Developing a sales compensation plan is a difficult process that involves taking into consideration a variety of variables. At a very basic level, sales compensation plans must be easy to understand and administer. When a plan is too complicated, management and employees may become confused and a salesperson will focus more on figuring out the plan than making actual sales. Beyond being easy to understand, most effective sales compensation plans maintain a good variable compensation and salary balance. It’s important that salespeople are motivated to stay at the company and improve their sales, so a good balance is key.
While creating a mutually-beneficial plan is important, it would not be possible without knowledge of the industry and cost of sales. Having a strong grasp of an organization’s place in an entire industry allows for a plan that reflects a company’s needs. If long-term employees are needed, for example, sales compensation plans should reflect that. Understanding the cost of sales also helps with the process. While limiting sales compensation improves profits, it may result in a company hiring less effective salespeople and, thus, losing sales in the long run. Instead, effective plans draw in and retain top salespeople.