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Small Business Sales Compensation: How to Pay for Performance but Not Over Pay

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Small Business Sales Compensation

If one had to generally summarize the role of a sales compensation plan, it would be to serve two purposes. Firstly, it provides and communicates a framework for a sales rep to understand what is expected of them and what they will get (monetarily) for their efforts. Secondly, the compensation plan provides a guideline to the CEO (and the CFO) as to the cost of sales for planning, budgeting and forecasting purposes. In a nutshell, what revenue is expected and at what cost (ROI).

There are numerous other roles that a comp plan plays and many will argue that the two that I highlight are not the key ones. However, the context is key here, which is: Small Business. Please read on and evaluate for yourself.

When I was at D&B (a medium size business) we had a good comp plan, I believe.  Most reps liked it, some did not, which is a solid indicator that it struck the right balance (hey, if the entire sales force thought their comp plan was the cat’s meow, then I submit it’s probably weighted too much in favor of the rep and not enough for the company). The plan worked. It drove the right behaviours and outcomes.

More recently, I’ve had some significant exposure to a small company that had the following sales comp plan: “We’ll pay you a salary plus 15% for every dollar you sell.” That’s it. No quota. No minimums. No carrot. No stick. Guess what? The reps really liked it and no wonder because they ALWAYS got money for even the most paltry sales performance (they were a mediocre bunch to start with).

Basic Sales Plan for a Small Business

Companies like D&B generally have their act together regarding comp plans. Sadly, some (many?) smaller businesses don’t. But all they need is a basic plan to make things work for their reps and themselves.  I propose the following basic sales plan for a small business who needs to better frame the expectations for a sales rep …and it’s quite simple:

  1. A sales rep gets a base salary PLUS the opportunity to earn more money through commissions.
  2. A sales rep is assigned a sales target (put a timeframe to it: annual, monthly, etc.).
  3. Minimum performance expectation: The rep is expected to generate a certain minimum level of sales and for that they get their salary. Expressed as a % of quota.
  4. Commissions: Only after they have reached their minimum, they start to earn commissions. The rep gets a commission for every dollar above their minimum.
  5. Commission kicker: Lastly, once the rep hits their full target, they are rewarded with extra commission dollars. This is called the commission accelerator or multiplier. The commission rate is factored up for every dollar above the quota.

Let’s do a few quick examples with the following conditions (if you don’t like numbers, skip to bottom) :

  • Rep salary:  $30,000
  • Quota:  $500,000
  • Minimum performance before commissions:  80% or $400,000
  • Commission rate:  15%
  • Commission kicker above full quota:  1.5 or 22.5% (15% * 1.5)

Scenario #1: Rep generates $450,000 in revenue:

  • (Performance minus minimum) times (commission rate) plus (salary) = total compensation
  • ($450,000 – $400,000) * 15% + $30,000 = $37,500 total compensation or 8.3% cost of sales

Scenario #2: Rep generates $600,000 in revenue:

  • [(Quota minus minimum) times (commission rate)] plus [(Performance minus quota) times (commission rate after kicker)] plus (salary) = total comp
  • [ ($500,000 – $400,000) * 15%] + [($600,000 – $500,000) * 22.5%] + $30,000 = $67,500 total compensation or 11.25% cost of sales.

What is achieved with this plan/approach?

  • The rep knows what is expected re: minimum performance
  • The rep sees that there is escalating incentives to achieve minimums and quotas
  • The company gets minimum performance for a base salary
  • The company can correlate costs of sales to revenue
  • The company can better performance manage their sales reps.

This approach is simple but effective and while not necessarily suitable to all companies, this can be a starter plan for those that don’t have anything right now and want to improve their sales performance.

The 5 point sales comp schema described above is available as an online tool or as an excel download at Sales Compensation & Commission Calculator.

I hope you found this helpful. Happy selling!

Geoff Vincent

About

Geoff Vincent, a former B2B corporate marketing wonk (worked at FedEx, Amex, CCH, D&B) with an ultra-pragmatic POV for small business about sales, marketing, leadership, people management and other management best practices.

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{ 16 Responses }

  1. John says:
    Thankyou for an insight into how larger companies get great sales reps, we are looking at expanding our sales team and you've given me some great ideas. Regards John
  2. Samuel says:
    Love the article, even though the formulas are a little confusing, but with a little understanding, they do make sense. Every business need a plan to spread out their earnings and see what works and doesn't. That is why every small business need to make a compensation plan.
    • Geoff Vincent says:
      Hi Samuel, thanks for the comment and apologies for the formulae. I put them there for the wonks (like me!) who like or want to see the calculations. For the super wonks out there, the calculator is available in Excel and the commission calculation formula looks like this: =IF(C12<F$7,0,(IF(C12<F$4,((C12-F$7)*F$8),(((F$4-F$7)*F$8)+(((C12-F$4)*F$8)*F$9))))) What fun!
  3. Reese says:
    These isn't only good for sales. We had the same compensation scheme when I was working in production and we had a quota. In my experience, it is also a plus if the targets are reachable and not too unbelievably high.
    • Geoff Vincent says:
      Thanks for your comments, Reese, and interesting point about the production side of things. You're right about the reach-abiity of targets. Its a balancing act. The goals need to be high enough that they're not a gift, but not so high that folks don't even bother to try. Cheers. Geoff
    • Geoff Vincent says:
      Oops, typo. That's "reach-ability".
  4. Daniel Milstein says:
    This is indeed a great post, Geoff. I agree with you that these are quite basic fundamentals to tune up sales performance but they are almost everything that's required to get things running. One thing I learned before I became a bestselling author and long before Inc Magazine voted my company as one of the fastest growing companies is that it is very much important to get the basics right before we start off on anything.
    • Geoff Vincent says:
      Hi Daniel. Thanks for the comments and congrats on the Inc. Magazine recognition. Basics, foundation building, planning, execution. Sounds boring and even "process-y" but absolutely required for success, IMHO. Cheers. Geoff
  5. Chris says:
    This is a great idea. I never thought of putting something like this together. Showing a sales rep exactly what kind of sales they are expected to produce which will make them X amount of dollars is a good way to motivate.
    • Geoff Vincent says:
      Hi Chris and thanks for the comment. Good reps will create their own spreadsheets to model possible results. So might as well do it for them. Other reps who never would have thought of doing this sort of thing will (hopefully) embrace it and use it to drive their own behavior. Cheers. Geoff
  6. Venipuncture Bob says:
    Great article! I'm going to try some of these sales incentive techniques at the day job. I do have a question though. What happens if the sales rep fails to meet minimum requirements? In a down market, this could happen in many sectors, so should we just mark down the requirements or change the incentives?
    • Geoff Vincent says:
      Hi Bob and thanks for your comments and question. So what to do if a sales rep fails to meet minimum requirements? There could be all sorts of factors but I'd start by comparing a rep's results to his/her peer group. If most or everyone is missing minimum requirements then we can assume that there's something systemic going on in the market or with the overall plan design. But if its just one rep and everyone else is doing OK, then you have an individual coaching job at hand that can result in a turnaround or possibly a dismissal. Hope this helps. Cheers. Geoff
  7. Raj says:
    This depends on what kind of products / services are promoted by the company. For fast moving products, this looks fine but in some companies, they work on acquiring big projects which take months to come from the initial sales call. For these cases, the initial evaluation itself takes place every quarter and if we restrict the employee to a basic pay there is a good chance that they wont stay.
    • Geoff Vincent says:
      Hi Raj, thanks for your comment and I totally agree with you. What I propose is something that can work or be adopted in most sales environments but not all. For larger projects with longer selling cycles, a different approach makes sense to keep a rep "hungry" throughout the cycle. Cheers! Geoff
  8. mike says:
    Like your idea on sales comp. As with everything in corp america -- we try to overcomplicate things and end up losing productivity all around. Imagine the time it takes to develop these crazy sales comp plan, then teach the sales folks, then teach the finance folks --- just a complete waste of time if you ask me.....I like your approach!
    • Geoff Vincent says:
      Hi Mike. Thanks for your comment and I think we're on the same page. Speaking of "pages", if a comp plan can't be explained on a single page of paper, its probably too complicated and that's when all the teaching starts to come into play, as you suggest. Another nasty fallout of a too-busy comp plan is that reps will spend undue time trying to figure out how to game the plan instead of focusing on selling. Cheers! Geoff