Variable Compensation: Most Effective Practices

Defining a salesperson’s variable compensation directly impacts their motivation and performance. It can represent as much as their fixed salary, making its purpose twofold: it’s both an extraordinary motivational tool and a costly investment whose return must be optimized.

Start by defining business objectives, then determine variable compensation accordingly

To define your variable compensation policy, you must first determine your current business objectives (margin, revenue, new product launch…), then identify the behaviors to encourage (more appointments, improving prospect-to-client conversion, increasing calls…), and only then define a variable compensation and incentive system.

Motivate the Entire Sales Team

For your variable compensation plan to be effective, it’s important that it benefits as many salespeople as possible. If only a handful of top performers benefit, you lose all the motivational (and thus performance) potential for the majority of salespeople. However, it’s not about indiscriminate distribution. Ensure bonuses are calibrated to create a scale that penalizes underperformers and rewards strong performance.

What Budget for Coaching and Motivating your Sales Team?

Calibrate Bonus Progression Based on Performance to Respect the Overall Budget

To do this, study the distribution of performance: Is it centered around the average? Highly dispersed? By combining this with the variable compensation system you envision, you will get an estimate of your overall budget, which will indicate its sensitivity to the results actually achieved by salespeople and how variable pay is distributed among them.

Avoid Stepped Compensation Curves

A stepped compensation curve has many negative consequences. When a salesperson is close to the end of a tier, a marginal increase in performance leads to a reward far superior to the effort provided. Conversely, at the beginning of a tier, the next tier can seem very far away and be demotivating. Favor a continuous bonus progression to maintain interest and motivation for as long as possible.

Consider the Limitations of Commission-Based Pay When Defining Variable Compensation

Commission-based pay is the simplest variable compensation system: it assigns a fixed percentage of an indicator (most often revenue or margin). The problem is that this compensation method has very low sensitivity to results. For example, a 10% decrease in results, which leads to a 10% decrease in variable pay, may not be critical for the salesperson, but it can dangerously threaten the company’s bottom line.

Set Ambitious and Agreed-Upon Goals

Motivation is contingent on adherence to company objectives. However, salespeople will more easily adhere to easy-to-achieve objectives (to guarantee their bonus). Conversely, the company needs ambitious goals to achieve its business objectives. To reconcile these divergent interests, involve salespeople in defining their objectives to empower them and ensure they are both ambitious and realistic.

Communicate Your Variable Compensation Policy

However well-designed, your variable compensation plan will not yield results if your salespeople are unaware of it. Therefore, it’s important to communicate it effectively and take the time to explain its mechanisms, especially if they are complex.

Ultimately, your ability to create a variable compensation system that is motivating and tailored to your specific situation will establish the conditions for a win-win relationship with your salespeople. What criteria do you use to compensate your salespeople? What challenges do you face?

What Budget for Coaching and Motivating your Sales Team?