Sales compensation plans are a great way to improve employee morale and boost employee performance. However, it’s critical to use the right sales incentive strategies to properly motivate staff. You must choose the types of sales compensation that resonate most with your employees.
In this post, we’ll look at seven sample plans and examine how to choose the best option for your company.
What Are Sales Compensation Plans?
Also known as sales commission plans, these programs aim to increase sales productivity. Some might have the goal of general employee performance improvements for departments outside of sales. However, most are a simple reward system in sales.
Employees typically earn points for each lead they bring in or deal they close. The types of sales compensation can include cash rewards, time off, paid holidays, gift cards and many others. Companies must ensure that the plan is equitable and has easily quantifiable goals for it to be successful.
The Benefits of Attractive Sales Compensation Plans
There are several benefits to offering a sales bonus structure.
Improve Employee Morale
An ancillary benefit of enhancing sales team morale is that employees are more likely to stay. Your employees will feel more valued and happier in their jobs. They will see a direct benefit in working harder and will want to push for more sales.
Sales compensation plans are an efficient way to boost sales. You can even differentiate between different products to drive acquisitions to more high-value offerings.
A compensation plan can go a long way toward increasing sales productivity. Employees will actively look for ways to streamline processes to fit in more time for sales. They will focus more on work and less on distractions.
Types of Sales Compensation
Here are the basic types of compensation plans to use as inspiration. Companies sometimes use hybrid versions of these for a better fit.
1. Straight Commission
Commission-only plans are ones where you only pay the employee if they sell something. The cost-to-company is thus very attractive, as you only pay for results. They are also easy to administer.
The downside is that such plans have high burnout rates and can foster unhealthy competition in the workplace.
Employees may also focus more on the quantity of sales rather than the quality. They might, therefore, be less worried about ongoing customer satisfaction.
2. Salary Plus Commission
This is a more equitable solution. Employees earn a basic salary and can then earn commission on additional sales. You can attract and retain talent more easily with this kind of structure while still basing pay on performance.
The downside is that working out the commission can prove complicated. It might also discourage the team from selling low-value products.
3. Salary Plus Bonuses
This is different from the first option in that the company pays a basic minimum wage and a bonus over and above that. The cost-to-company is thus higher.
The advantage is that retention rates are higher as employees have a living wage. They will also sell the full range of products and focus more on customer satisfaction. The downside is that it makes payroll expenses more unpredictable.
4. Tiered Commission
With these sales compensation plans, employees earn different rates of commission as they reach a particular benchmark. An employee may, for example, earn a 5% commission on sales after they meet their basic target. This may double once they achieve 200% of their target.
The value of this system is that it promotes healthy competition and inspires reps to upsell products. The downside is that it could be confusing for human resources personnel.
5. Profit Sharing
Profit sharing offers reps a real incentive to help the company grow and do well. Companies typically pay a basic salary and then share a percentage of the profits. The upside is that this allows companies access to skilled talent at a fraction of the real-world cost.
Employees have a personal stake, meaning that they are motivated to succeed. The downside is that this type of plan may reward mediocre and high performers the same. It also reduces the funds available for development.
6. Set-Rate Commission
Set-rate plans offer employees a set rate for each product instead of a percentage of the revenue. The advantage is that it makes predicting payroll expenses and working out profit margins simpler.
The downside is that salespeople may not feel like they’re earning enough, so turnover might be high.
Equity plans are common with startups as a way to attract talent at a lower cost. In essence, employees accept a lower salary for a stake in the company. The rates depend on what the employee negotiates and can prove quite favorable for both parties.
The downside is that you no longer control 100% of the company, and the tax implications are challenging.
How to Choose the Best Sales Incentive Strategies
Choosing the right sales compensation plan requires some research. Consider the following factors:
- Do you want to reward your sales reps as a team or individually? The former might foster a happier work environment, but only if everyone on the team pulls their weight. If you’re worried about individual performances, offering individual incentives is better.
- What will motivate your team to perform? Is it better to offer fixed incentives or a percentage of sales to drive better productivity? Asking your team may be worthwhile, as they will know what motivates them the most.
- How easy is your plan to structure? How much work will it entail to track performance and implement the rewards? If you have to buy a new system to track sales or employ someone, you must work that into the cost of running the program.
- What goals do you wish to achieve with this program? Do you want to sell a particular product or increase the customer’s lifetime value overall?
How To Create A Sales Compensation Plan
Now that you have examples of seven popular plans, it’s time to create your own strategy. Here’s how.
What Will Work In Your Company?
You can’t just take a generic plan off the shelf and hope it works. Consider what elements will motivate your employees and work for your company.
Also, consider the future. Can you set clear, measurable goals, and how will you administer the program? What are your company’s goals, and what happens if market conditions change?
Who Does What?
Your next step is to define the expectations for all stakeholders. What will your reps need to do to earn their incentive? How will everyone know they are on track?
Your reps and human resources team must have clear guidelines to prevent disagreements later.
What Are Your Total On-Target Earnings?
Now you must determine the reward you offer and work out the total on-target earnings. In other words, what happens if your salesperson meets all of their targets and earns their full incentive? How much will it cost your company if everyone achieves their goals?
This is an important step when working out your budget to ensure that your company remains competitive. While offering generous incentives is wonderful, this can backfire if you cannot afford to buy new stock every month. Your company must offer incentives that boost profits over the long term.
What are the Base Pay Rate and the Incentive?
Offering employees a basic salary allows them some breathing room. It also ensures that they receive compensation for the time and effort that they put in, even if there is a downturn in the market. The incentive is what motivates them to strive for excellence.
Sales compensation plans are effective motivators when you choose them carefully and administer them properly. But a successful sales team begins with finding the right salespeople to hire. If you need help in this area, call us at (866) 972-5373.