Do I Need To Create Sales Compensation Plans?

If you just started hiring your sales team, you may wonder if you need to give them a sales compensation plan (also known as a “commission plan”) to sign.  You may think “It’s only 2 sales people, we can have a verbal agreement”.  Well, you can definitely choose to do that if the sales professional agrees, but its best practice to give them a plan.  Here is why…

A sales compensation plan documents the agreement between the company and the employee, and how the salesperson will earn their target variable.  If you verbally give them instruction on what they should be selling and how much they will get then it seems pretty simple, right?  But usually with that limited information questions will arise and there is no legal protection – on either side.  This is why we need sales compensation plans for sales teams.  The comp plan goes deeper, including important items that need to be documented to protect the company AND the employee.  A sales comp plan is not just for the company’s protection (as some people assume).

So, what does a sales comp plan look like or what needs to go into a comp plan?  Well, there are various items, but at minimum these should be included…

• Time-frame of the plan (i.e. the plan period)
• Relationship between the sales employee and the company (the agreement)
• Plan eligibility and responsibilities of the sales employee for sales credit (quota and commission)
• Target variable and the allocation of it
• Products and services they can sell, and the time-frame they can be sold
• Quota(s)
• Incentive payment based on achievement (whether that’s a commission rate, bonus, or percentage of target variable)
• Payout above and below quota (e.g., thresholds, accelerated rates, caps)
• Qualifiers for credit (e.g., standard contract terms with legal, finance approval etc.)
• Payment timing (when can a person expect to receive payout after a sale)
• If there are claw backs or deductions to their pay, and the timing around those
• What qualifies as a claw back
• Terms & definitions (some terms used in sales compensation plans maybe unclear, so its best to be transparent)
• Legalities (state legalities, plan interpretation, leave of absence, termination/separation clauses etc.)
• Company authorized signature and the employee’s signature

Now you may ask “do sales reps need to sign an annual comp plan?”.  The answer is yes, all comp plans should be signed, most companies actually have language that incentive payment is not made until signature.  However, when you send compensation plans you want to make sure you have communicated the plan well and how it works beforehand.  That way the person receiving is not caught off guard, and has a good understanding of the sales comp plan.  In addition, after sending, give the employee time to actually read through the plan before signing in case they have more questions.  Generally speaking, you want to give at least 5 business days to the salesperson to review their compensation plan before requesting signed documents back.

One key thing after creating your sales compensation plans is legal review.  Before sending sales compensation plans to your sales team, have a compensation attorney review your compensation plan with all your business terms.  The main reason for this review is that a comp plan is a legally binding document.

With a well-documented compensation plan, both the company and the employee will understand their relationship and responsibilities.  This will also avoid possible lawsuits if compensation administration aligns with what is documented in the plan.  If you want to learn more on how to create sales compensation plans or how to write a comp plan for a sales employee, checkout our course here, which has a downloadable sales comp plan template that you can leverage to build your own.