We’re Paying Too Much In Sales Comp!

But are you?  We hear this often from senior leadership.  While this may be true, there are cases where it is not true.  Instead of looking at straight cash out, look at commission paid relative to revenue.  From this perspective, you can you determine if you truly are paying too much in sales compensation. 

This can be a tricky area because sometimes leadership may want to apply caps (limit payout, set a max payment) to certain people who receive high payouts.  A company should avoid doing this because this may create pay inequity and bring the company into a bigger problem.  These types of actions may also cause you to lose credibility with the sales team, because we all know that people talk (including sales team members).  Ideally caps should be applied to a role, not an individual, so that the same treatment is applied; or if you are capping a deal then all those who get paid on that same deal should get treated with the same methodology set.  If caps are to be utilized then they should be documented and communicated beforehand. 

So how do you address?  Well to start you can look at a couple different areas: quota achievability, business to quota gap, sales payout: variable pay vs target variable.  With this type of analysis, you can determine if the company is paying too much.  Sometimes the high expense is related to SPIFFs, this you can also determine through this same analysis.   

Sometimes high incentive payouts are related to large deals that the rep has no influence over, then its best to incorporate plan language to account for these situations (e.g., bluebird, windfall).  Make the language in the sales comp plan transparent, so that the sales employee knows what type of deal qualifies and the protocol they have to follow in order to receive quota credit and payment.  Last thing a company should do is have a sales rep close a massive deal for your company and then decide how to pay the sales rep after.  The sales employees should understand their sales comp plan and have a clear understanding on what payment they can expect to receive, providing they follow the requirements in the plan.  The sales comp plan should be designed in a way that it is fair to the company and fair to the salesperson.

In regards to overpaying sales comp, you can keep costs under control if you design plans to pay based on attainment to quota and quotas are set fairly.  As long as the payout is correlated to revenue attainment then you are paying along the continuum, as you have designed the plans.  So, the high payouts are correlated with high revenue – which is what you want in sales comp.    

If you start with a sales comp budget, factoring in all rewards, then you will have a benchmark to track against total payout.  This reference will also help you determine if you are overpaying in sales comp.  At Sales Comp Academy, we have payout analysis examples along with other sales incentive tools and resources to help you manage your plans.  These are embedded in our Sales Compensation Plan Effectiveness course.  For all of our sales compensation resources checkout our resources page here.