The One-stop Guide to Sales Compensation Plans

May 14, 2022
Daily digest

Choosing the right compensation plans for sales teams is critical for any organization to attract and retain top talent. A fairly designed plan will keep sales people motivated, appreciated, and feel valued while a poor one can cause even the best employees to leave.

However, creating an effective sales compensation plan is not an easy task. In fact, it is tricky even because of the dozen variables you need to balance to ensure fair pay. When developing a pay structure, you need to ensure that both the employees and the management are happy. Getting this right will keep your star sellers motivated and hit targets continuously while increasing profit margins.

What is sales compensation?

Sales compensation is a combination of base salary, bonuses, commissions, incentives to attract, retain, and motivate salespeople. Its primary objective is to drive performance and incentivize specific positive actions that are beneficial to the company. It also sets the standards and expectations for compensations and drives a result-oriented team.

With the right sales compensation plans, organizations can reward desired behaviors that drive better and consistent revenues on a recurring basis. You can improve your sales compensation planning greatly by using compensation planning software like Compport that are built to give you the relevant insights without relying on guesswork.

Types of common sales compensation plans

Here are some examples of the most common types of sales compensation plans:

Straight salary

In the base salary only compensation plan, salespeople get paid a predetermined amount, irrespective of how much they sell. It is not a common approach to sales compensation because there’s no motivation for sales reps to go the extra mile after they have hit their sales quotas. So the base salary needs to be extremely competitive to attract and retain talent. However, small sales teams that are versatile and focus on multiple functionalities still have a salary only plan.

Commission only

This is when you pay sales reps exactly for the revenue they bring in and nothing more. It’s a rather uncommon approach even though it’s easy to administer. However, it is difficult for organizations to predict their expenses and have to stick to a tighter budget.

Also, for salespeople, it leads to low income security and stability during certain months or volatile periods. It tends to attract fewer candidates, increase burnout, and can lead to high attrition.

Salary plus commission

This is one of the most common forms of sales compensation where sales reps get a base salary along with an agreed-upon commission based on the value of each sale. There are multiple versions like a flat percentage or a slab structure. Usually, the base salary is low and the commission makes up for the lion’s share of the employee’s salary.

It’s favorable to both employees and employers because it motivates sales reps to sell more and go beyond sales goals and can increase their earning potential while offering some sort of stable income. Employers have less variability and can predict their expenses with reasonable accuracy.

To arrive at the base salary, you need to consider the difficulty of the sale, lead generation autonomy, and the experience required. As for the variable compensation, think about the complexity of the sales cycle and the influence the salespeople have over the customers’ purchasing decisions.

Salary plus bonus

The base salary serves the stable, foundational part of the rep’s compensation. As opposed to the commissions on each sake, employees are paid a lump sum once the pre-set targets are reached. It gives a much clearer level of predictability while motivating your employees to hit targets and close more deals.

One disadvantage of this model is that there is no incentive for sales reps to over-perform once they hit their goals and their bonuses are secure.

Territory volume-based commission

Team selling is common these days and this approach is catered to such organizations. Sales teams work on leads and prospects from clearly defined regions or territories. Commissions are paid on the total sales from each territory split equally among all reps as opposed to an individual-sale basis. This mode of compensation works when your team has great camaraderie and can support each other to achieve team targets. Also, the territories need to be clearly delineated so as to avoid clashes and should be rich enough to support competitive commissions.

Profit-margin based commissions

These plans are common among companies where salespeople have more autonomy over offering discounts to close deals. Reps are compensated on the profit the company makes on that deal instead of the value of the deal or the revenue generated. This discourages salespeople from giving fat discounts to close a deal. However, it becomes difficult for employees to maintain a stable income during lean periods.

It works great when you combine it with flex times, stock options, and other incentives that attract salespeople.

How to design a sales compensation plan

Since the performance of your sales team is heavily dependent on their compensation, you need to design a plan that can keep them motivated to go over and beyond without them getting burnt out. You should also communicate the total value of their compensation clearly along with caps, if any, and the total earning potential.

There’s no one-size-fits-all sales compensation plan and it needs to be customized based on the organization’s budget, resources, and goals. You can either offer a higher base salary or plans where commissions and incentives for hitting targets take precedence. Every compensation plan should be based on the following factors:

  • Job role
  • Sales cycle length
  • Departmental budget
  • External competitiveness
  • Deal types
  • Organizational goals

If you’re building a sales compensation plan from scratch, make sure you go through the following steps:

  • Identify your objectives. Ex: Increase revenue, increase retention, increase cross/upsell rate, increase contract length
  • Align compensation strategy with sales and business objectives
  • Establish role levels
  • Choose a structure based on the above examples. Determine base pay, commission rates, etc.
  • Set quotas, targets, earning caps, and expectations for compensation
  • Assess pay competitiveness based on location, industry, etc.
  • Get inputs from executives, senior salespeople, and other stakeholders

In addition to all these, you also need to pick the right compensation management tool so you can administer the plan. One of the biggest challenges HRs face is compensation errors. A small manual error, something as small as 1%, can add up quickly and can cost your company a lot of money. There’s always the risk of adding an extra zero or a decimal in the wrong place. But the true cost of inaccuracy is even more; your employees lose trust when their bank balances don’t match with their expectations.

You need to automate as much as you can when it comes to compensation. Pick a tool like Compport to eliminate errors and you can rest assured that each commission is calculated accurately. Further, you also get insights to modify and improve your plan. Get a free demo today.

Closing thoughts

Keeping the sales team happy and motivated is critical to the success of any organization. You want to create a plan that will help team members succeed. The compensation plan should be easy to administer, simple enough for salespeople to understand, and reward them for their performance fairly.  

A skilled team when properly incentivized will achieve great results, increased revenue, and business objectives.

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