Sales compensation planning and design: 9 steps you can’t skip

Developing sales compensation plans isn’t easy.  

Unlike with product, customer support, and marketing roles, sales' compensation is complex and changes dramatically month over month pending performance.  

However, it's entirely worth optimizing variable compensation as a growth lever as you work to address changes to market changes with seller behavior and actively retain top talent.  

As Dooly found in their Sales happiness index, 87% of rep respondents are happy working in sales and in their current role, but—of those who want to leave: 43% cited a lack of benefits and, and 31% cited a lack of bonuses.

In other words, compensation design really matters as it aligns reps' actions and behaviors directly with company growth, and plays a major role in underlying job satisfaction.

As Nabeil Alazzam, founder of Forma.ai. shares on our podcast,  

"The ideal sales comp plan is designed for the rep...If they can take the plan and translate it to what they need to do to maximize their earnings, it actually drives the right behavior and more revenue for your business."

But what makes for effective sales compensation design? What steps should you enact after your sales planning process (generally) to design sales incentives, etc.?  

In this article we'll go through the steps it takes to design tailored, especially thoughtful sales compensation plans, complete with tips from professionals in sales performance management.  

What is sales compensation planning and design?

Well, to start, a sales compensation plan is the documented framework defining how your sales reps get paid.  

More than just a commission rate that applies to every sales representative for each sale, an effective plan tailors the pay packet for groups of roles within your sales team with components like:

• Base salary: the minimum amount each rep earns, regardless of performance.  

• Commissions: how much they’ll earn on top of base salary after hitting sales quota.

• Performance incentives and bonuses: additional rewards given when reps hit specific targets, such as a $250 bonus for becoming the highest selling agent of the month.

• Benefits and perks: like stock options, pension contributions, or health insurance.

When we talk about sales compensation planning and design, though, we're referring to the complex work sales compensation professionals do to define and develop the sales compensation plan.

This involves everything from collaborating with the executive stakeholders in sales planning season, all the way through to identifying the right pay mix, setting territories and quotas, the strategic selection of all the plan's details, and ensuring sales representatives fully understand how their earnings will work via on-point communication.

Some common strategic elements of successful sales compensation design

Ahead of diving into the essential steps involved in sales compensation plan development, let's define some of our key terms.

As there’s a lot that goes into each aspect of a sales compensation planning—it’s not always as simple as rewarding reps with a percentage of all sales over a certain amount.  

Some strategic components of successful sales comp designs include:

• Sales quotas: the minimum benchmark that reps should achieve. In many cases, they must hit quota before they’re eligible for compensation and incentives.  

• Multipliers or accelerators: extra incentives given to top performers to continue exceeding targets. For example, achieving 120% quota attainment might yield a 1.2x multiplier on any base commission.  

• Decelerators: minimum thresholds (or other mechanisms) put in place to reduce the rate of a salesperson's total commission, incentives or earnings.  

• Clawbacks: a provision that lets you withdraw commission if a sale falls through, the customer cancels their subscription, or a product is returned.

• Spiffs: one-time, time-sensitive incentives that encourage reps to meet short-term goals. For example, a software company might offer a $500 spiff to reps who sell new enterprise subscriptions over $10,000 in value in the final month of the financial year.

Typical challenges in sales compensation development

With its complexity, there’s a lot that can go wrong when designing sales performance plans, ultimately rendering the interplay of your territories, quotas, and incentives useless.  

While this isn't an exhaustive list, here are some of the most common challenges to avoid:

• Unbalanced sales territories. Agents operating in a saturated territory where opportunities are plentiful will rake in incentives and bonuses, leaving those assigned to less fruitful territories at a disadvantage. Ultimately, territories should be balanced enough that the compensation plan offers equal earning opportunity.  
  

• Over reliance on spiffs. Short-term incentives are great for issuing rewards that motivate reps in the short term, but agents might lose motivation if these incentives become too predictable or even expected. The same level of effort won’t reap the same rewards month on month. As Maria Oczko-Canant, Head of Global Sales Planning, Compensation and Performance Analytics at Workiva says on spiff best practices:  

• Unappealing incentives. Will agents push to meet ambitious sales targets if the reward for doing so isn’t interesting to them personally? Probably not. You’ll need to design sales compensation plans with performance incentives that are especially motivating—such as the top-performing rep of the quarter winning a non-monetary prize that aligns with their identity as a hockey lover, for example.  

• Capped commissions. Putting a ceiling on your agent's ability to bump up their revenue can deter top performers from bringing in more sales. They know they won’t be rewarded for the extra effort they’re putting in.  
  

• Easily exploitable plans. If you're not careful with well-considered terms and conditions, audit or comp assurance processes, and general governance (scenario planning, and solid checks and balances before compensation is administered), you'll likely see more instances of loopholes being gamed. Be mindful of what you can proactively control to avoid compensation headaches ahead of time.

So how can you best account for all these factors? Let's get into it.

The 9 critical steps involved sales compensation planning

1. Fully understand the company's overarching revenue-growth strategy and goals

Sales compensation plans—above all—need to align with corporate goals, growth objectives, and revenue targets to be successful.

And now, more than ever, the goals of sales compensation are expanding to encompass the entire customer journey or go-to-market motion. Everything from acquisition through to retention and expansion can be something your organization is working to have sales compensation account for.

It's going far beyond an initial sale.

Let’s say your organizational goal is to reduce customer churn. To keep reps assigned to a given territory on-track to achieving a goal of retention and adoption, you could design a compensation plan that includes eligibility requirements. That is, reps wouldn't become eligible for commission until the customer keeps their subscription active for three months post-sign up. The introduction of an eligibility requirement like this in the terms and conditions could motivate reps to prioritize customer retention over short-term sales.

This kind of usage, or consumption-based aspect as introduced to sales compensation is becoming more and more common.  

Very early on in the sales planning season:  

• Make a point to learn exactly what executives are prioritizing as the company's overarching objectives. These will define what incentives you design to influence associated behaviors.

• Determine all your stakeholders within the business who you'll work with as you develop the plan. These are essentially your 'compensation committee". Do you need input from sales leaders to pinpoint quotas that reps must hit before being eligible for compensation? The finance team to confirm how much budget you have to play with? Know the complete stakeholder landscape at the outset and develop these relationships early.

• Overall, consider the overall sales compensation structure that might suit your organization and the associated top-level goals.

As PepsiCo’s John Waldron summarizes:

2. Dive deep into historical sales performance data to understand incentive effectiveness and baselines

In this next step, reviewing sales data will prevent you from draining financial resources on incentives that don't end up driving the right behaviors or profit for the business.  

Take sales commission planning, for example. If you’re promising sales reps 4% commission on each sale above quota, the plan could be unprofitable—particularly if the customer’s lifetime value falls below the 4% commission rate on offer after taking expenses (e.g. the rep’s base salary, software costs, and perks) into account.  

Historical data helps you uncover performance trends around quotas and compensation effectiveness. You can identify and analyze how effective previous incentive structures were at motivating reps and aligning with business and financial goals.  

Ultimately your goal is to understand what has been working and what hasn't, so you can highlight hidden biases that often crop up in gut instinct and fine-tune your approach going forward.

In terms of data, after identifying how well (or not well) prior incentives were at driving behaviors, you might also turn to more advanced analytics for determining prior sales effectiveness. This might be things like Monte-Carlo simulations for cost modeling and budgeting, regression/correlation analysis for determining what contributes to performance and use in plan design/quota setting, and territory workload balance analysis.

In relation to your data, ideally when you have hypotheses of what types of territories, quotas, and incentives may work out for your business, you can start modelling various plan scenarios in sales performance management (SPM) software.  That is, if you've moved past legacy ICM options, an SPM platform will be one unified platform where you can plan and enact your compensation plan designs. A full-stack SPM platform can ultimately help you consolidate all your SPM data (ingesting from various point solutions and sources) and it'll help you to draw optimal and meaningful conclusions from it as all the data all finally 'talks' together.

When should you make the investment? As shared with us on the Sales Compensation Podcast:

Forma.ai, for example, lets you integrate with over 200+ data sources, from enterprise resource planning software (Oracle NetSuite, etc.), CRMs like Salesforce and Microsoft Dynamics 365, and data intelligence platforms like Databricks.

During the data exploration stage, ask for input from your sales rep qualitatively too.

Effective sales compensation planning requires a combination of data analysis and critical thinking.  

The only way to know what's working or could use improvement is by asking the agents involved. As revenue and sales leaders know, sales compensation is both an art and science.  

3. Define the behaviors (and associated metrics) you'll use to determine sales performance

When you successfully design plans that drive desired behaviors, sales reps will know exactly which metrics they need to meet to qualify for each level of compensation. This clarity is essential to your plan's efficacy. Naturally, each of your compensation plan metrics will be mapped nearly 1:1 with the overarching goals of the business determined in step one, and will account for the different sales roles/types within the team.

Company goals can match up to a broad range of different metrics for determining sales efficacy, but at a high level, this may include things like:  

• Revenue growth: If your company’s priority is growth, you'll be focused on compensating your salespeople based on performance metrics like total revenue, net new revenue, or new customer acquisition/logos.

• Profitability: If profitability is critical, you'll measure performance via metrics like gross margin or profit per sale, so that salespeople focus not just on revenue but on profitable sales.  

• Market share: If expanding market share is a goal, metrics around percentage of market penetration or customer retention in certain territories may be important.

• Customer satisfaction: Use metrics like Net Promoter Score (NPS) or customer satisfaction ratings to ensure that salespeople prioritize long-term relationships over short-term revenue when focused on customer satisfaction.

• Customer retention rate: This is critical in industries where customer lifetime value is high, and churn is costly.

You'll need to balance all of these KPIs based on roles, regions, or product lines. As Forma.ai's CEO and Founder Nabeil Alazzam explains:  

“In some cases when you optimize and analyze your data, the outcome is a base plan that can apply to everybody, but is designed based on the individual data. In others, the plan needs to be tailored based on the individual rep profile.”

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For example:

• Hunters: For roles focused on acquiring new customers, emphasize metrics like new business revenue, new customer acquisition, or number of new accounts when planning sales comp.  

• Farmers: For account managers, use metrics like renewals, upsell revenue, or customer retention to drive these desired actions through comp plans.

• Inside sales: For inside sales or support roles, metrics like number of calls, appointments set, or lead conversions may be more appropriate.

Similarly, reps selling different product lines (or have longer sales cycle durations in some cases) will need different measures of performance—even if the KPI is the same.

Teams selling high ticket subscriptions might earn a lower recurring commission versus a higher flat rate for those selling one-time purchases, for example.

4. Determine the ground-floor basics of the plan (the fine details)

In the previous step you outlined the metrics and components of the plan, and now you'll work to fill in the details of this even further.

In this step, you'll come up with the details like your pay mix, quotas, and OTE.

First, rely on your understanding of the business goals and historical data from your SPM software to set quotas.  

For example, if your target is to increase customer retention in a particular territory, you might set a quota for the average lifetime value of new accounts to exceed $7,000. Your SPM shows that the current average is $5,700. Input from stakeholders who know the territory well, and team leaders exceeding the current quota attainment, can validate that the quota is realistic and reasonable.  

From here, we can calculate OTE—how much you’d like team members to earn provided they meet performance targets. As a rough guide to calculate OTE, Indeed reports:

• The average base salary for a salesperson in the U.S. is $76,143

• Most sales reps earn an extra $11,300 in commission each year  

What’s determined as “competitive” on-target earning (OTE) differs dramatically, especially if you’re designing compensation plans for an international workforce. Reps with a low local cost of living will require a higher base rate than those with a cheaper cost of living. Consult legal and finance departments to confirm you’re setting competitive rates that are compliant with local employment laws and regulations.  

You'll need to adjust and model base pay and variable compensation scenarios until you settle on the mix most likely to motivate reps and drive desired behaviors. In the example above: the pay mix is roughly 87:13. Reps make the bulk of their OTE through a stable base salary.  

However, the optimal pay mix can vary by salesperson. High performers might sacrifice $10,000 in annual base pay for the chance to make $25,000 in commissions, whereas graduates or new parents might prefer a stable salary with less risk.  

“Salespeople are highly financially motivated. As long as that’s the case, there’s an important role for variable compensation to play."  

— Josh Miller, Head of Sales Comp at CVS Health

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Similarly, think about the payout schedules for eligible commissions. The sooner you can deliver the rewards promised to sales reps, the better—not everyone can delay gratification. But this needs to be balanced with sales cycle length to protect cash flow. It doesn’t make sense to pay commission based on a quota of 50 product demos booked if those leads won’t translate into revenue for another two months.  

5. Incorporate behavioral science in incentive planning

Compensation packages are effective when reps are highly motivated to achieve targets and unlock rewards. Part of this includes giving your team skin in the game—a stake of ownership that lets them choose which components they want to base performance on.  

“People value feeling like they have control over these kinds of decisions, as opposed to decisions being made for them,” says Phillip Wiseman, Assistant Professor of Marketing, Texas Tech University, at our NUDGE '24 virtual conference.  

Other behavioral economics principles help us design incentives that drive desired behaviors. That includes concepts like:

• Last-place aversion. Leaderboards and team-wide competitions can motivate reps to work harder. “Social comparisons are very important motivators,” explains Nick Lee, Professor at Warwick Business School. “People want to improve their performance so they can avoid last place.” Consider making standings toward OTE visible to the entire department to let competitive agents course-correct if they’re predicted to finish in last place.

• Intrinsic motivation. Not all salespeople value monetary rewards. Design plans that incorporate recognition or status when a certain goal is met. For example: sales reps that have a self-perception of being charitable might be more motivated by a $50 donation to a non-profit or cause they care about, as opposed to a 1.5% increase in base commission for sales over quota.  

• Loss aversion. Play on what a rep can lose, instead of what they’ll gain, for each incentive on offer. If you’re rewarding 100% quota attainment with an extra day of PTO, for example, explain the things they could do (and not miss out on) by unlocking the performance incentive.  

It’s not just the benefits on offer that we can apply behavioral economics to—the way in which you present these changes can impact how likely your team is to buy into them. One of the most important steps in any sales comp plan's effectiveness is in how it is grasped by the sales team.

6. Build in flexibility for market conditions

“As a sales organization, you have to be extremely agile in order to adapt to and attack a changing market,” says Stephen Long, Head of Global Sales Compensation at Blue Yonder. This applies to sales compensation: you’ll need a framework for adapting to market changes or internal shifts.

Use data forecasting to anticipate market conditions and bake flexibility into your compensation plans.  

Dynamic quotas, for example, adjust the minimum goal a rep must achieve before qualifying for incentives and commission. It uses real-time data, such as market trends and consumer behavior, to adjust quotas in real-time and keep agents motivated. For example: reps targeting your Louisiana territory might have their quotas dropped significantly if there’s a natural disaster in the area.  

Similarly, evaluate any upcoming changes in resources that could impact compensation packages. Internal shifts—like team restructures that come into play when a rep is on parental leave, for example—might mean you allocate budget for that agent’s commission level and redistribute it to the team.  

The goal remains the same, but the resources are more scarce. An increase in commission—even if it’s just the rep on parental leave’s 3% bonus divided between six people—could be the extra push your remaining team needs to keep sales consistent.

But be wary of changing the goalposts too soon; it can have the opposite effect on rep motivation. There’s no strong incentive for reps to meet performance targets if they don’t get the compensation originally promised. The idea is to strike a balance between motivational compensation packages, while keeping them realistic based on the parameters your reps are working within.  

7. Pilot and refine the plan

You don’t have to launch the new sales compensation plan immediately and risk confusing reps. Ahead of the SKO in quarter 1, you have the option to test or pilot the plan with a smaller focus group and gather their feedback to fine-tune and iterate compensation plans before the full scale roll out. For example:

• Do reps understand how the new compensation plan works?

• Are they motivated by the incentives on offer?

• Are incentives tied to a desired action (e.g. demos offered or sales closed)?  

• Is the balance between base salary and variable compensation fair?  

• Are the performance metrics and targets realistic and achievable?

Forma.ai includes sales compensation planning capabilities including predictive modeling. This way, you can test or simulate your pilot compensation package and show the most likely scenarios, helping you to easily and directly test variables without impacting your current plans and confusing agents.

“Forma.ai provides flexibility like no one else in the category,” says Dr. Robert Bieshaar, Senior Director of Worldwide Incentive Compensation at Autodesk. “With their real-time modeling, I can apply any idea I have against last year’s data to see how much it would cost and what it could actually achieve.”

8. Establish monitoring and reporting

Standardize the process of data collection with administration and tracking mechanisms that make data analysis an active part of the compensation plan, as opposed to an afterthought.  

Choosing a sales performance management system that collates data from all sources, including your CRM, payroll software, and data intelligence platforms, is one thing. Actually making sure this data is clean and accurate is another.

Update training procedures—particularly your code of culture and rep onboarding training—to reinforce the importance of data collection. You could also create checklists for every task that data is required for. For a comp plan that’s incentivizing reps to make large sales: if a rep’s adding a new lead into your CRM, for example, set “priority” and “estimated deal size” as required fields.  

Other monitoring and reporting procedures to have in place include:

• A compensation dashboard to show on-target earnings in real-time  

• Regular performance reviews with sales teams

• Attrition analysis to determine the impact of your compensation plan on retention

• Quota attainment reports to track how many reps meet or exceed quota and become eligible for variable compensation

9. Evaluate and continually optimize your sales compensation plan

Sales compensation planning isn’t an annual task to tick off your checklist at the start of a new year. Customer churn, market changes, and internal strategy shifts can throw your sales compensation plans off course. You’ll need to make ongoing adjustments as you gather feedback from the initial program.  

Pay close attention to the following metrics to determine how effectively your sales compensation plan is at motivating employees and incentivizing desired actions:

• Quota accuracy. Are you able to accurately set quotas that predict rep performance? “What I would generally expect to see here when a good quota setting process is in place is a normal distribution—a shape of distribution that looks like a bell curve generally centered around 100% attainment,” says Forma.ai’s Chief of Staff Kyle Webster.

• Quota fairness. What biases exist in the targets that you set reps, and are they influencing performance? Large variations in quota attainment by territory size could indicate unfair quotas that make it harder for reps assigned to one territory to qualify for variable compensation than others.  

• Pay differentiation. Are you paying the right amounts to retain top talent and manage low performers? Top reps need to earn enough to stick around, whereas low performers don’t want to get comfortable receiving lots of compensation for minimal performance. As a general rule: top performers should earn 3x the average. Bottom performers should earn 30% of the average.

• Pay composition. Is the sales comp plan driving the desired focus and outcomes? If a metric with 40% OTE assigned to it only contributes 20% to the rep’s actual earnings, they might not be engaging with it to the desired degree.  

• Cost of sales analysis. How much are you spending on sales compensation compared to revenue generated? Include other expenses associated with the sale including go-to-market expenses, partner incentives, customer incentives, for a more holistic view of how much profit you’re earning after taking expenses into account.

“We use the data to plan for next year,” Samantha Jozwik, Sales Compensation & Analytics Manager at Intermedia Cloud Communications. “We’re analyzing what’s working with our plan and what’s not. This helps us identify any gaps and consider if there is something that we need to change structurally or what we can do with other departments (i.e., marketing) to improve.”

Before making any major decisions about future sales compensation plans, use Monte Carlo simulations to model the plan and predict how much you’ll spend on the new program.

As Kyle Webster explains:

“What a Monte Carlo analysis lets us do is instead of running one static calculation (what would we spend if everyone had the same performance as last year?). Instead, we’re able to simulate and iterate through thousands of different performance scenarios so that we can understand which are the most likely to occur and what the associated cost and sales comp budget should be.”  

Master sales comp design for your sales organization

Sales compensation planning is all about designing incentives that incentivize reps to not only complete desired actions, but to stick around. A solid structure in place that lets reps know exactly what they’ll earn can go a long way in retaining salespeople.  

The secret to success is using data to design compensation packages, incorporating feedback from the teams who will be receiving them, and regularly iterating based on the data you’re collecting.  

As Vince DaCosta, Director of Global Sales Compensation Strategy, Operations & Systems Databricks, summarizes: “If you don’t strive towards this idea of continuous improvement, you’re just going to go backwards.”  

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