How to Change a Crappy Sales Compensation Plan to a Better One

Posted by Dave Kurlan on Thu, Nov 03, 2016 @ 07:11 AM

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Nearly every company gets to the point where they must realign territories, accounts or roles.  While doing that is always challenging, perhaps the biggest issue is how salespeople will respond to the impact this change has on their total compensation.  That problem is the biggest reason why it is so important to create an effective compensation plan.

Let's take John, who is being paid a $75,000 base salary and earns commissions of 10% on the revenue generated in the territory.  If the territory generates $1 million in sales, John gets $100,000 in commissions and his total compensation is $175,000.  It's also important to note that John spends most of his time on 20 great accounts and has little time leftover for the other accounts in the territory and he no longer prospects for new business.  The company has decided to split the territory, hoping that a new salesperson will hunt for new business and John will have time to do the same.  As part of this change, John will lose 10 accounts, worth $500,000 in revenue, to the new salesperson and initially, his total comp will be reduced by $50,000!  John will not be a happy camper.  How could this have been avoided?

First, this is simply an example - one example - and not the only way to create a sales compensation plan.  However, this example will illustrate the most important component to be changed.

For the sake of argument, let's assume that the following compensation plan was given to John when he started selling at this company.  To make it simple, let's retain John's $75,000 base salary but explain that the salary pays him to manage and service his existing and future accounts. In addition to his base salary, he will earn 20% on the gross profit of new business (first year) he generates with new customers and 20% of the gross profit on the growth of his existing customers.  So if he has $1 million in existing business and grows it by 20% to $1.2 million, and the company's gross profit is 30%,  his commission on existing customers is $12,000.

Later, if you decide to take accounts away or reduce the size of the territory, it has a far less significant impact on earnings.

I am also a proponent of a sliding base/commission plan.  You can read about my concept here.

I also wrote these articles about sales compensation:

Get Sales Compensation Right to Recruit Winning Salespeople

Do We Have Sales Compensation All Wrong?

Sales Compensation and Stupid Human Tricks

But I'm a Sales Guy! The Story of Motivation and Compensation

A Different Look at Sales Compensation

Compensation - the Unchanging Role

Does Changing Compensation Increase Sales?

Sales Compensation - Exceptions to the Rule

When it Comes to Compensation Sales is Not Like Baseball

Sales Candidates, Sales Compensation and the Number of Resumes

Compensation Stupidity Again?

Top 7 Sales Force Compensation Secrets

How Wrong are Company Methods to Rank and Compensate Salespeople?

Dunkin Dunuts - Time to Make Sales Compensation and Sales Competencies Work 

Topics: Dave Kurlan, sales compensation, sales commissions, dunkin donuts

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About Dave

Best-Selling Author, Keynote Speaker and Sales Thought Leader.  Dave Kurlan's Understanding the Sales Force Blog has earned a medal for the Top Sales & Marketing Blog award for six consecutive years.  Dave's Blog earned a Bronze Medal in 2016 and this article earned a Bronze Medal for Top Sales Blog post in 2016. Read more about Dave.

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