Six Common Mistakes People Make When Designing a Sales Compensation Plan

Erick Vargas

Setting a sales compensation plan is important when it comes to motivation, longevity of an employee, and the behavior of your staff. In this blog, we share some tips on how to best set a sales compensation plan that works best for your construction company.

Here are six common mistakes people make when setting a sales compensation plan:

1. The Right Compensation Plan Won’t Fix a Bad Hire

The first mistake we see is that the right compensation plan won’t fix a bad hire. A lot of people want to use their compensation plan as a manager when it’s really supposed to be a management tool. If you have an employee that’s lazy, the right compensation plan is not going to motivate that individual. Generally, the best hires are already internally motivated. Sometimes hiring a salesperson who’s not a good fit culturally is not worth a big compensation package as it diminishes the rest of your team.

2. Paying on Revenue and Not Gross Margin

So often, we see companies paying salespeople and project managers on revenue rather than gross margin. Here’s why this is an issue. Let’s say you pay an employee on a $100,000 job revenue and they get whatever percentage of that total. They are not incentivized to manage that project well through to completion. Depending on how your company is structured is really going to dictate how you compensate your employees. For example, if your team is a cradle to grave, they sell the job and manage the jobs, you’re going to want to structure their compensation plan around gross margin. And if you split out those two roles into sales and project management, you’re going to have to include some combination of revenue and gross margin on paying your salespeople. You might also want to compensate your project management employees to make sure the margins are there, too. Typically, paying on revenue isn’t the best way to package a compensation plan as it tends to disincentivize the employees to not get the highest margin possible.  

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It’s also common for companies to bid the lowest price possible just to get that revenue in the door and when it’s 5% margin, you’re not making any money on it. Thus, it’s important to pay on gross margin and not revenue.

3. The Right Compensation Plan Won’t Fix Lack of Accountability

The third most common mistake we see is companies that believe the right compensation plan won’t fix the lack of accountability. This goes back to our second point, which is making sure that you have high gross margins and are growing your gross margin per job so that you’re making money as a company. There’s no purpose in doing work for free, especially when you have overhead salaries to pay and you want to make sure your company is profitable.  

With Followup CRM, most companies grow their average gross margin between 25-40% over the years as they gather more data and analytics they need to bid the right kind of jobs, develop the right opportunities and manage their projects successfully.

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4. Keep Changing the Plan

The next common mistake we see is companies constantly changing the compensation plan. There’s nothing more discouraging to salespeople or project managers than a constant change of their compensation plan. Generally, it’s best to limit changes to once a year. Your salespeople and project managers are going to work their compensation plan to their advantage. Therefore, it’s important to design a compensation plan that allows them and the company to benefit from when they work the set compensation plan.  

If you design a compensation plan and you find holes and gaps in the plan and your employees are working it to the company’s deficit, a best practice as a leader is to honor that compensation plan for at least six months to a year. If you roll out a compensation plan for the year, honor it, and then if you find holes within the plan throughout the year, then you can change it in the beginning of the year. You can change the plan whenever you want, but keep in mind you also don’t want to discourage your team.

We saw one company recently change their compensation plan in the middle of the year right as they were getting some good momentum and they ended up losing 80% of their sales team, which was devastating. We highly recommend finding a plan and sticking to it for at least a structured amount of time.  

5. Too Complex

The fifth most common mistake we see is compensation plans that are too complex. Keep it simple. You might have a compensation plan that’s based off of multiple different levers depending on the goals you’re trying to achieve as a company. If you present a compensation plan to your sales team with too many variables, it’s actually demotivating because it’s not giving them a clear vision for the future and what they could be making.  

A best practice is to set no more than three levers for your compensation plan (I.e., number of contracts, gross margin, etc.). Try and stick to two levers so that your salespeople and project managers can easily do the math on their compensation. As a company, you want to create the vision of success for your salespeople and project managers so that they can make the income they want to make. The simpler, the better.  

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6. Wrong Compensation Plan for the Role

Last, and one of the biggest mistakes we’ve seen across the board is companies setting the wrong compensation plan for the role. Whether you’re a residential, large, service, or GC company, having a different compensation plan per the role is going to be best for you, the company, and the salesperson.  

Or maybe you have a company that all of the above – service, large commercial work, residential, etc. This means you won’t have a one size fits all compensation plan for your team and you have to divide it up. For example, let’s say we have a farmer. There’s a farmer mentality when it comes to large commercial jobs because they can take 18 months to close and that is definitely impacting your compensation.  

It’s important to design a compensation plan appropriately as it fits each role at your company.

Download Our Free Sales Compensation Plan Template

If you're struggling to put together the right compensation plan for your team, download our Free Sales Compensation Plan Template. This template breaks down multiple different package levels along with potential earnings. Happy planning!

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