Businesses that create attractive sales compensation plans give the best talent a reason to stay with the company for the long term. The right compensation plan also encourages the right behaviors, minimizes risks, and increases revenue.
What Is Sales Compensation?
Sales compensation is the pay that a salesperson receives. Although compensation differs between companies, it typically consists of elements such as a base salary, commission, and incentives designed to drive specific performance of a sales organization.
What Is a Sales Compensation Plan?
A sales compensation plan describes the mechanics of how the sales team will be rewarded for achieving their objectives. It includes details about pay structure like base salary, commission, incentives, and benefits.
The purpose of a sales compensation plan is to encourage specific sales behaviors and clearly communicate expectations and criteria for compensation of sales team members. This plan is designed to incentivize reps to reach their objectives and organizational goals.
Each organization has a sales compensation plan unique to its business. It is influenced by factors such as team structure, resources, goals, and company strategy. Plans are often further tailored to each sales role, experience or seniority, length of sales cycle, and type of customer engagement.
Other factors usually consider when designing sales compensation plans are company culture, competitors pay, and the local cost of living.
The Key Requirements of a Good Sales Compensation Plan
Consider the Total Rewards Package
A competitive compensation framework should take a holistic approach to designing incentive packages to attract and retain talented employees. Good salespeople will consider their “on target earnings” first and foremost. These employees expect to be appropriately rewarded for their success. Beyond monetary compensation, organizations should consider health and pension benefits, gym membership, as well as training and professional development opportunities to round out the incentive program.
Goal setting is essential in realizing the full value of a compensation plan. Individual goals – whether revenue targets for the sales team or delivery targets for employees outside of sales – need to be made clear, relevant, and achievable. Team goals and company-wide goals also need to be carefully considered and implemented with a strong focus on clarity and relevance.
Understand What Should Be Included in A Sales Incentive Plan
Clarity needs to be part of any sales incentive plan, and the most important point is that it needs to be clear what revenues a salesperson will be paid on. Not all revenues are equal, and some are worth more to the business than others. For example, product revenues may attract higher commission rates compared with services revenue. The rules and rates need to be clear for everyone to avoid friction amongst the sales team and disputes with the sales operations team.
Compensate for Onboarding and Training
Employees cannot be expected to be fully productive on day one of their employment with their new employer. It takes time to learn their new systems and processes, their new colleagues, their new responsibilities, and their new customers and business partners.
There’s always a debate about how best to manage compensation for new hires. On the one hand, you want them focused on their new responsibilities and not left out of the wider company compensation framework. On the other hand, how reasonable is it to pay employees for valuable rewards they’ve not earned? It’s not unusual to compromise a little and pay new sales hires a minimum commission, or a recoverable draw, for their first few months in a new role.
Different Types of Sales Compensation Plans and Models
Sales compensation plans are not one-size-fits-all. They’re tailored to suit the specific needs of your organization and sales team. The most common types of payment included in comp plans are hourly wages or salary, commission, and bonuses. The percentages and inclusion of each vary based on many factors such as business type, industry, budget, and goals.
It’s essential to carefully consider the structure of your sales compensation plan since it will greatly influence and impact your ability to attract and retain top sales talent. This helps minimize recruitment and repeat onboarding costs.
The following are the most common types of sales compensation plans. Each example has a different structure. Use them as a starting point for customizing a plan for a specific sales team and business based on needs, resources, and goals.
- Straight Salary
Straight salary sales compensation plans are suitable for some organizations. This structure establishes a set amount salespeople will be paid, regardless of how much they sell. As the name indicates, this approach to pay includes salary and no bonuses, no commissions, no sales incentives.
This type of compensation plan is frequently used in industries prohibiting direct sales or when salespeople are measured as part of a small group or team with equal contributions. It’s also employed when a sales team is relatively small or when sales isn’t the primary responsibility of the employee and most of their time is spent engaging in other tasks besides selling.
These plans don’t tend to motivate sales reps to go the extra mile because they lack incentives to drive them on to the next sale once they hit quota for the current period. Plus, using this plan increases the risk of losing top-performing reps who are inspired by commissions and may leave for better compensation.
- Commission Only
A commission-only sales compensation plan is based entirely on performance. A sales rep pay is calculated as a percentage of their sales.
This type of plan is easier to administer because of its simplicity. It also minimizes financial risk by paying only for sales success when revenue increases. The company doesn’t need to pay commissions when reps fail.
High-performing reps are often attracted by commission-only plans as they give them the freedom to make as much money as they can. But it can lead to burnout and high rep turnover. When setting up a commission-only plan, commission rates typically range from 5%-45%.
- Salary Plus Commission
A salary plus commission pay structure is the most common type of plan. It gives sales reps a fixed annual base salary plus commissions. This provides the security of a predictable income with the potential for increased pay based on performance.
This plan is suitable for most businesses, providing better clarity and predictability of expenses while attracting highly motivated and competitive salespeople. Plus, giving reps a base salary enables the business to require some non-selling tasks like assisting with new team member onboarding.
When commissions accompany a base salary, the ratio of salary to commissions varies from plan to plan. The standard resulting ratio is often 60% salary to 40% commissions, but some organizations prefer a 70:30 or 75:25 mix. Examples of factors to consider when determining the ratio to use include:
- Difficulty of the sale
- Amount of autonomy or support needed
- Experience necessary
- Complexity of the sales cycle
- Amount of influence the rep has over the purchase decision
- Number of leads reps can work with simultaneously
- Territory Volume
A territory volume commission plan is typically used where sales teams work as a team to serve prospects and clients in well-defined regions. Compensation is then calculated based on territory volume at the end of a compensation period. Then it’s equally split between all the reps working that specific territory.
This type of plan works best in a team selling culture where the salespeople are all working to reach a common goal within a given territory. Leveraging an attractive commission rate with a rich territory helps attract quality reps to this type of plan.
- Tiered Commission
A tiered commission plan combines a fixed salary with a stepped commission structure. Salespeople under this plan receive increasing commission percentages based on which tier they reach for the period, such as meeting quota or how much they exceed quota. But they receive a lower percent commission if they miss their target, enabling the company to recover revenue to cover the sales rep’s base salary.
This type of commission structure is ideal for companies that need salespeople to consistently strive to exceed their goals while maintaining greater control of commission rates.
- Profit Margin
Some companies prefer to pay reps based on profit rather than sales. This means that reps selling at a higher gross margin receive greater compensation.
The benefit of this plan is that it discourages discounting that erodes margins and decreases perceived product value. This plan prevents reps from becoming reliant on discounts to close deals that may negatively impact the business. This commission plan also encourages salespeople to promote specific product lines and sell more of the most profitable ones.
Companies choosing to implement a profit margin compensation structure should remember that:
- Revenue must be a priority for this plan to work.
- Reps need to have control over pricing.
- An effective method of tracking gross margin must be put in place.
Tips to Manage Your Sales Compensation Plan
A good sales compensation plan is a win-win-win: It’s easy to implement and benefits everyone. Here are five things to keep in mind when planning or updating yours.
Explore Different Types of Sales Compensation Plans
When selecting the best compensation plan, it’s important to keep the company’s goals in mind. Refer back to the types of plans we reviewed above.
Then, consider the following information:
- Value of overall budget
- Number of sales reps
- Types of compensation plans used by competitors
- What salespeople will expect of the plan
It’s also important to determine the timing of commission payments. The four most common options include:
- When the customer signs a contract
- When the customer's first payment is received
- Every time a customer pays
- When deal goals are reached
It’s essential to set quotas that are attainable by 50–70% of the reps on the sales team. Otherwise, there’s the risk of demotivating them or creating a high turnover rate. A properly set target will motivate reps to stretch but shouldn’t be unrealistic.
When establishing goals for salespeople, consider factors like average contract value, close rate, how long it takes to close a deal, and whether there are sufficient resources to support these goals. Adjustments may need to be made for specific reps based on the potential of each rep’s specific territory.
Keep it Simple
Sales compensation plans need to be clear and easy to understand. If reps cannot interpret how the plan works, it won’t be effective, and reps won’t be motivated by it.
But when it’s clear to salespeople what they need to do to increase their income, they’ll be motivated to adopt the desired behaviors and strive to hit the targets set for them. Then they’ll be able to easily calculate how much they’ll be paid.
Involve the Right Team Members
Just as there’s no one-size-fits-all sales compensation plan for organizations, there needs to be a different plan in place for different types of team members. Positions like sales support, sales management, vice presidents, field sales reps, and inside sales reps all need to have their own unique plan. Plus, it’s important to consider experience levels as well. Doing so will result in compensation plans that are more appealing to each group.
Compensation = Performance
A well-formulated compensation plan should embody the company’s broader sales strategy, but SPIFs and sales contests should be leveraged as new products or priorities arise throughout the year. These temporary bonuses can be an effective way to drive specific sales behavior to meet a company’s goal. It can be based on individual or team performance for the contest period.
Be sure to only hold one or two of these short-term events per quarter to focus rep behavior and ensure better results. And don’t change the sales comp plan partway through the year. This complicates the situation and confuses reps while demotivating them.
Another option is to add an accelerator to an existing sales compensation plan to drive a specific behavior for a longer time. This motivates salespeople to reach for the higher payoff for attaining sales above quota.
Determine On-target Earnings
It’s important to determine on-target Earnings or OTE before deciding which type of sales compensation plan to use. OTE is the projected amount of pay a sales rep will receive annually, including base salary plus incentives, commissions, or variable pay.
Don’t Cap Compensation
Capping commissions limits the amount of compensation a salesperson can earn. So, when a rep hits their commission cap, they’re no longer financially compensated for closing additional business.
This demotivates sales reps from pushing to close more deals until the next pay period and limits the amount of revenue to the bottom line as well. It also makes the sales compensation plan unappealing to top-performing sales talent since they often prefer the opportunity to make as much as they can.
A well-executed sales process with the right talent and a fundamentally sound compensation plan will provide the engine for sales growth. To learn more on how you can drive sales performance with your sales compensation plan and, most importantly, manage the payout process, all which leads to positive results, schedule a meeting here.