A reader recently wrote in after reading our CPG Sales Career FAQs. She’s the CEO of a chocolate company and runs a small sales team. She wanted to know how to structure a CPG sales compensation plan. What are the best practices? How much base salary, and how much bonus? And how do you pay salespeople in a way that will maximize the company’s revenues?
I researched this topic in 2018 as I was trying to help my company motivate its sales team (including me, a veteran salesperson). Because a good sales comp plan can serve to drive growth and revenues for the business, I’m passionate about the topic and and am excited to share my findings with you.
In this post, I cover 12 things to consider as you put together a winning CPG sales compensation plan for your sales team.
1. Get Clear on the Goals of the Compensation Plan
The goal of the compensation plan is to define success for the role and motivate behavior by rewarding desired results. (For instance, sell 1M cookies this year and earn X — or sell 1.2M cookies this year and earn X+Y.)
Good salespeople are naturally motivated by the potential to earn more money, and will often exceed their quotas if it means getting paid extra. This is not a bad thing. Salespeople often have personal goals (pay off student loans, save for retirement, buy a first home, etc.) and have opted into sales precisely because they know that exceptional performance usually means exceptional pay. And let’s be clear: It’s not easy to be a good salesperson. It takes a specific type of person to be okay with continuous rejection and to be available around the clock to answer the phone when a customer comes calling.
2. Find Alignment
A good compensation plan will naturally find the alignment between the company’s desire to earn more revenues and the salesperson’s desire to earn more money. So how do you do that?
3. Tie Compensation to Your Company’s Goals
Start with your annual revenue goal and work backwards. For instance, if you want to bring in $10M in new accounts this year, how many deals will you need to close? What does that mean in terms of number of opportunities you’ll need to see? How many leads are needed to generate those opportunities?
While leads and opportunities are components of the pipeline, they’re not a good way to track salesperson performance. These activities are indicators that salespeople are doing the right thing to get to closing deals. But at the end of the day, you want deals. It’s all about the dollars. When you make money, your salespeople make money (and vice versa).
4. Understand Your Sales Team and How They are Motivated
Some salespeople simply have greater ability and internal drive than others. Overall performance tends to fall along a bell curve. An HBR article titled Motivating Sales People: What Really Works indicates that “a growing body of research suggests that stars, laggards, and core performers are motivated by different facets of comp plans.” The best compensation plans will be designed to motivate all three types of salespeople.
Let’s quickly define the three types of salespeople referenced in the HBR article:
Stars seem to knock down any target that stands in their way — but may stop working if a ceiling (i.e., commission cap) is imposed.
Laggards need more guidance and prodding to make their numbers (carrots as well as sticks).
Core performers fall somewhere in the middle; they get the least attention, even though they’re the group most likely to move the needle — if they’re given the proper incentives.
Be sure to read Steenburgh and Ahearne’s HBR article on compensation for more details on how these three types of salespeople tend to think and perform. The goal is to build a comp plan that will motivate each type of person on your team. This post, without going into full details, will help you ensure you’ve built a well-rounded plan.
5. Find the Right Balance between Base and Variable Compensation
I just got off the phone with a foodservice recruiter who told me his startup client likely intends to pay a base salary and equity — but no commissions. I think that’s a mistake. Why? Good salespeople want skin in the game — and if you go back to #1 and #2 in this list, you want to make sure you’ve aligned incentives and ensured that your compensation plan is motivating salespeople to help you reach your revenue goals.
But what’s the right balance between base and variable compensation? Open View Partners argues that the base should be determined by:
- Level of Difficulty
- Level of Autonomy
- Expertise Required
And that the Variable Comp should be determined by:
- Complexity of the Sales Cycle
- Influence on Buying Decision
- Inbound vs. Outbound
- Hunting vs. Farming vs. Catching
At the end of the day, my favorite split for OTE (or on-target earnings) in growth-stage businesses is 50/50, where 50% of the target compensation is made up by salary and the other 50% is made up by commissions earned by hitting sales targets.
OpenView Partners explains in their Guide to Creating a Scalable Sales Compensation Plan, “the more you can leverage compensation to results, the better off you (and your sales team) will be in the long term.” Align around driving revenues, create urgency, and provide upside for over-performers.
6. Think About Commission Structure
Commissions can be structured to be paid in at least three ways: standard, sliding scale, or in a step function. We’ll define each quickly.
Standard or Flat-Line
The standard commission rate (for instance, 3% on sales) is paid in a flat and predictable way.
Sliding scale commission plans are meant to accelerate sales up front.
In a step function plan, reps have to pass certain thresholds to achieve higher commission levels.
Unless you really need to incentivize front loading sales at the beginning of the year (sliding scale) or have a star-studded team that you want to incentivize to hit lofty goals (step function), a standard commission plan is likely to be best for your CPG sales team. Why’s that? It’s simple, straight forward, and easy to understand for tracking and reporting purposes.
7. Consider Trackability & Reporting
Make sure that commissions are easy to track and report.
Use Metrics You Can Track
Avoid using metrics that are dynamic (like pipeline), estimated, subjective, or incomplete. Do focus on what you can measure: for instance, total sales, margins, or paid invoices.
Provide Real-Time Visibility
Even with simple plans, it’s crucially important that you provide an easy way for reps to understand where they stand in relation to their quota and how much money they’re on track to make.
8. Keep Room in Your Budget for Ad-Hoc Spiffs, Contests, and Bonuses
Give yourself the flexibility to launch quick contests and campaigns. You never know when you’ll need the extra boost. These contests or campaigns might be used to keep a team of salespeople motivated (friendly competition or a few extra carrots can be helpful) — or your retail or foodservice team might want to spend a little money motivating distributor reps or brokers.
9. Pay Commissions Quarterly
Laggards, in particular, will stop performing if you don’t pay commissions quarterly. The study referenced by the HBR article found that laggard’s overall performance decreased by as much as 10% without quarterly payments. Core and star salespeople’s performance also decreased — by 4% and 2% respectively. At the end of the day, the authors report, “there is no downside to including quarterly bonuses.”
Another point on pay frequency: It depends on how young or old your team is. Younger people tend to have less cash reserves. You might need to pay them monthly, Open View points out in their article Taking the Guesswork out of Sales Team Compensation. Seasoned sales executives tend to have more in savings, so may tolerate being paid commissions and bonuses less frequently. This said, don’t forget about how pay frequency also helps drive revenues for the business.
10. Do Not Cap Commissions
Why do companies cap commissions? In short, cost control — driven by the finance department. But this isn’t a rational practice. “This is simple,” Open View states, “Never use a ceiling. If reps want to make a ton of money for the organization, why would you get in the way?”
A study by Sanjog Misra and Harikesh Nair looked at compensation plans at a Fortune 500 contact lens manufacturer. When the company stopped paying commissions once salespeople hit their quotas, the salespeople ended up holding sales under the ceiling. By eliminating the cap and making other changes to the commission plan, the company was able to keep its sales people motivated and increased revenue by about 9%.
As Devon McDonald states in the Open View Guide to Creating Scalable Sales Compensation Plans, “if your company’s bonus and commission plan are tied to results, then why would you want to encourage reps or managers to stop performing once they have reached their payout limit?” She goes on: “Worse yet, by removing any real incentive or reward for going above and beyond the call of duty, you could also kill team morale and create a poor company culture.” This one is big.
11. Team Bonuses are Fine — But Include Individual Bonuses
Sales is largely an individual sport. Team dynamics are important, of course. But your stars have little influence over the laggards, and your core performers will keep on keeping on despite what the laggards and the stars do. Pay bonuses on an individual basis — and if you want to throw in a team kicker, great, but don’t base variable comp on team performance.
12. Keep It Simple
We said this previously, but it bears saying again. Keep it simple. Make it easy to track. Don’t make your team or your reps do a bunch of math or pull a bunch of inaccessible reports to figure out how much you owe your sales reps. Cut complexity wherever you can.
Wrapping it Up
In summary, structuring a CPG sales compensation plan requires making sure you’re clear on your companies goals, have aligned incentives in order to encourage the right behaviors from your sales people, and have established a clear commission plan that will get them to perform.
In the CPG industry, I like something close to a 50/50 up to a 70/30 split on base versus variable compensation. Use a standard commission plan (i.e., 2.5% of sales), pay bonuses quarterly, and eliminate caps.
While your finance department might want to reign in the payments to your sales team, remember that they are your only revenue center. Every other department in the business costs you money. But every time your sales team brings in a new order, you make money — and paying them a small piece of it will get them to keep bringing in more and more money. Win-win.