Motivational Compensation Plans for an Outside Salesforce

By Bryan Shirley

Bryan Shirley, Author

One of the most essential elements of running a successful sales team is to have an extremely motivating, equitable and clear compensat

ion plan for outside salespeople, right next to creating and sustaining relationships with principals, distributors and customers. “Pay (compensation) is rewarded for the sole intent of shaping a salesperson’s behavior.” This sounds somewhat sales-psycho voodoo and I hope that if you disagree you will let me know. Leaders “pay” salespeople to do the right thing, which is hopefully to focus on the highest-dollar new business opportunities with the highest confidence of closing. Simply stated, mostly a compensation plan either stymies or stimulates motivation for sales growth. Remember that the very best salespeople are coin-operated—you put coins in, and they do what you want.

Compensation for outside salespeople is so very critical for attracting, motivating and keeping the best players. Rep companies should only hire ‘A’ players and it could be argued that a sales team will be marginalized if they don’t. The reality is if rep companies do have ‘A,’ ‘B’ and ‘C’ players—let go of the ‘C’ players and spend your time with the ‘B’ players to make them ‘A’ players. ‘A’ players should mostly be on autopilot, and they are in it to be great salespeople.

Draft a mission statement

Compensation plans are so important to everyone’s success; rep companies are encouraged to write a short Mission Statement for their compensation plan. What is the mission of your compensation plan? Start with, “We want our compensation plan to __________” and list some bullet points, using verbs like “motivate,” “retain,” and “grow/stretch.” Use even more specific details that make sense for your situation, your sales team and your company. A good mission statement for comp plans that I saw many years ago was: “We want our compensation for outside sales to motivate and compensate our salespeople to proactively and very actively focus on income-generating activities while maximizing the face-to-face meetings with the highest-dollar existing and new business opportunities where we have the highest confidence of closing.” We all do things that are nice, but do we focus on what is necessary? Nice versus necessary…Do the necessary things first. (But I am not telling you to not be nice!) Once companies completely understand their compensation plan mission, make sure that it is accurately and clearly over-communicated to the outside sales team. Many times, poor job performance is due to poorly communicated expectations by the sales leadership. Be certain to create a plan that is easy to understand and administer and then measure the plan to see if it is doing what was intended.

Types of compensation plans

There are five platforms for outside sales compensation (and probably 5,000 variations):

Straight salary. This is clear and easy to administer but greatly limits motivation to do more. On a straight salary, ask yourself, “If I make two more sales calls next week, will my paycheck change?” Then ask, “If I made four less sales calls next week, would my paycheck change?” No, to both. With straight salary, there is usually a small year-end holiday bonus.

Salary plus bonus. Fixed salary that doesn’t need to change, and a bonus payment periodically (quarterly or every six months). Salary is usually 70-75 percent of total W-2 earnings and bonus payments are usually 25-30 percent of total W-2 earnings. This plan helps with cash flow for sales leaders and provides a mostly secure income for the salespeople, but be sure to have very clear objectives for “how” they achieve bonus payments.

Salary plus commission. Fixed salary (guaranteed) which is usually 40-60 percent of total W-2 earnings and the commission totals 40-60 percent of the total W-2 earnings. Commissions are tracked and paid for the specific accounts handled by the outside salesperson. Commissions are typically paid monthly or quarterly. With this plan, there is good incentive and motivation to grow accounts and find new business opportunities. A loss of a major account or major principal can cause problems (for all plans!).

Straight commission. There is no salary, no guarantee and this plan is not for the risk-adverse and not for the non-performers. This is total pay for performance for the accounts and new business opportunities of the salesperson. This plan can create some big paychecks, but the same caution apples to the loss of a major account or principal. Sales superstars may flourish but there is not much of a team selling environment and sometimes the superstars will neglect some of the principals on the line card. Outside salespeople who are 1099 independent contractors should be noted here too, as they are usually paid straight commission.

Pool plan. This is a newer type of plan where you put a percentage of the firm’s total commission each month into a “pool” and then each of the outside salespeople gets a percentage of the pool dollars at differing percentages based upon objective and subjective parameters: commission generated, tenure, experience, new business closure rates, reporting, etc. Deciding the percentages can be a challenge. The pool plan works great for team selling and peer management. The pool plan is used in other more transactional industries, such as plumbing, HVAC and petroleum, where it’s more difficult to track commission by accounts/distributors. Successful pool plans have been carried out by ERA members.

The recommendation would be either pool plan, straight commission or salary plus commission. All of these allow for an unlimited upper end of earnings for salespeople and are the most motivating. Ultimately the plan needs to work for your team.

Performance objectives

With any plan and pretty much any job position, performance objectives need to be established. Outside salespeople could create their own performance objectives and you can work together to refine them and focus on what really matters to grow business and create long-term customer and distributor relationships. Stick to performance objectives that really matter for sales growth.

The performance objectives should be measured monthly to stay on track and ultimately, should be used as metrics for compensation in just about any pay plan. Measure what matters and it will get done.

If you want to hear a pin drop, say this at your next team meeting: “We’re going to change your compensation plan.” When outside sales reps hear this, 98 percent of them will think they are going to earn less money. It is an emotionally-charged conversation, so try to involve your team early. Ask other companies what they do. Look at ERA surveys on compensation plans. Remember that if you look to change your plan you can run it backwards. Take sales/commission from 2021, 2020 and maybe even 2019 and run the new plan backwards and see how it looks. Review your current plan and decide the changes you want to make, if any.

Make sure that the new plan is very rewarding with lots of earnings growth potential that allows your salespeople to stretch and grow. Be sure to devote the appropriate amount of time to constructing a new plan so you can commit to the new structure and only change it if absolutely necessary. Make it easy to understand and administer. A really good reporting system (CRM) makes this work.

Compensation plans are the number one thing that’s most important to salespeople, but creating a fair and acceptable plan is the number one challenge for company owners. It is, however, the number one thing that keeps your best salespeople.

Good luck to you and good selling!

About the author

Bryan C. Shirley, CPMR, is a consultant and owner of Bryan Shirley Consulting and a regular presenter to various associations, sales organizations, manufacturers and manufacturers’ trade associations. Shirley is a graduate of Virginia Tech and a visiting professor at the University of Texas-Austin, teaching a four-hour course on Motivational Compensation for Outside Sales for CPMR and teaches the Manufacturers’ Best Practices course for MRERF He is published in various industries’ sales and trade journals. He can be reached at bryan@bryanshirley.com.