Creating a Sales Commission Plan: Development, Tips & Considerations
For this upcoming year, your company may have redesigned their sales commission plans — or developed a new one altogether.
Whether your commission calculations are automated in real-time or rely upon manual processing, there are a few areas that should never be overlooked as the new plans are launched.
What is a sales commission plan?
A sales commission plan is a roadmap of how you’re going to reward your sales team for growing your business and commonly involves paying additional fees to your team for meeting or exceeding their sales quotas.
Some plans involve commission (also referred to as incentive or variable pay) whereas others offer only base pay; most plans will incorporate elements from both.
Why are sales commission plans important?
Sales commission plans are great for motivating your team, helping them reach better targets, and consequently, growing your business to new heights.
Steps Before Launching a New Sales Commission Plan:
- Conduct testing for any new sales commission plans or changes to old ones
- Communicate changes to sales commission plans
- Review your internal control policies
- Assess the calculation process
1. Conduct testing for any new sales commission plans or changes to old ones
Designing new sales plans can consume significant resources across the company, so it’s important to obtain a return on that time by testing new plans before they go live.
For example, there could be a hidden design flaw that results in overpaying or underpaying key members of your sales force under certain conditions. Or, your new plans may yield a payout that is too expensive relative to your sales.
Types of sales commission plan tests:
Regression Test: To see how your new plan or adjusted plan would respond in the real world, calculate the payout using actual historical data over the last 6 to 12 months. It’s human nature to use smooth and linear data when testing sales plans, and actual historical data has more variability and randomness than analysts would naturally use on their own.
While passing historical data through the new plan, there are a few areas to which you should pay special attention:
- Commission Expense vs. Volume: If volume (e.g., units/subscriptions sold) increases, does the commission payout as a percentage of gross sales stay steady, increase, or perhaps decrease if volume increases? What did the plan’s design intend?
- Commission Expense vs. Sales Channel: Not all volume has the same customer acquisition cost (CAC). Verify the new commission plan to ensure it factors in the sales channel’s CAC, and whether the target commission expense rate is maintained per channel as volume is flexed up and down.
Stress Test: Stress tests determine how robust the plan is under more severe conditions. In these tests, corner cases are applied – for example, if a grid is drawn with the X-axis as volume and the Y-axis as price, the four corners of the grid should be tested.
Stress tests are especially helpful to companies that are experiencing high growth, entering new markets, or launching new products or services where future sales performance is more difficult to predict.
Pilot Test: If your company is introducing a new plan or a plan change to a large sales force, a smaller pilot test is recommended. For pilot tests, choose veteran members of your sales force that are steady producers and have a strong relationship with management.
2. Communicate changes to sales commission plans
If new sales plans are being introduced, or existing plans are experiencing modifications, it is equally important to determine how and when the changes will be communicated to everyone involved with the plan.
Change management can often be overlooked once the work has been put into designing and testing the plan,
How to communicate changes to sales commission plans:
- Avoid introducing the plan via group or Zoom meeting, Instead, budget time for 1-on-1 sessions per employee to explain the new plan.
- Have a clear timeline of when the new plan or modification will go into effect.
- Determine a sunset process for sales transactions executed in prior periods under legacy plans.
- Offer anonymous question submission to HR or management after the plan is introduced.
3. Review your internal control policies
Introducing a new sales plan is typically a good test of your internal control policies.
However, instead of reacting to gaps in your policy, this is an ideal opportunity to and familiarize yourself with it again by considering a few questions.
Key questions to ask when conducting reviews of internal control policies:
- Among management and staff, who needs to approve the new plans?
- Will future modifications to the new plans be governed in the same way?
- How will the company obtain an acknowledgment from the sales team that they understand the new plans?
- How are plans monitored to make sure they are producing intended outcomes? For companies with larger sales forces, a commission committee is recommended to meet quarterly to review not only the impact of new plans but also plan changes and your sales commission policies in general.
4. Assess the calculation process
Finally, before new plans are implemented, it’s important to assess the efficiency of the process behind calculating commission payouts.
Key questions to ask when assessing your calculation process for efficiency:
- With the new plans, what is your expected sales commission calculation cycle? Can this be shortened?
- Are there opportunities with the new plans to refer to cleaner data sets that require less scrubbing to prepare commission data?
- Can any legacy commission plans be retired, or can a clear timeline be set to consolidate sales plans?
- To what extent is your sales commission process manual and reliant on end-of-period accounting?
How to Create a Sales Compensation Plan:
It’s critical when building a sales compensation plan to keep in mind the following steps to be successful:
- Set the basic requirements for your sales compensation plan
- Determine role-levels (entry, baseline, experienced)
- Establish total On-Target Earnings (OTE)
- Determine the base pay and sales commission structure
- Set targets based on your specific business model
- Plan compensation packages for training & onboarding
Bringing in Expert Assistance for Sales Plan Development
Launching a new sales commission plan can bring excitement to the sales team, but pre-launch testing and process assessment are the keys to unlocking their true potential.
It’s important to note that it can be particularly beneficial to turn to a trusted partner during pre-launch to streamline your sales development process, show you where to overcome the gaps, and help you reach all your future sales goals.
Need Help Developing a Sales Plan?
Bridgepoint Consulting can help your company prepare for the launch of your new sales plans and assess how to take your sales commission processes to the next level. At Bridgepoint, we offer a full suite of services with seasoned consultants from a variety of industries who are prepared to assist your organization with adjusting or creating new sales plans.
Contact us today or click on the link below to learn more about our Finance & Accounting services.