7 Major Mistakes to Avoid When Designing a Sales Compensation Plan

As a sales manager or company leader, do you ever make the mistake of not letting your salespeople do the selling? Do you horn in on faltering deals, or micromanage the process?

You may have seen these “don’ts” spelled out among the biggest mistakes sales managers can make, and you may have started thinking (as we did): What else would top the list of costly sales management mistakes? Which missteps can truly impair a sales department -- if not an entire company?

Given that sales compensation planning has been described by HubSpot chief revenue officer Mark Roberge as the most important tool in your sales tool chest, we think common mistakes in plan design are a good place to start.

Here are seven sales compensation plan mistakes we see every day. Which ones are you making?

1) Recycling Another Company’s Sales Compensation Plan

Your sales compensation plan is the articulation of your company’s strategic vision, designed to support unique organizational goals and priorities. Yes, there are structural components all plans should share; these can be taken from a sample sales compensation plan or template. But you need to do more than just cut and paste. Borrowing a compensation plan from a former employer or past business venture is a bad idea, on par with recycling another company’s mission statement.

2) Creating Unnecessary Commissionable Events

Growing a sales team is sometimes an exercise in trial and error. In an effort to coach new reps, you may want to attach bonus pay to specific selling activities, like hitting the benchmark for weekly cold calls. Try to resist this urge. Creating commissionable events around process (rather than results) is another way of overpaying for underperformance and will not ensure you get the results you need. Instead, you should reserve compensation budget for star performers -- the reps who are closing deals and ultimately furthering progress toward company goals.

3) Using a Flat-Rate Commission Structure

In 2014 we surveyed SMB sales leaders and found nearly half of them (46%) use only flat commission rates in their sales compensation plans. That means their salespeople earn the same percentage on every sale, regardless of whether a rep meets or exceeds quota, closes a new product deal, or acquires a new customer. It’s no mystery why some companies opt for flat-rate plans; they’re easier to manage and administer. But weighing all sales equally is still a huge mistake, in terms of under-motivated sales reps, ignored opportunities, and resulting revenue losses.

4) Drafting Ambiguous Commission Crediting Terms

Does your sales compensation plan account for the possibility of split or shared commission credit? Is there any ambiguity as to who gets what percentage, or the level of involvement that’s commissionable? Until you draft crystal-clear commission crediting terms (and have your compensation plan documents legally reviewed), you’re guaranteed to encounter more than a few disputed payouts. Commission disputes create tension and bad blood within a sales department. They can also land you in a courtroom.

5) Not Supplying a Compensation Plan During the Hiring Process

Attracting qualified sales reps is already a tall order. Bringing the brightest talent on board gets even harder without an official, comprehensive compensation plan to give candidates alongside your job offer. Although this example isn’t a compensation plan design mistake, it’s a good reminder as to why you need to revisit your current plan design now, and with each subsequent year.

6) Tying Commission to the Accuracy of Sales Forecasts

Do you offer a “forecast accuracy” bonus if your sales reps deliver forecasted results within a certain margin of error? If so, why?! Tying commission to an activity that doesn’t lead to a closed sale is a waste of money. Instead of selling, reps are incentivized to spend time gauging timelines (or looking for ways to manipulate them). Some commission consultants hold a different view on this issue. As always, your comments are welcome below.

7) Relying on Spreadsheets

Mapping your sales compensation plan -- and essentially your business strategy -- on a spreadsheet is like using a hacksaw for a haircut. It’s inefficient, it’s imprecise, and it’s dangerous. (Seriously. Did we mention what can happen with sales commission lawsuits?)

Too many company leaders mistake the issue of spreadsheets vs. sales commission software as an administrative concern. But having the right system in place to:

a) drive your business strategy

b) automate calculations and the commission crediting process

c) show reps payout details on paid and potential sales

d) forecast overall compensation costs

is a high-level priority. In fact, we might argue that not having such a system in place is actually the biggest sales management mistake you can make. Can you think of a bigger one?

Editor's note: This post originally appeared on Cornerstone Software's blog, and is republished here with permission.