In the past, employees were more likely to work for the same company for decades at a time. In some cases, working at the same company their entire life. However, that is far from the case today and a lot of that has to do with how an organization’s compensation plan is structured.
Employees today are much more likely to inquire and pay attention to the compensation details of the company they work for or a company that they may be applying for. They are looking for organizations that focus on consistent, transparent, and fair compensation practices. They are looking for reassurance that their work will be valued and that there aren’t major discrepancies in how employees are paid across the company. They are looking for the ‘why’ behind an organization’s compensation plan and that’s exactly the reason more companies today are incorporating a sales compensation philosophy.
What is a Sales Compensation Philosophy?
A compensation philosophy in and of itself is just a formal statement that documents a company’s position about employee compensation. Like a company’s mission statement, a compensation philosophy is a commitment – not to customers – but to employees for what they can expect regarding their pay.
A sales compensation philosophy is an extension of the organization’s overall compensation philosophy but focuses more on how it specifically applies to employees working within a sales role. It provides the why and how for the payment structure for employees to ensure consistency across the organization.
A sales compensation philosophy is the foundation for the actual sales compensation plan. It gives your team the building blocks to help determine appropriate compensation amounts for your sales reps.
Why is it Important to Have a Sales Compensation Philosophy?
There are many reasons why having a sales compensation philosophy is a good business practice. When you document practices for how compensation should be structured, you are creating a consistent framework that will be standard across your organization which ensures fairness and transparency for your employees.
Additionally, basing your sales compensation philosophy not just on what works best for the organization, but also what will be valuable to your sales reps will help attract and retain top talent. You may also find that creating a sales compensation philosophy better aligns your team’s efforts to outlined sales goals.
What Makes a Successful Sales Compensation Philosophy?
Clear Business Objectives: Just like we recommend in our Complete Guide to Sales Commission Plans, the first step in establishing a sales compensation philosophy is to determine your overall goals. These goals will both create the foundation for your philosophy, but also allow you to easily build from there to determine what type of pay structure will best motivate your team to reach these goals.
For example, if your goal is focused on overall revenue growth, your compensation philosophy should emphasize and reward reps for sales volume and new business. However, if your goal is to improve customer retention and decrease customer churn, your plan should incentivize recurring customer sales and building long-term relationships with accounts.
Transparency Around Compensation: If you’ve ever worked for a company that was secretive around their compensation policy and specifically requested that employees don’t share their pay details with others, then you know how this can lead to a lack of trust in company leadership. When organizations are deliberately evasive when talking about how their compensation structure works, it can be a sign that the structure is not built around a philosophy of fairness. Here’s how to combat that:
- Be Consistent: Sales reps in similar roles and situations should be compensated similarly.
- Be Transparent: The plan should be simple enough that sales reps understand how their pay is calculated and what they need to do to achieve their target earnings.
- Be Objective: Use clear, measurable criteria for determining performance to minimize subjectivity.
Transparency also involves clear communication. Sales reps should be involved in discussions around compensation changes, and expectations should be clearly outlined from the beginning.
Establishing Prominence of Pay: Prominence of pay comes down to how you want to tie your individual employee’s performance to how they are paid in the organization. A component of establishing your prominence of pay would include how you plan to balance salary and sales compensation. So, in cases of a high pay prominence, organizations typically employ a lower base salary to motivate sales reps to perform well by dangling a carrot of variable compensation such as bonuses, commissions, and other incentives.
On the other end of the spectrum, a lower pay prominence on individual performance usually focuses more on how your team performs as a whole. This model more often promotes a culture of collaboration where the team works together to reach key objectives. Thus, your employees are still rewarded on performance, but with shared initiatives, your variable compensation is more equally divided among team members based on the company’s overall performance.
Create Fair Pay Differentials: A fair compensation policy for paying employees is one of the founding principles for instituting a sales compensation philosophy in the first place, so how you incorporate these values into your philosophy will play a big role in how effective it will be.
What does fairness mean when it comes to sales compensation? It means two things:
- Sales reps are compensated fairly based on their job responsibilities, experience, education, and performance.
- The gap in pay between your high performing and/or more seasoned employees and your lower performing and/or newer, more entry level employees is reasonable. This allows your newer employees to work up to the higher bracket of pay once they gain more experience and knowledge.
Incorporating Market Trends: As one of the primary benefits of a sales compensation philosophy, allowing market trends to influence your compensation structure enables you to remain competitive when attracting and retaining top talent. Market conditions change, competitors evolve, and new products or services come into play. Your organization should remain flexible with your sales compensation philosophy as it makes it easier to adapt quickly when changes occur.
The ability to make adjustments mid-year or mid-quarter without undermining the integrity of the compensation plan is a hallmark of a well-designed system.
Aligning Incentives with Performance Metrics: One of the most crucial elements in creating a strong sales compensation plan is selecting the right performance metrics. These metrics should be directly tied to your business goals and measurable in a way that’s fair and transparent.
Common metrics include:
- Revenue Growth
- Profitability
- Customer Retention
- New Business Acquisition
The key is to make sure that the metrics are within the control of the sales team and clearly defined.
How to Review and Adjust Your Sales Compensation Philosophy
Unlike the design of your sales compensation plan, your sales compensation philosophy does not require adjustments or updates as frequently. Again, your sales compensation philosophy is focused on the why and how for your employee’s pay. It does not include the nitty gritty details of your actual pay plan. It provides the foundation and supports how you build your compensation plan, but your actual compensation plan will vary based on industry changes, changes to your department goals, etc.
While it’s at least worth a review annually to ensure that all of the components of your sales compensation philosophy are still relevant, it probably won’t require a complete overhaul of your policy – just minor tweaks and adjustments here and there.
However, big disruptions in your industry or if you are experiencing higher than normal employee turnover, these may be signs that you need to seriously make changes to your philosophy. Pay attention to these red flags, so if needed, you can make changes before they spiral out of control.
Put Your Sales Compensation Philosophy to Work
A sales compensation philosophy is something that you should be proud to share with your organization. Its very existence is indicative of an organization that is putting in the work to ensure their employees are paid consistently and fairly, so having it prominently visible to your employees can be encouraging to team members.
Once you have a clearly defined ‘why’, you can build or modify your sales compensation plan and that’s when you’ll need a platform like Core Commissions to help you manage and automate your plan details.
Core’s customizable sales compensation application has all of the tools you need to accurately calculate any type of variable pay plan for both sales and non-sales staff. Additionally, our web-based application gives your employees complete visibility to the components of sales compensation with access to our online portal for full transparency.
Contact us or set up a free demo and we’ll show you how Core can automate your sales compensation plan.