How to Document Your Sales Compensation Plan

How to Document Your Sales Compensation Plan

How to Document Your Sales Compensation Plan

We are often involved in reviewing a client’s sales compensation plan document for clarity and completeness.

What we find when we read this document is that it appears to have been “written by attorneys for attorneys.”

If your sales compensation plan document is the primary means by which you communicate compensation to your sales people, read it from their point of view. Does it engage and inspire them? Does it make clear how they can earn significant income for doing things that truly benefit the company? Do they see themselves in alignment with the company’s goals?

Many times, the definitions and terms of conditions appear at the beginning of the document, and not until you get considerably into the Appendices or Attachments do you see how the plan works. It is important that the plan document doesn’t indirectly or inappropriately communicate the message that “We really don’t want to pay you, but if you do these things, I guess we’ll have to!”

Compensation Plans Guiding Principles

To optimize understanding and engagement while providing legal protections, there are three guiding principles to consider:

  1. The plan description is primarily a reference document, usually in pdf format. Make it easy to find what the seller needs to know.
  2. Don’t describe every possible situation in the terms and conditions section of the document. Describe the most prevalent and develop a governance process and authorized management for sellers to find out the answer to other issues.
  3. Emphasize the awesome compensation opportunity your company is providing when the seller performs. Move the terms and conditions towards the end of the document, start with the sales strategy, compensation and quota and account assignment practices.

Organizing Plan Content

Below are specific guidelines for reordering and reorganizing the content of your company’s sales compensation plan description for clarity and meaning.

Cover Page

Create an inviting cover page and consider creating a tagline for your sales compensation program that ties to your strategy, e.g., “Growing. Winning. Collaborating”.

Table of Contents

Make the content a seller needs to reference easy to find with the beginning of each section and subsections identified with a page number. As a pdf, create links from the table of contents.

Introduction

Describe the purpose of the document and include any legal references or terms, such as names that go in quotations, like the “Plan” or “Participant”. For example, “the purpose of this Sales Compensation Plan (“SCP”) is to communicate the philosophy, description and the most prevalent terms and conditions by which sales incentive compensation is calculated and paid at BestCompany, Inc. (“Company”).”

Plan Purpose, Effective Date and Eligibility

The reason for sales compensation is to achieve the sales strategy. The compensation plan is also meant to drive certain sales behaviors and the fulfillment of key responsibilities. The purpose of the plan should integrate the annual sales strategy and desired sales behaviors/responsibilities of the role. For example, “the purpose of the plan is to reward sellers for increasing the number of products in existing accounts, achieving or exceeding product xyz’s quota and ensuring accounts renew their contracts.”

Components of the Sales Compensation Plan

This section describes each of the components of total cash compensation, including any salary, commission, bonus and draws. Begin the section with a sentence describing the essence of the compensation, e.g., “your total compensation is designed to deliver more compensation with the achievement of higher levels of quota and from the sale of product xyz”. Equity awards are usually described in a separate document but can also be included as appropriate. Recognition programs or SPIFFS can also be described in this section.

Illustrative Example of Commission and Bonus Calculations

Examples are provided in this section to show how formulas, such as commission accelerators, work. It will require developing a sample of a realistic attainment level of quota or related targets and showing how it is calculated and paid. Then add in the annual base salary to reinforce their total potential earnings at year end. Illustrative tables and graphs help reinforce understanding. Some organizations put these illustrations at the end of the document in an appendix if there is a need to show many examples or if the plan has been in place for many years.

Territory, Account and Quota Assignments

The sales compensation plan components are not believable to sellers until they understand how accounts are assigned, what that means for quota and under what circumstances they might be reset. The tone of this section should communicate both fairness and performance in describing how quotas are assigned.

Sales Compensation Payout Timing or When Sales Incentives are Earned

In this section, you want to be clear when commission is earned versus paid, what happens when the customer does not pay or returns the product and any requirements or steps the seller must meet or follow to ensure they are credited with the sale. Typically, this is where the revenue crediting process is described, such as when the company recognizes the sale for purposes of paying the commission or bonus, such as when it is booked, invoiced or paid by customer. Due to varying state laws around what a seller has earned when they terminate, it is always safer to say that commission is earned once the customer pays even though the company is paying at the time it is booked.

New Hires, Leave of Absences, Terminations and Transfers

This section describes how sellers are paid if they terminate, transfer to another position or take a leave of absence.

Sales Crediting Terms and Conditions

This section can cause much angst among sellers as there can be many situations that limit whether they receive any or full compensation for a sale, such as when other sellers are involved in the sale, what happens in the case of a windfall, multi-year contracts and certain products that are not given full credit or may be given additional credit. These are the most typical changes that can occur each year and can really disengage a seller if not appropriately designed or described with the right tone. It is most effective to be factual and clear about the circumstances where incentive is reduced and reinforce any cases where they receive additional sales crediting or incentives.

General Terms and Conditions

This is where most of the legal language should be placed, such as employment at will, interpretation of the plan provisions, etc.

Glossary of Terms

Define each of the terms used in the document but don’t describe policies. Select the terms you put in the glossary from the perspective of a new hire. This could be put in the appendix.

Signatures

There are two approaches to signatures. One is to have a signature line in this document, usually completed using an electronic signature tool like DocuSign. The other approach considers that the seller is also receiving an individual incentive plan statement which lists their specific quota, incentive, base salary, etc. For organizations with incentive software, this is generated by the software and then the Sales Compensation Plan Description is attached. If this is the case, the signature for the individual statement will also cover this document with the sentence: “By signing this individual incentive plan, the seller is also acknowledging that the Sales Compensation Plan Description has been read and accepted.”

Need Help Documenting Your Sales Comp Plan?

This article may have created questions, or you may want additional detail about documenting your plan. If you would like to discuss your specific situation or questions, we would enjoy speaking with you.

Wilson Group develops customized sales compensation plans and has worked across industries to:

  • Analyze competitive market compensation
  • Collect and provide insights about salesforce feedback
  • Define and articulate the core sales strategy
  • Describe sales roles and key accountabilities
  • Develop “costing” models and provide insights to understand the impact of the new plan
  • Facilitate the resolution of key issues that impact compensation plan design and success—such as, quota setting, revenue crediting and territory management
  • Develop a framework for sales recognition, SPIFFS and Presidents Club
  • Create presentations, calculators and compensation plan documents
  • Prepare sales plan documents, illustrations and tools
  • Assist in the selection of technology to administer the plans
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