty of business management platforms available to provide the visibility you need to determine what makes a deal profitable. Whatever you want more of is what you compensate on. You want more profit? Compensate on profit. You want more agreements? Incentivize agreements. Want more customers? Pay on number of acquired customers. What you compensate on may change every year, but base it on your business plan and business goals. Determine what’s more important to your organization. If you’re transitioning to an a-as-service model, it’s a great way to get your sales people to sell service contracts and the like. Before you can begin to pay out incentives, you first need to have a thorough understanding of your total cost of goods and services. Consider the following when trying to determine your total costs.
Identify Your Cost of Goods:
• Hardware/software • Labor burden • Expense account (lunch, golfing, presents, entertainment) • Outsourced services
All these areas eat into your profitability and should be excluded when considering commissions. For instance, if your sales rep spends $1,500 on golf and drinks with a client to capture a $10,000 deal with a 25% profit margin, you should only pay a commission on $1,000 of that $2,500 profit.
Paying a base salary is incredibly important. It’s going to take time for your new rep to learn how to effectively sell your products, and most people need a steady paycheck in order to make ends meet.
I believe in having a 60-day ramp up period. During this time, there shouldn’t be any selling, just prepping to sell. Knowing that, what are you going to do to help them become successful?
Once you have a handle on the on-boarding, it’s time to think commission. Certainly, some reps can evolve into a commission-only plan, but they require a mixed approach up front. No one shows up on day one able to close tons of business for a product they’ve never sold before. Give new sales reps time to build relationships, learn the products inside and out, and become a part of your company’s culture.
The prospect of forgoing commission for 60+ days can keep a sales superstar from opting to work for you. In special cases like these, we recommend the commission ramp-down option.
With this model, they don’t have to sacrifice commission up front while they learn how to sell your products and services. The idea is that their skill level and sales will rise to meet the reduction in guaranteed commission each month until they’re achieving 100% on their own.
How a Commission Ramp-Down Plan Works
If you really want an established sales superstar, and their desired salary range is something you can afford, consider a guaranteed ramp-down commission plan to sweeten the deal. If he or she wants to make $150,000 per year, do a guaranteed, six-month commission ramp-down where the candidate gets:
100% of their commission in the first month 83% in the second month 66% in the third month 49% in their fourth month 32% in their fifth month 15% in the sixth and final ramp-down month
Roles and Responsibilities
To keep business running smoothly, it’s important to define each role clearly and to give them shared goals. Look at the various activities that tie your team together, and use these common areas to create intertwining goals. Below are some of the typical roles you’ll find in a sales organizations—and recommendations around how to compensate them.
This role is the heartbeat of the sales team. It takes all the administrative burdens off your farmers and closers, so they can identify and capture more business. This is typically a salary-only role, but everything this role does can be tied to deals won. As such, we recommend adding a small incentive attached to won opportunities. This ensures everyone is motivated and focused on achieving the same goal.
Finding and nurturing leads, farmers qualify, follow up with, and help nurture prospects into customers. Their performance should be measured against call volume and sales-qualified leads. The key is volume. Track the volume they produce without micromanaging them. A business management tool can help you do this. This role should receive a mid-level salary. More than admin, but less than closer.
Once leads near readiness to buy, they’re transferred from the farmer to the closer, to seal the deal. This role is highly persuasive and responsible for winning business. It should receive a medium/high salary.
This role is fully dedicated to removing sales barriers. They’re compensated on the overall success of their sales team, and they typically receive high salaries.
This role sells into and acts as the primary point of contact for existing customers. Their salaries will vary based on experience, but usually fall somewhere between farmer and closer. They should be incentivized on customer retention rates, upselling, add-ons, and upgrades.
Quotas are your primary measure of sales success. Without these, your sales team can easily lose focus of company goals. To make sure your team is on track, you need a smart business tool that empowers you to track sales goal progress, activities, as well as call volume via real-time dashboards. All these key pieces of data can be early indicators of failure or success. And you can use them to coach and manage your team.
Consider Having Quotas for (and Measuring):
1. Hardware profits
You need to make sure these traditionally low margin products aren’t being given away for free.
2. Labor profits
Product installation and maintenance comes at a cost. By creating quotas around this, you’ll ensure your sales reps aren’t recklessly discounting labor.
3. Contract amounts/agreements
Net new business is a must if you want to keep growing. As such, reps need to be goaled on capturing a certain amount of new business each month.
Anyone can sell something once, but keeping customers happy and coming back for more is another story. Reward reps with annuities for clients who renew service contracts with your company
5. Proactive sales
Activities This is the one quota that should be met every quarter. It includes follow-up calls, appointments, client or prospect visits, thank you letters, quotes, emails, or any other activities that have been demonstrated to move the needle in your sales organization.
5 Commission Recommendations: 1. Pay commission every single month 2. Pay commission on the past month (e.g. September sales get paid in October) 3. Print out all supporting documentation 4. Job cost the projects 5. Beware of changing it up
By putting these incentivizing best practices into place in your sales organization, you’ll position yourself to fairly compensate and motivate your team to succeed.
In Sales process “part 3”, I’ll talk about how to generate and hold accountability to sales practices that not only help your sales reps be more successful overall, but also give you dashboard visibility to sales tracking.