Maximize Your Revenue With This Sales Comp Plan

The Harvard Business Review recently published a great article featuring research on the sales compensation that best motivates salespeople. I know how busy you are so I wrote this handy summary for you instead.

your sales comp plan doesn't have to be this complicated

The best part? Designing a sales comp plan that maximizes your revenue doesn’t have to be complicated.

What doesn’t motivate salespeople

  • Caps on commissions. Research suggests capping commission, a standard feature of sales comp plans, decreases high performers’ motivation and effort. You’re basically telling your sales team: you’re making us too much money, you can stop now.
  • Racheting quotas. There’s a lot of disagreement about whether you should increase a sales rep’s annual quota if they exceeded it in the previous year, but doing so can upset high performers who may view this as unfair.
  • Complicated pay structures. When the sales comp plan becomes too complicated, sales reps find ways to game it (e.g., “pulling” next month’s sales and “pushing” last month’s sales to the present month to hit their numbers).

racheting quotas decreases salespeople's motivation

What motivates all salespeople

  • Straight-line commission. Research by economists suggests the best way to keep salespeople motivated is paying commissions at the same rate regardless of how much they sell.
  • Cumulative quotas. A cumulative (year-to-date) quota works better for keeping salespeople motivated during periods they’re doing poorly because they know that even if they’re going to miss their numbers for this quarter, any deals they close will help them reach their cumulative number for the next one. Research has found that using cumulative annual quotas increases annual revenue by 2.2%.
  • Bonuses. Bonuses increase productivity across the sales team.
  • Gifts. No-strings-attached gifts create goodwill and reciprocity but timing is important: If sales reps receive a gift at the beginning of a period, they see it as a reward for past performance and start to relax. If you tell sales reps they’ll receive a gift at the end of a period, they work harder.
  • Incentives for effort. For example, rewarding salespeople with cash incentives for passing tests about the product/service results in them selling more.
  • Fairness. Much like racheting decreases sales reps’ perceptions of fairness, reducing quotas due to factors outside of the salesperson’s control (e.g., an economic downturn) works to keep the sales team consistently motivated.

sales comp plans

What motivates high performing salespeople

  • Overachievement commissions. High performers can be successfully incentivized by an annual quota and yearly bonus. Earning overachievement commissions (a higher commission rate on the revenue surpassing the annual quota) at the end of the year helps keep them motivated after they’ve hit their quotas. Research has found that adding overachievement commissions increases annual revenue by 6.7%.

What motivates low performing salespeople

  • Quarterly bonuses. Lower performing salespeople require more frequent goals to stay motivated and quarterly bonuses serve as pacers for hitting their annual sales quota. Research has found that adding quarterly bonuses increases annual revenue by 13.6%.

quarterly bonuses increase salespeople's effortThe takeaways

The best ways to motivate your sales team overall? Simplicity and fairness: remove caps on commission, give bonuses and (no-strings-attached) gifts, reward effort, be careful about increasing annual quotas, and consider temporarily lowering quotas in response to market conditions.

Provide different levers for your high vs. low sales performers: overachievement commissions to keep your high performers motivated after they’ve hit their quotas and quarterly bonuses to keep your low performers motivated to continue attaining their quotas.

So stop punishing your sales reps or worrying that your top performers are making too much money. In a winner-takes-all market, optimizing the sales comp plan means kissing your sales team’s ass to prevent competitors from kicking yours.

How do you make sure you’re motivating both your top and bottom salespeople? Let me know in the comments or tweet @ideal.

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Ji-A Min

Ji-A Min

Head Data Scientist at Ideal
Ji-A Min is the Head Data Scientist at Ideal. With a Master’s in Industrial-Organizational Psychology, Ji-A promotes best practices in data-based recruitment. She writes about research and trends in talent acquisition, recruitment tech, and people analytics.
Ji-A Min