There are many different types of sales compensation plans to choose from; each one is designed to motivate salespeople differently. In the US, sales performance management is a 3.4 billion-dollar-a-year industry that impacts every company worldwide. But it is not just in the US – sales compensation plans are all over the world and are used widely by companies of all types and sizes.
What is a Sales Compensation Plan?
Compensation planning is a function of sales performance management to measure, manage and optimize sales results. A compensation plan is a set of rules and procedures for paying employees. The plan states how much a sales employee will earn and how that amount is determined.
All sales compensation plans have a common goal to motivate employees to do their jobs well and to reward them when they do well. The success of a company lies in the hands of its sales team. So, you must have a sound compensation plan in place to help your sales force perform at their best.
What are the Four Basic Types of Compensation Plans?
Sales force compensation plans are about making the job worthwhile for everyone involved. Most sales force compensation plans fall into one of four basic categories:
- Salary. You pay sales employees a fixed amount for their work, regardless of the number of hours worked or the quality of their performance.
- Hourly. You pay the employees based on the number of hours they work each week or month.
- Commission. Employees earn commission based on sales volume or revenue they generate.
- Bonus. You issue bonuses rewarding employees for meeting company goals or exceeding expectations during a specific period (e.g., year-end bonuses).
Why Do You Need a Compensation Plan?
There are many reasons why companies need a compensation plan. Some of them are:
Sales force compensation plans help the company determine what employees should be paid for doing their job. It’s critical to have a system in place to enable the company to determine what it can afford to pay its employees. Managers can use this information when hiring, promoting, or making changes to their sales force compensation package year after year.
The right sales compensation models can fast-track the alignment of the interests of management and employees. Salespeople must have incentives to perform well, but they also need to be rewarded fairly if they do so.
A fair compensation plan will help you create a positive culture where people work hard to achieve their goals while encouraging collaboration and teamwork.
Creating a culture of loyalty and satisfaction
Your culture is one of the most important aspects of your company. How you pay your employees can dictate their level of dedication, as well as their personal motivation and passion for their work. A well-structured compensation plan for sales managers can help to attract top talent — which means happier employees who are less likely to quit.
How to Pay Your Sales Force: 9 Types of Compensation Plans to Implement
Salespeople are a unique breed of employees. They can be high achievers and highly motivated, but they also have a reputation for being unpredictable and difficult to manage.
Many companies have found that they must pay salespeople differently than other employees to get the most out of them. Here are some tips on how to pay your sales reps:
Companies pay out commissions as a percentage of sales. A salesperson may receive other forms of compensation, such as bonuses or salary, but a typical sales commission is usually the primary form of payment.
How to pay a salesperson’s commission depends on your budget and the scope of their responsibilities, among other factors. You should compensate them accordingly if they’re responsible for selling multiple products or services and making cold calls.
This compensation plan relates directly to performance; the better a salesperson performs, the more they will be paid. Commissions can motivate sales teams to do everything they can within reason to increase their sales figure. But it also means that they might neglect non-selling duties (like customer service) if they do not contribute as much directly toward increasing their incomes.
2. Straight salary
A straight salesperson salary is a fixed amount of money earned each month, regardless of sales volume. In this case, the company has established a base rate for all employees in the same position and then pays incentives as needed or desired by management or shareholders.
This type of plan does not reward employees based on their performance. Rather it provides one fixed amount regardless if an employee has had a good or bad year (or quarter). The main benefit of this type of compensation is that it can be easier to budget for and plan your expenses and payroll.
However, it also has some drawbacks that should be taken into consideration. For example, if you have employees who work harder than others, they may feel underpaid compared to their peers. A salary-only structure can create a negative environment within your company as well as cause some employees to look for new jobs elsewhere.
3. Salary plus commission
Salary plus commission compensation is a common sales compensation plan for sales teams. The basic idea behind this structure is that the salesperson receives a base salary plus a percentage of the total sale. With this compensation model, you can pay commissions on either net or gross revenue.
When determining when to pay commissions on sales, it is important to consider how long your reps take to close deals. The longer it takes, the more you should consider paying monthly rather than quarterly or annually.
Monthly commission plans give salespeople instant feedback on their performance and allow them to see how their income is affected by their own actions.
4. Base salary plus incentives
Base salary plus incentives is a compensation plan that ties the salesperson’s pay to the base salary and incentives. The employee receives a base salary typically paid monthly or weekly. In addition to the base salary, they also receive incentives based on performance.
Incentives are payments given when a goal has been met or exceeded. Incentives are forward-looking and guaranteed in how they are tied to a specific goal. You can calculate the incentive amount as a percentage of the employee’s base pay or a fixed dollar amount. In either case, it must tie directly to specific goals that you have previously established.
For example, you pay a sales employee $100,000 yearly as their base salary. If they work hard and help your company hit its year-end goal of increasing revenue by 25%, for example, they receive an additional $10,000 at the end of the year.
5. Bonus structures
A bonus is an amount paid in addition to a regular salary or wage. You might be familiar with bonuses as part of your work life, but they can also be used as a sales compensation plan. Many companies use bonuses as part of their overall compensation program for salespeople and managers.
Bonus plans typically pay out when the employee reaches a specific goal or milestone (like reaching a certain number of sales). Bonuses are different from incentives in that they are not guaranteed. Employers usually offer the reward in cash after salespeople achieve a goal instead of adding it to base salary and commissions.
Bonuses increase the likelihood that employees will stick around longer because they have something to look forward to. However, creating a fair bonus structure for everyone on your team may prove to be challenging.
6. Piece rate or piecework plans
Piece rate or piecework plans are payment methods that pay salespersons an amount for each unit sold. Piecework replaced hourly rates early when most companies had moved from manual labor to mechanized assembly lines.
Companies realized that paying workers by the hour was inefficient and encouraged them to take longer breaks or speed up their production line pace. Instead of paying them by the hour, some companies began paying their workers based on how many products they produced per shift or day.
An example of a piece rate plan would be paying salespeople $10 for every widget they sell this month. This kind of plan may be more practical at trade shows where you have limited inventory control over what gets sold (thus making it difficult to predict exactly how much revenue will come in).
7. Combination plans
A combination compensation plan offers a mix of base salary and monetary incentives. These plans can help reduce turnover, attract top talent, and reward performance. A combination plan typically combines two or more elements of different plans. Combination plans can include any combination of the following:
- A base salary
- A commission
- A performance bonus
Combination plans are more effective in sales and marketing jobs where you can meet employees’ needs for motivation by both financial rewards and recognition for milestones achieved.
It provides security for employees whose performance may vary from year to year. They still have something to fall back on if they have a bad year. They benefit from their base salary, bonus, and incentives or commissions if they have a good year.
8. Profit-sharing plans
Profit-sharing plans are practical; you need to reward sales employees for contributing to the company’s profitability. The idea behind a profit-sharing plan is that you pay a percentage of profits to your salespeople. If the company makes money, everyone gets paid more! If it loses money, nobody gets paid anything at all.
The main advantage of a profit-sharing plan is that it rewards employees based on their contribution — instead of just their hours worked. However, it can create a lot of administrative work for employers, with many employees participating in the program.
Payroll staff will need to keep track of everyone’s contributions and calculate how much each person should receive each quarter or year.
9. Sales incentives
Incentives are an important part of your compensation plan. Incentives can be cash, but you can also use non-cash incentives, such as gift cards or event tickets, to recognize an employee’s contribution to the company.
Sales incentives are great ways to motivate salespeople who feel they have made a difference in your organization. You can give out these awards for various reasons:
- Achieving sales quotas
- Achieving performance goals
- Meeting customer service standards
Transparency is key here. Employees need to understand exactly how much money they will make based on their performance each month (or quarter). The goal is to ensure everyone stays motivated by seeing the fruits of their labor come through in real-time.
Sales Compensation Plan for Managers: 4 Tips for Success
To design the best sales compensation plan, you must consider many factors. Here are four tips:
Set your goals
Your first step is to define what you want to accomplish with your sales compensation plan. The most common goal is to increase sales. But it is also important to consider other goals, such as improving customer satisfaction or reducing expenses in the field.
Create a comprehensive plan. Make sure your sales compensation plan covers all of the salespeople on your team, from top performers to those who are not performing as well as you would like them to.
Choose and manage the right salespeople
Ensure that you have the right people to sell your product or service. Sales personality traits and skills are often overlooked because they can be difficult to measure, but finding people with the right combination of Drive, knowledge and passion is essential. If you have a successful formula for identifying these qualities, it will save you time and money in the long run.
Create a motivating environment
Once you have hired your sales team, make sure they feel motivated by their work and supported by their employer. You can achieve this by offering them plenty of training, development, and advancement opportunities within their career path. Salespeople also need to feel like they are part of something bigger than themselves — this will help create an atmosphere where everyone wants to perform well as part of a team rather than just for personal gain.
Evaluate and adjust
Sales compensation plans are constantly changing and evolving. Your business model will change over time, as will your industry, customer base, and market conditions. You should evaluate your plan each year to determine if it still fits with your goals and objectives.
There are many different types of sales compensation plans. The best one for your business will depend on your goals, budget, and work type. It is important to remember that no plan is perfect—each option has pros and cons. But if you find yourself stuck and unable to move forward with a new strategy, it may be time for some fresh ideas.
And if you are looking for help hiring great salespeople, consider incorporating a sales aptitude test into your hiring process. We, at SalesDrive, would be delighted to help you hire better salespeople with the DriveTest®. Get started today with one free assessment.