Sales Comp Guy
How to Start Your Sales Compensation Plan and Your Salespeople—Off Right!
Sales Comp Guy • April 28, 2022
The WRONG Way to Hire Salespeople and Setup A Sales Compensation Plan
How to start a successful sales team for new and small businesses—hint, most newer companies miss the mark on this.
First of all, if your company is in the startup phase, or if it’s a small business, you need a different strategy for growing your sales team. Massive companies with established financials can afford to experiment with their sales force compensation structure…but if you want to ensure success (and limit pitfalls wherever possible), it’s all about where you start.
DON’T Start With How Much You Want to Pay Your Salespeople
A simple search on the subject will quickly supply you with the target pay for your sales team. After all, you want to provide the most competitive pay possible so you can recruit the top talent, right?
The problem is, for smaller companies, targeting a competitive salary may simply be out of reach. The purpose of bringing on a sales team in the first place is to increase revenue profitably.
That’s the keyword.
Profitably.
The simplest way to put it is—if your salesperson costs more than the amount of revenue they’ll be able to bring in, then that path to growth hurts the company.
You should make the right level of target compensation a goal, but right now, it’s the wrong place to start.
DON’T Start With Your Business Objectives
This one may sound crazy. Obviously as a company you should know your clear objectives and reverse engineer your strategy from there, right?
If you think so, you’re not entirely wrong. This is definitely something you should be doing alongside developing your compensation plan.
However, if your objective is to become the next profitable 7+ figure company, you’re going to engineer a sales compensation plan based on what you need in order to achieve that end. The problem there is, what you need for that goal and what your company can currently afford may be two different things.
It’s important to identify that gap and work towards closing it. But the first place to start in developing your sales compensation plan is not on your business objectives.
DON’T Start With the Pay Type and Mix
Salary-only? Commission-only? Combination of the two? And at what level of each? Those are questions you’ll address early in the development of your plan.
However, for our purposes right now, they are best left as future variables to come back to. If you start by focusing on the types of pay and mixture between guaranteed pay and variable pay, you could be left carrying too much fixed costs or paying out far too much in commissions or sales incentive.
Additionally, if you focus on only leading with competitive base pay, you could be missing out on the incremental growth that happens when salespeople are motivated to earn more incentives.
DO Start With What Your Company Can Afford
IF you can afford to acquire revenue at a loss, you can focus on creating a compensation plan that appeals to the top sales talent in your industry. A plan that pays richly and rewards top incentives for all levels of performance.
However, if you are building your sales team from the ground up and have genuine financial limitations, you will need to start by doing the math.
1. What can your company afford?
Given your existing costs and revenue, how much can you afford to pay a salesperson in base salary…and for how long?
This isn’t going to be a static number, either. Once you bring on a salesperson, ideally your cash inflow will increase (because they’ll be generating incremental revenue for you), and you’ll want to re-evaluate your structure at each step of growth.
However, you want to be able to factor in the time it takes your new salesperson to train and get good at their job. It’s important to be prepared to pay that salary without a return for a certain amount of time. How long with that be?
2. At what level of performance will your salespeople pay for themselves?
Now you need to project what it will take for your new salesperson to cover the cost of their total pay.
Not only that, you’ll want to project how much revenue they’ll need to generate in order for you to create a variable pay program for them. And beyond revenue, what level of profit does that performance equate to in order to grow sustainably?
Since salespeople are largely motivated by their earning potential, you’ll want to be able to offer them commissions or bonuses based on their success. Ideally you are able to create a structure that sends the message that the more they sell, the more money they can make.
What do those numbers look like for your company?
3. What’s your total target cash compensation plan?
While it can be more complex than this, the quick way to determine total target cash compensation is by simply adding up the base salary that your company can afford along with the variable pay at target for your prospective sales person.
Adding these pieces together gives you a general idea of what you can afford to offer your sales employee. Even though this is only one part of the total equation when you’re looking to hire—it’s arguably the most compelling part.
After all, salespeople are driven by their ambition and potential to earn. One of the aspects of the job that is attractive is the clarity of connection between earning potential and achievement.
Given the limitations of your company, it is important to be clear, honest, and adaptive when creating your first sales compensation plan.
Let prospective salespeople know where you are in the growth process and what their role is in the company. Just because you can’t afford to create a glitzy compensation plan right now, doesn’t mean you can’t attract great talent with authenticity.
For every small company that does due diligence in building their compensation strategy sustainably—there are likely a dozen that don’t. And no salesperson wants to make it to the end of the month and find out their employer can’t actually afford to pay them their commission.
Trust and solid planning go a long way towards attracting top notch salespeople.
First of all, if your company is in the startup phase, or if it’s a small business, you need a different strategy for growing your sales team. Massive companies with established financials can afford to experiment with their sales force compensation structure…but if you want to ensure success (and limit pitfalls wherever possible), it’s all about where you start.
DON’T Start With How Much You Want to Pay Your Salespeople
A simple search on the subject will quickly supply you with the target pay for your sales team. After all, you want to provide the most competitive pay possible so you can recruit the top talent, right?
The problem is, for smaller companies, targeting a competitive salary may simply be out of reach. The purpose of bringing on a sales team in the first place is to increase revenue profitably.
That’s the keyword.
Profitably.
The simplest way to put it is—if your salesperson costs more than the amount of revenue they’ll be able to bring in, then that path to growth hurts the company.
You should make the right level of target compensation a goal, but right now, it’s the wrong place to start.
DON’T Start With Your Business Objectives
This one may sound crazy. Obviously as a company you should know your clear objectives and reverse engineer your strategy from there, right?
If you think so, you’re not entirely wrong. This is definitely something you should be doing alongside developing your compensation plan.
However, if your objective is to become the next profitable 7+ figure company, you’re going to engineer a sales compensation plan based on what you need in order to achieve that end. The problem there is, what you need for that goal and what your company can currently afford may be two different things.
It’s important to identify that gap and work towards closing it. But the first place to start in developing your sales compensation plan is not on your business objectives.
DON’T Start With the Pay Type and Mix
Salary-only? Commission-only? Combination of the two? And at what level of each? Those are questions you’ll address early in the development of your plan.
However, for our purposes right now, they are best left as future variables to come back to. If you start by focusing on the types of pay and mixture between guaranteed pay and variable pay, you could be left carrying too much fixed costs or paying out far too much in commissions or sales incentive.
Additionally, if you focus on only leading with competitive base pay, you could be missing out on the incremental growth that happens when salespeople are motivated to earn more incentives.
DO Start With What Your Company Can Afford
IF you can afford to acquire revenue at a loss, you can focus on creating a compensation plan that appeals to the top sales talent in your industry. A plan that pays richly and rewards top incentives for all levels of performance.
However, if you are building your sales team from the ground up and have genuine financial limitations, you will need to start by doing the math.
1. What can your company afford?
Given your existing costs and revenue, how much can you afford to pay a salesperson in base salary…and for how long?
This isn’t going to be a static number, either. Once you bring on a salesperson, ideally your cash inflow will increase (because they’ll be generating incremental revenue for you), and you’ll want to re-evaluate your structure at each step of growth.
However, you want to be able to factor in the time it takes your new salesperson to train and get good at their job. It’s important to be prepared to pay that salary without a return for a certain amount of time. How long with that be?
2. At what level of performance will your salespeople pay for themselves?
Now you need to project what it will take for your new salesperson to cover the cost of their total pay.
Not only that, you’ll want to project how much revenue they’ll need to generate in order for you to create a variable pay program for them. And beyond revenue, what level of profit does that performance equate to in order to grow sustainably?
Since salespeople are largely motivated by their earning potential, you’ll want to be able to offer them commissions or bonuses based on their success. Ideally you are able to create a structure that sends the message that the more they sell, the more money they can make.
What do those numbers look like for your company?
3. What’s your total target cash compensation plan?
While it can be more complex than this, the quick way to determine total target cash compensation is by simply adding up the base salary that your company can afford along with the variable pay at target for your prospective sales person.
Adding these pieces together gives you a general idea of what you can afford to offer your sales employee. Even though this is only one part of the total equation when you’re looking to hire—it’s arguably the most compelling part.
After all, salespeople are driven by their ambition and potential to earn. One of the aspects of the job that is attractive is the clarity of connection between earning potential and achievement.
Given the limitations of your company, it is important to be clear, honest, and adaptive when creating your first sales compensation plan.
Let prospective salespeople know where you are in the growth process and what their role is in the company. Just because you can’t afford to create a glitzy compensation plan right now, doesn’t mean you can’t attract great talent with authenticity.
For every small company that does due diligence in building their compensation strategy sustainably—there are likely a dozen that don’t. And no salesperson wants to make it to the end of the month and find out their employer can’t actually afford to pay them their commission.
Trust and solid planning go a long way towards attracting top notch salespeople.
Want to know more about the steps needed to implement sales compensation in your company?
Check out the latest book and the companion workbook here!
In my first Best Practices post, I talked about the importance of knowing what you can pay for your sales roles before worrying about what the market is saying. In my second post, I covered ways to utilize culture in a sales organization . The following Best Practice in sales compensation involves job content. Job content plays several roles in your compensation plan: 1. It gives your salesperson a guide to what success looks like in their role. 2. It gives you a guide to evaluating the performance of your salesperson. 3. It rationalizes differing levels of variable pay outcomes for varying performance levels. 4. It provides your organization with the structure needed to comply with any reporting, pay transparency, or other regulations. Hopefully, that’s enough to convince you of the importance of taking the time to define your new roles and revisit the definition of your existing roles. Now, here’s how job content actually does those things. Defining the job The first role of job content is to define the who, what, where, when, and how of the function. It can be tempting to borrow a job description from LinkedIn, Glassdoor, etc., with the assumption that the content will be similar enough to fit your needs. However, the way a specific role performs is unique to the organization it’s acting in, which is why it’s important to take the time to define the job from scratch. Here are the questions you should be answering in your job content: What does the person need to do on a daily basis? How does this individual pursue sales, and in what segment or with what type of customer? Where should they focus their time and attention when building a pipeline of deals? Who should they be interfacing with, both internally and externally? When do they engage with customers and/or prospects? What portion of the sales process do they own or support? How do they interface with and influence decision-makers? Now, even though I said to write your job description from scratch, that doesn’t mean this is the time or place to get too creative. Job seekers are going to be searching by job title or category, so it’s essential to stick to the common vernacular regarding industry jargon and expected job titles. Job Description: A Byproduct of Job Content Another positive outcome of creating job content for your roles is that you will have generated much of the information needed for a job description if or when you’re ready to hire. Information such as: Job duties and responsibilities that clarify the type of work and engagement with customers. Qualifications/Requirements that are both minimum and desired. Those include education, knowledge, skills, capabilities, and competencies. Performance measures of the role include items like achieving sales targets, new logo acquisition, development of pipeline, accuracy in forecasting, etc. With all of this information on file, it will not only be easier for you to prepare to hire for the roles you want, but it will also be easier to evaluate existing employees in those roles. Beyond all of that, you’ll be well prepared for competitive market research and establishing your variable pay program. I’ll be posting more best practices on the blog, but if you’re anxious to dive deeper into the subject of sales compensation, you can grab a copy of my book Starting Simple: Sales Compensation and consider working through the companion Workbook to build a sales compensation plan from scratch.
Best Practices in Sales Compensation Part 2
Best Practices in Sales Compensation Part 1
Aligning Compensation Strategies with Sales Leadership Objectives
Key Strategies to Align Your Sales Team for Success Next Year
Exploring the intricacies of sales compensation for specialists
Understanding Pay Equity
Incentivizing Success Beyond the Office
Creating detailed job content for each sales role can help your team succeed and prevent conflict or disputes.
How DOL requirements affect inside sales compensation
