Sales Compensation Plans: The Basics

Sales compensation is essentially any financial compensation that sales reps receive for making sales. There are plenty of different types of sales compensation plans, and they vary with how they pay for performance. A common example is a plan that offers a base salary, commissions for sales, and some additional financial incentives.

Why are sales compensation plans important?

Your sales compensation strategy achieves things because it

• promotes productive behavior in your sales team,
• drives performance,
• increases revenue, and
• sets performance expectations

It’s therefore essential to have the right compensation plan for getting the most out of your sales department.

Things to Consider in a Sales Compensation Strategy

The same compensation plan that works for your competitor won’t necessarily work for your team. This equally applies to the different sales roles within your company.

There are a number of important factors to consider that take into account the unique situation of your business.

Things like budget, company culture, length of the sales cycle, and the cost of living in your area will all influence what makes the best compensation plan for your business.

The questions you need to consider for the right plan of action are:

• What roles do you have within your sales team and how does your compensation for those roles drive the desired behavior and ultimately obtain results?
• If the salesperson wins financially, do you also equally win?
• Do you have the right balance between base and incentive / commission?

Examples of Sales Compensation Plans

1 Salary Only

A salary-only compensation plan has the benefit of making it easy to calculate salary expenses. With this plan, your sales personnel earn a fixed amount regardless of how much or how little they sell. While this approach may be tempting for how straightforward it is, it has its drawbacks.

With this plan, there’s little incentive for your sales reps to sell more than the quota. It may also inspire your top-performers to seek a position with a different company that will offer compensation for higher sales.

There are also many sales reps that simply thrive in an environment that fosters healthy competition. A salary-only compensation plan doesn’t offer this competitive outlet.

2 Commission Only

On the flip side of salary-only is commission-only. With this type of commission plan, your employees forgo a salary in favor of commissions for the sales they make. In this scenario, zero sales means zero earnings for a sales rep.

One advantage of this strategy is that it’s less risky for the business. You won’t ever have to pay sales reps that aren’t generating revenue. It also motivates your sales team to make as many sales as possible so that they can earn as much as possible.

A downside to this model is that it can make it difficult to predict expenses. The lack of economic security is also an aspect that many salespeople will find negative. Often, commission-only compensation plans drive sales reps to make poor decisions that negatively affect themselves, your business, and your customers.

3 Base Salary Plus Commission and/or Bonuses

This is the combination of the above two plans and is a much more popular option.

It involves providing your sales force with a base salary in addition to the opportunity to make commissions or other incentive compensation. This is often seen as the best of both worlds. It provides employees with a steady income as well as a monetary incentive to make more sales.

For many businesses, a version of this is the right compensation plan. It takes out some of the uncertainty associated with only paying your employees a commission while still providing motivation.

The base salary also means that the business can potentially get more out of their sales team. Requiring your sales reps to perform any non-selling tasks really only makes sense if they’re receiving some kind of base salary.

Building A Compensation Plan

The sales compensation strategy that your company implements will affect many aspects of your business.

In addition to just your sales department, the compensation plan will also affect the finance and HR departments. So, it’s wise to get key players from each of these involved in the planning process.

Also, developing one compensation plan to fit every sales role is unrealistic. Your sales managers, for example, should probably receive different pay mixes than your less experienced sales reps. Incentive planning should be tailored to the sales role and the part it plays in your sales process.

How you compensate your sales force should also reflect your company culture. This is one of the most individualized aspects of the compensation plan design and has a large influence on how well you’ll retain your best talent. Paying your sales professionals fairly in comparison to competitors is extremely important when it comes to attracting, motivating, and holding onto your best sales reps.

Final Thoughts

It’s good to put aside time to take another look at the way your business operates.

>>Is your sales strategy effective and strong enough to keep your best players?

>>Are you meeting sales goals?

For many companies, this pause for thought offers a chance for updating compensation strategies.

Developing the right sales compensation strategy is one of the best ways to inspire your sales team and drive them to outperform the competition. It’s also how you can make sure that your company’s goals and sales behaviors are aligned.

This obviously isn’t a decision to take lightly. And frankly, sometimes it’s best to seek professional guidance. An outside perspective is often just what you need to make the best-informed decisions.

We Can Help with a Sales Compensation Strategy

Our passion at 360 Consulting is to expedite you meeting and exceeding your sales goals. We love seeing businesses break their records.  Schedule your free consultation here and let’s talk!

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