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January 30, 2017 // 6:30 AM

8 Things You Need to Understand About Your Sales Compensation Plan

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It’s the beginning of the year, and you’ve just been handed your new sales compensation plan.

As a sales rep, you need to quickly get up to speed with this plan so you can develop a strategy.

You may need to shift your prospecting focus, modify your sales processes, and incorporate the latest tools -- not to mention, keep up with your normal selling tasks like filling your pipeline, working on existing opportunities, publishing fresh content to social media, and staying up-to-date on industry and product-related news.

To quickly understand your new commission plan, use this eight-part guide. Answering the questions below will help you maintain or even exceed your current earnings level.

1) Quota

Ask yourself:

  • What is my new quota?
  • Do I have one quota or several?
  • Which quota is the most important?
  • Am I measured on achieving the annual quota or are there smaller targets, like quarterly or monthly milestones, driving my commission?

Watch out for:

An unattainable quota -- it should be aggressive yet realistic. If your quota is overly ambitious, consider trying to negotiate it lower. Use fact-based arguments, such as, "My territory is shrinking by 30% yet my quota is increasing by 25%, and I'm selling the same products," rather than emotion-based arguments such as, "This quota isn't fair because it's too high for me to maintain my current earnings."

2) Sales crediting rules

Ask yourself:

  • What do I receive credit on/what counts toward my quota?
  • When do I receive credit for the order?

Watch out for:

A shift in timing. For example, maybe you used to receive credit for the order when the customer signs, and now you receive credit upon receipt of payment. This change will impact your cash flow: It will take at least 30 days for your company to receive the invoice so you, in turn, can get paid.

3) Sales value rules

Ask yourself:

  • How is the value of my sale determined?
  • Is it based on the amount I closed the deal for?
  • Is there a different method for calculating the value for different types of products?
  • Can I calculate the sales credit value myself?

Watch out for:

Credit value that Finance determines through multiple and/or complex calculations. If it's difficult for you to understand the value of the deal at closing, it's also difficult to know how close you are to hitting your quota or earning your bonus. When in doubt, ask Finance how much more you need to sell. Sometimes salespeople are only a few dollars short of attaining their goal -- don't let that happen to you.

4) Commission rates

Ask yourself:

  • Do I earn the same rate on everything, or are some products and services earned at a different rate?
  • What do I have to do to earn a higher commission rate?

Watch out for:

Products or services that have higher commission rates but aren’t necessarily worth focusing on. The difference in commission should be proportional to the difficulty or length of the sale.

5) Commission thresholds

Ask yourself:

  • Is there a sales threshold I must cross before I receive payment?
  • Once I cross that threshold, will I be paid back to my first sale?
  • How often does the threshold reset?

Watch out for:

An excessively high threshold. Unfortunately, some companies establish high thresholds to avoid paying a significant amount in commission. I once analyzed a company’s data to find one rep had earned $90,000 more than another rep. They had brought in the same amount of business that year, but the rep who had earned more had strategically timed closing deals when they would count the most. Some months he didn't close any sales because he didn't anticipate crossing the threshold, while other months he exceeded his quota so the accelerator would kick in.

6) Earning possibilities

Ask yourself:

  • What do I have to do to earn as much as I did last year?
  • If I sell what I believe I’m capable of, what will I make?
  • How much do I need to sell to reach [target amount]?

Watch out for:

A compensation plan that combines two or more separate elements to determine earnings. It should be relatively easy to calculate your earnings potential by multiplying your projected sales volume and your commission rate, then adding any bonuses you expect to earn. I recommend using your earnings and sales volume from last year as a baseline.

If your plan is confusing, ask for help. You won't be motivated to sell if you don't know how you'll benefit.

7) Earnings caps

Ask yourself:

  • If I’m a top performer and crush my quota, will I be paid for every sale?
  • Will the commission rate change?

Watch out for:

A limit on how much you can earn. If there's a cap in the plan, you might want to postpone closing a big deal until the next month or quarter.

Some companies tie their earnings cap to deal size (also known as the bluebird clause). If this clause applies to you, try to structure deals to avoid the cap. For example, you might break one order into several smaller ones or arrange to have deliveries made over time rather than all at once.

8) Payment timing

Ask yourself:

  • Will I get paid the month after the sale is made?
  • Will the company hold earned commission until another event happens?

Watch out for:

Commission that’s earned when one event (such as booking) occurs but not paid until another event (like cash receipt) takes place. If you earn it at booking, you may have to wait several months to be paid commission. If you leave the company, you might be eligible for unpaid commission payments, so check with a lawyer.

Knowing your sales compensation plan inside and out allows you to craft a winning strategy. Use these questions to familiarize yourself with your new plan.

HubSpot CRM

Topics: Sales Incentives

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