Documenting Your Sales Compensation Plan

sales compensation

I can’t tell you how many startups go through the effort to think through the best method to compensate their sales team but don’t take the next step to document it so that it can be clearly communicated.  Deciding about the metric(s) on which to pay the sales team and the right split of base compensation versus sales commission is absolutely fundamental to any sales compensation plan.  But that’s not enough.

If you read my other sales-related articles titled 5 Golden Rules for Setting Sales Compensation and Is Your Sales Incentive Plan Driving Bad Behavior, you know there are several other factors that must be included in the full plan.  Two of my mantras are that it must be simple and it must be clear.  This article will describe what should be in the documented plan that you deliver to each commissioned sales rep and have them sign in acknowledgement.  I have even included a template for you to use.  So no excuses.

There are a handful of things that should be included in any sales compensation (aka sales commission) plan document.  I’ll describe each briefly and you’ll see how I recommend weaving them together using the template I have attached.  And remember that the primary purpose of documenting the sales compensation plan is to help communicate it to the sales team members that are paid against it.

1. Overview

The opening section should set the stage for the sales period (usually 1 year).  This is your opportunity to describe some of the key goals of the business and, more importantly, the sales function.  You can also reiterate the primary responsibilities of the sales representative function and your key routes to market (ie – channel, direct, OEM, etc).

2. Metrics

What metrics affect the sales compensation plan?  Explain them in sufficient detail.  For example, if your metric is annual contract value (ACV), make sure you describe what is included and what is not included in ACV.  If your metric is new customers, describe what constitutes a new customer (for example, is there a minimum deal size to qualify?).

3. Payment Exceptions

This is your chance to describe various types of “bad behavior” that could be cause for non-payment or at least management judgment.  Common examples include orders with contingencies, side letters or excessive discounts that aren’t pre-approved by sales management.

4. Compensation Mechanics

Depending on whether your sales compensation plan uses absolute or relative payment mechanics (see related article titled “Absolute Versus Relative Sales Commission Plans“), you need to be very clear on how the calculations will be made to determine the commission payment.  Also, how often will the sales team be paid?  Are there any minimums that are required?

5. Targets

What is the quota for each period in which commission payments are eligible?

6. Payment Example

With all of the above information communicated, this is your opportunity to show some examples.  If you have accelerators or decelerators, make sure to show examples that incorporate them.  If your mathematical formula allows it, include a graph that shows the payout amount (or %) based on different levels of performance from 0% to 150% of target.  If you have multiple targets, this won’t be practical.  The main point is to give some examples at different levels of performance to make it really clear how the sales compensation plan works.

7. Corrupt Practices Protection

This is almost never a problem but some investors or acquirers will want to specifically see that your company has a culture that does not allow corruption.  US companies can simply reference the Foreign Corrupt Practices Act (FCPA) and include it in the sales plan document.  The template I’ve provided below has such a section for your consideration.

8. Acknowledgment

This is the opportunity for the commissioned sales professional to sign the document acknowledging their understanding and agreement.  With that, you are ready to have a great year.

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Thinking through the mechanics of your sales compensation plan is one of the most important activities you and your fellow management team members will undertake.  To do so without proper documentation for the sales professionals that will get paid against it is a real shame and will almost certainly come with complications.

You’ll see in my other articles on this topic that it’s important to make sure your sales compensation plan is simple and clear.  After documenting your plan, share it with one or more of your most trusted sales professionals and ask them for feedback.  Do they understand it?  Do they see how they can make a lot of money from doing things that are good for the company?  If so, you’re in great shape. Sales Comp Plan Graphic

Start the process of creating the sales plan for your next period (usually the next year) at least a few weeks before the next period starts.  There’s nothing that frustrates a seasoned sales rep more than starting a new plan period and not knowing their quota or sales compensation plan.

Click on the icon to the right to download a template I’ve created for just this purpose (scroll down to the Compensation Resources section of the page).  I hope you find it useful.

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