What's the ideal compensation structure for a sales executive?

I also want to add that the worse thing you can do is constantly modify the plan so that your top salespeople make less money, because they are making "too much".

While is a visceral response, think of it this way - if the salesperson wasn't making $X, you wouldn't have the sales to pay that person $X.

Be consistent and when the contract expires, re-negotiate fairly. Many a company has gone under because their top salesperson leaves.... with their client base (think non-solicit and/or non-compete clauses in contract; talk with your lawyer).

You may want to consider some measure of profitability as well. Many salespeople can low bid or otherwise give away margin to gain orders. But your good salesperson is going to be concerned about the company being profitable. Also, you referred to a sales executive, and I am guessing you might mean a VP of sales or sales/marketing. If that is the case, profitability as a measure is a given. Other metrics you might consider; market share growth, new clients vs. existing clients, and growth in new verticals. Just paying on straight sales volume can be misleading.

Compensation packages are road maps to how to maximize income. Figure out what the company really wants from its sales force and then design a plan that motivates the feet on the street to work in a way consistent with the company's goals. If you're looking to drive revenues without any regard to impact on margins, set up a plan that rewards for ever higher revenues. If you want the sales guys to understand that even as sales matter, so too do profits, temper the plan with a profitability benchmark.

Whatever you do, be cautious about wholesale changes to plans within a short period of time It's better to find something that is looks like it might provide a solid framework and then tweak it over time.

Some additional thoughts:
1. Keep the plan as simple as possible.
2. Get input from your top, trusted sales guys.
3. Spend time explaining the plans to the individuals affected by the plans. If there are concerns that can be addressed, best to deal with them early.

For our organization we have drafted compensations levels for desired outcomes.
For our Senior VP we have added three levels, Revenue, GM, and Productivity of team.
Within each tier we have thresholds with increasing %. Our VPs have only 2 tiers - Revenue and GM.

This model for us has been effective in helping to ensure we meet the revenue goals and for the desired margin by product line.

This is a huge topic. Incentive structures and metrics are usually industry specific. Three factors not mentioned in the comments so far are:

1. Alignment of incentives with business risk. This is the subject of new bank regulations covering executives and teams (thousands of employees) who are in positions to initiate and approve transactions. Management has to stress test the incentive plans and review the plan, the covered employees, levels of risk, risk mitigation methods, and incentive payouts with the board. But, the misalignment of incentives can occur in any business of any size.

2. Another factor is the type of sales role. Many organizations have sales teams dedicated to growing existing accounts and a different sales force looking for the new name accounts. Some organizations will focus one sales team on existing product lines and a different sales team on a new segment (product and/or geography). Each role will have specific cash flows associated with their transactions and different patterns and volumes of transactions.

3. The third factor is setting the quota or sales goals. This is another huge topic with many complications such as market potential, strength of competition, contribution of others (especially sales executives in other territories who contribute across lines), prior experience, general economic conditions, currency fluctuations, etc.

A common sales saying is "last year's success is next year's quota". Ratcheting up the quota over time will force the good sales executives out. Rather, the desired plan is one where the high producing sales executives cannot afford to leave and the low producing sales executives cannot afford to stay.

David -

"A common sales saying is "last year's success is next year's quota". Ratcheting up the quota over time will force the good sales executives out. Rather, the desired plan is one where the high producing sales executives cannot afford to leave and the low producing sales executives cannot afford to stay."

Can we add a caveat that says "high producing sales executives FEEL THEY cannot afford to leave AND THOUGH LOYALTY AND GOOD HUMAN RESOURCES DON'T LEAVE..."

Nothing like having an employee who feels trapped; doesn't make a good relationship regardless of how much they earn.

I think what has been stated to date are all good thoughts. Let me add my own twist, without hopefully repeating some things previously stated:

-See what your Competitors are offering – very important first step. Your compensation should not be too low or too high.

-Identify Your Goals – why are you changing compensation?

-Identify Regulatory Requirements – do not incent behavior that crosses an ethical line.

-Implement a tiered plan – creating a high end that benefits Sales that reach stretch goals and a low end that benefits Sales that operate in difficult markets.

-Consider your Benefits, as they are part of your total compensation plan. It is in this place that you should out pace your competitors, not in the dollar category.

Good luck!