The Secret to Developing a Winning Sales Compensation Philosophy

How well can you explain (or defend) the way your company compensates sales employees? In today’s world, where pay transparency and compensation fairness are increasingly in the spotlight, sales employees and high-quality job candidates want to know more than just “how” your sales reps are paid. The “why” behind your compensation strategy — your compensation philosophy — is just as critical.

In this article, we’ll explain what a sales compensation philosophy really means, why it’s important, and how you can establish a winning compensation philosophy that benefits both your sales employees and your organization’s bottom line.

What you’ll learn:

• What is a sales compensation philosophy?
• Why is a sales compensation philosophy important?
• Who should contribute to a sales compensation philosophy?
• Top 4 components of a successful sales compensation philosophy

What is a sales compensation philosophy?

A sales compensation philosophy is a documented overview of your business’s approach to paying sales employees. It defines principles and guidelines for designing and managing sales compensation plans, while also outlining the specific business goals and results that your plans aim to achieve. Essentially, your sales compensation philosophy explains both the “how” (how your sales employees are paid) and the “why” (why they’re being paid that way).

Let’s illustrate this concept with a few examples. (Keep in mind, however, that your documented philosophy will be more nuanced than these quick overviews. These examples will just give you an idea of how differences in sales compensation philosophy will impact everything from comp plan design to sales rep behavior.)

Say that Company A adheres to a “sales-centric” compensation philosophy. This company wants to close as many deals and ultimately generate as much revenue as possible. They give sales reps more autonomy over which deals to pursue and how to pursue them, and their comp plans are designed to reward reps for bringing in a high volume of new business.

Compare that to Company B, which adheres to a “customer-centric” compensation philosophy. Satisfying customers and earning long-term business are this company’s top priorities; they only want to sell to prospects who are a genuine fit for their product. A company with this philosophy will build comp plans that aim to reduce customer churn and emphasize metrics around customer lifetime value, upsells, and renewals. This company might also implement a more rigid sales qualification framework that equips reps to sell to the right prospects.

Why is a sales compensation philosophy important?

Documenting a clear and thorough sales compensation philosophy is beneficial for a number of reasons:

1. Alignment with business goals and values

A well-defined philosophy ensures that your sales compensation plans and selling methods align with your business’s goals, vision, and values.

For teams responsible for designing comp plans, a documented philosophy provides an outline of the broader objectives and priorities they should be considering. Plus, it helps to create a cohesive and unified vision within the sales team, motivating everyone to work towards common goals.

2. Transparency

A solid sales compensation philosophy can help you demonstrate transparency and establish trust, both with job candidates and your current sales employees. Plenty of companies offer competitive compensation, but if you’re able to show high-quality candidates the exact reasoning behind your compensation strategy, your transparency will make a distinct impression.

The same goes for high-quality sales employees. A sales rep might not love every aspect of your commission program, but if they understand the logic and consideration that went into it, they’ll be more likely to remain engaged and motivated to hit their goals.

3. Accountability

Of course, compensation plans hold individual sales employees accountable for their performance and behaviors. But a sales compensation philosophy also adds an element of accountability for the leaders and managers who make decisions around how reps are compensated.

Your sales compensation philosophy should outline the company’s understanding of and commitment to fair and competitive pay for sales employees. When your RevOps or finance team is building new comp plans, for example, they’ll be held to the standards outlined in your compensation philosophy, thus ensuring that every aspect of the comp plans they design is fair and unbiased.

4. Comp plan consistency

Your sales department likely consists of a number of different roles, each role necessitating a different compensation plan. For example, the variable pay in an account executive’s plan depends on different metrics than an inbound SDR’s commission plan, as these roles have unique purposes and objectives. But it’s still important to achieve some semblance of consistency across the various comp plans your business deploys.

A sales compensation philosophy outlines the shared priorities of the sales organization, the most important metrics that align with these goals, and how the compensation of each unique sales role relates to the organization’s overall success. This alignment-focused approach helps to foster unity across different sales roles and prevent conflict that could arise from perceived unfairness or unequal treatment.

5. Adaptability

Your sales organization needs to be agile, constantly shifting its approach based on new objectives, new products, market changes, and more. Likewise, compensation plans require frequent updates and refinement to ensure they’re in line with the sales organization’s priorities and performance. 

But you can face unintended consequences if your sales strategies and comp plans are constantly changing, especially if the people in charge of implementing these changes lack a unified sense of direction. For one, this constant change can sow confusion, frustration, and division among your sales teams. And the more on-the-fly changes you make, the harder your plans become to track, analyze, and ensure that they’re aligned with business goals.

A sales compensation philosophy provides a solid blueprint for how to remain agile and adaptive without creating disarray and confusion. When major changes need to take place, your philosophy enables your teams to adapt without losing sight of the core objectives, values, and vision that unites them.

Who should contribute to a sales compensation philosophy?

The worst mistake you can make is to build out a sales compensation philosophy without getting input from a variety of perspectives and stakeholders. If you deploy a philosophy that doesn’t resonate with the people it impacts, you risk sending a wrong – or even harmful – message about your leadership team and your view on compensation as an organization.

A committee of stakeholders should be involved in brainstorming and deciding what factors are important to include in the sales compensation philosophy:

• Executives: Provide a broader business perspective, helping to strike the right balance between financial sustainability and performance-driven incentives.
• Sales leaders: Bring insights into the unique dynamics and challenges of the sales team.
• Finance leaders: Play pivotal roles in crafting the nuanced financial aspects of compensation plans.
• HR leaders: Can speak for the company’s impact on employee experience and new talent acquisition, as well as the potential legal regulations that impact salary and pay.

Make sure all these voices are accounted for, and you’ll be able to develop a sales compensation philosophy free of blind spots and biases.

Top 4 components of a successful sales compensation philosophy

Your sales compensation philosophy doesn’t need to be an exhaustive, lengthy document. In fact, it’s often best to narrow your philosophy down to its most important elements — that way, it’s easy for everyone to understand, from sales leaders to sales comp managers to brand-new sales reps.

That said, here are some critical components to consider when creating your sales compensation philosophy.

1. Comp plan ownership

Start by defining which teams or individuals have ultimate control over the design and iteration of your compensation plans.

From there, list the secondary stakeholders who play a role in the comp plan design process. Does your finance team work alongside sales managers and RevOps personnel when creating new comp plans? Does a single sales comp manager have final say over comp plan design? Do HR and talent leaders review comp plans before they’re deployed to ensure they meet the company standards for fair compensation?

To ensure consistency and fairness, it’s important to not only document comp plan ownership, but also the procedures and best practices plan owners should follow when making decisions that impact sales employee compensation.

2. Prominence of pay

Of all the components in a sales compensation philosophy, prominence of pay is the most, well, philosophical. This term boils down to the following question: How important is individual performance and pay to your organization?

If pay has a high prominence at your organization, it means that each individual’s potential pay is the core driver of their performance — the pay is the thing that each individual rep is chasing. Compensation programs exist to reinforce the specific day-to-day activities that individual sales reps should perform in order to earn their total target compensation.

If pay has low prominence, your compensation programs exist less to drive performance than to reward performance. Sales reps are still coached on best practices and ideal selling behaviors, but these factors aren’t emphasized as heavily in individual compensation plans. Your company culture revolves more so on shared initiatives, and sales employees have more of an equal share of bonus earnings based on the company’s overall performance.

While pay is highly prominent within most sales organizations, companies whose business models rely more on collaboration and shared objectives often succeed by putting less of an emphasis on individual pay, and more of an emphasis on overall company success.

3. Relative pay positioning

Relative pay positioning refers to how your organization’s sales compensation stacks up against market standards. Do you offer leading pay ranges (on-target-earnings, or OTE, above most competitors), matching pay ranges (OTE around the median of competitors), or lagging pay ranges (OTE slightly lower than most competitors)?

Of the many elements that you can include in a sales compensation philosophy, this is the one that requires the most frequent re-examination. While your business doesn’t necessarily have to promise leading pay ranges, it’s important to analyze the market and know exactly how your pay stacks up at all times. Promising competitive pay will only hurt your business if it turns out you’re not delivering on that promise.

4. Pay differentiation

What is an acceptable variance between what your top sales performers, median sales performers, and bottom sales performers earn?

If your pay differentiation is too low — meaning top performers don’t earn much more than the average performer — then you run the risk of frustrating and demotivating your best sellers. But, if pay differentiation is incredibly high, your sales organization’s success may be incredibly volatile; losing one of your top performers would be a massive blow to your bottom line.

Your sales compensation philosophy should define your ideal pay differentiation, as this information will be valuable to both comp plan owners and sales managers. If pay differentiation dips too low, a sales comp manager may consider adjusting comp plans to better incentivize top performers. If differentiation is too high, it’s a sign for sales managers to get more hands-on with their training and development of lagging performers.

Revisit your compensation philosophy every year

Unlike comp plans, your sales compensation philosophy doesn’t need to be something you’re constantly adjusting. Once a year or so, gather stakeholders and determine whether any element of your philosophy has changed or evolved. These conversations happen informally all the time, but channeling them into a documented, transparent philosophy will help you solve problems faster, support a wide range of employees, and foster a more unified and transparent sales culture.