What is a Sales Compensation Plan?
Sales compensation is how much a sales rep earns per given time period, which is typically expressed in annual terms. It includes their base salary, commission, and other incentives their employer may have in place.
On the other hand, a sales compensation plan is a clearly spelled out program that you use to determine sales compensation. It tells you how you arrive at a sales rep’s total earnings.
Sales compensation plans differ depending on a company’s structure, goals, and budget. So there is no one sales compensation plan that applies to all businesses.
Why are Sales Compensation Plans Important?
The goal of a sales compensation plan is to set performance standards for your sales team. When your sales reps know specifically what they earn if they perform to a specific standard, it can drive them to work harder.
Like every other professional, sales reps are motivated by money. They want to maximize their reward and a detailed compensation plan sets the standard required for them to do so. So the plan incentivizes your team to work harder on their targets.
It’s crucial to design your sales compensation plans in a way that ensures fairness, toward both company and reps. A good compensation scheme will set a clear structure between sales reps of different experience levels, which will help decrease rep turnover as the more experienced know they will be paid what’s commensurate with their experience.
Lastly, a competitive sales compensation model makes your best salespeople feel valued and appreciated. A plan that rewards the best performers will also attract quality sales reps and ensures they stay for a long time.
5-Step Process for Developing a Sales Compensation Plan
As we have said, compensation plans will differ between companies, depending on the type of product, company culture, and other variables. One company will offer a low base salary with a big commission and another the exact opposite.
Having said that, there are questions you must ask yourself before you sit down to design your sales compensation plan:
- Is your company a startup or an established business?
- What is the length of the sales cycle?
- What is your delivery cycle like?
- What is it you’re selling?
- Who are you selling to, C-level prospects, vendor managers, or small, one-man shops?
- What is your pricing model?
- How do you get your leads?
- Are you utilizing inbound marketing methods and email campaigns?
- Are sales being initiated through outbound calling?
- How can you balance sales team performance and payment?
- What can you offer as a motivational factor for the success of reps?
Once you have answers to these questions, you can move ahead and start crafting your compensation plan. You will do this in these steps:
Step 1: Set your payment target
First, you must find out what the competition is paying for the same role. This needs to be your direct competition. Remember too that pay largely depends on where one is geographically located, so take note of that as you research the salaries others in your industry are paying.
Some organizations use sales compensation planners that tie sales rep earnings to revenue. In other words, you want the revenue you are generating to be able to cover the sales team’s compensation. No point in paying well if the business is not profitable.
Step 2: Decide on a sales compensation mix
Are you paying a straight salary, absolute commission, or a mix of base salary and commission? Again, this should be based on your goals, the nature of the product, and your resources.
For example, you might want to pay your sales reps a base salary plus commissions for reaching certain milestones because you want them to go the extra mile.
On the other hand, for a sales manager compensation plan, you can offer a large straight salary and a commission based on sales quota attainment. This motivates them to find ways of improving the sales team’s performance as a collective, which boosts team morale.
Here’s a typical example of a sales compensation plan template for some inspiration.
Step 3: Determine your KPIs
The best compensation plans have a performance measurement guide. They tell you specifically what you track to measure how productive a salesperson has been. The most common key performance indicators that can be used to determine sales compensation include:
- Sales growth rate,
- Profit margin,
- Number of prospects turned to sales opportunities
- Sales quota attainment,
- Average deals made by size,
- Customer Lifetime Value (LTV),
- Onboarding rates & demo calls made,
- Lead conversion & prospecting time,
- Potential customer deals won vs deals lost,
- Market penetration.
You can integrate a CRM solution to keep track of your KPIs. That said, you will need to decide which KPIs apply to which roles in your sales organization. Some will apply to sales reps, others to the sales manager, and some to sales support agents.
Step 4: Make sure your compensation plan includes your whole sales team
When it comes to designing sales compensation plans, you shouldn’t just focus on your sales reps. Include every team member from the sales support staff, internal salespeople, field sales reps, to the sales manager.
Don’t stop there:
Make sure to communicate every team member knows their sales compensation structure and how they can expect to be rewarded for their hard work.
The best sales compensation plans set compensation structures based on position, influence in sales, and sales milestones.
Step 5: Set up sales quotas and targets for your team
This is an important part of your sales compensation plan. If you fail here, all the work you did in the previous steps is wasted.
In simple terms, your quotas determine how much and if at all your reps will be rewarded for the extra effort they put in to beat their targets. Your sales quotas need to be achievable but not be overly generous that they won’t encourage your reps to overachieve.
At the same time, your sales quotas need not be so hard to achieve that even your best sales reps can’t meet them. That can only demotivate your sales reps and lead to poor sales performance for the whole team.
Let’s look at 4 different types of sales compensation plans:
4 Sales Compensation Plan Examples & Models
By understanding the different types of compensation plans, you can create one that suits your needs. Besides the straight salary model, here are 4 types of sales compensation plans you can use at your company:
1 Profit-Based Plan
With a profit-based plan, commission rates will change as profit margins increase. These types of plans will usually be based on an online invoice, product, or monthly averages of profit margins generated.
The greater the profit, the greater the commission the rep earns. The plan scales with the profit a rep’s sales generates. But it can be a double-edged sword because razor-thin profit margins mean razor-thin commissions.
2 Revenue/quota-based Plan
Here compensation is based on sales volume achieved over the previous sales period (monthly/quarterly) or on a percentage of quota achievement levels.
Many plans are structured this way as it is an easy way to track and pay out commissions. Volume and quota attainment are the driving factors for many sales reps who constantly monitor their sales months vs. their determined quota.
3 Balanced plan
With a balanced plan, compensation is based on a combination of KPIs and variables like the number of new clients, the number of upsells or cross-sells, or other specific tasks reps may be given.
4 Group/team-based plan
This plan rewards the group as a whole, meaning team members get the same commission and incentives for meeting set sales goals. While it appears fair, this plan can create animosity and a toxic team dynamic if certain team members feel they are contributing more than others.
5 Commission-only plan
Commission-only plans are preferred by organizations that want to reward reps on the output of their expended efforts. It pays a percentage of every closed sale, upsells, or new customer. So if a rep does not make any sale, they will not get paid.
Generally, this type works well with reps who usually drive good results.
A variation of commission-based incentive plans is the gross margin commission plan. This is when companies pay reps based on profit rather than sales. As a result, reps will be compensated more for closing large deals unlike closing small deals that generate less gross margins.
An advantage of this sales commission structure example is that it eliminates discounts due to the fact that many reps tend to turn to discount offers in order to close more deals, which can be bad for your business.
Other than offering financial incentives to motivate your sales reps, you might consider investing in tools and software that help them perform at their best.
One such tool is LeadFue:
LeadFuze solution offers reps real-time verified leads information such as emails, mobile numbers, and social platforms. It enables salespeople to build and trigger auto-pilot search lists of accurate leads and integrate them automatically with sales outreach tools. This can help them close more sales.
You can change Fuzebot’s auto-pilot settings to suit your goals.
6 Reasons Why Sales Focus is Lost With Complex Compensation Plans
A point of caution when developing sales compensation plans is to make them as simple as possible. Granted, compensation plans are unique to each organization and must factor in the company structure, culture, resources, and type of product.
That said if the plan includes too many variables that it is long and hard to understand, it becomes difficult for reps to decide precisely what they must prioritize to hit their earnings targets. It also makes it difficult to fairly compensate your reps for their efforts. You end up losing focus on sales.
Sales focus is lost due to an:
- Inability to provide real-time and accurate feedback to sales reps on their performance to goals and incentive earnings,
- Inability to pay salespeople more frequently or quicker after the close of the pay period due to resolution of data hiccups, manual “workarounds”, payroll delay, etc.
- Inability to provide detailed commission statements and frequent reports on performance along with the check,
- Inability to include transfers, which have a big impact on every territory, into the monthly reports to reps and daily sales reports to managers,
- Limited ability to run contests and recognition programs since they must be manually administered,
- Inability to provide accurate leads or sales development opportunities
Note that issue number 6 is exactly what LeadFuze sets out to solve.
The more variables worked into a sales compensation plan, the more the chance of creating uncertainty in the sales force.
If salespeople are not given easy tools to accurately predict their take-home commission, there can be negative repercussions due to a lack of confidence and fairness in the plan.
An unsettled sales force is unpredictable and unproductive.
Designing a sales compensation plan can surely be a difficult endeavor, but when it has the right balance between complexity and simplicity, it will be the kind of plan that drives and rewards performers who want to excel and not just pick up their check at the end of every month.
It can mean the difference between a high-performing and low-performing, frustrated sales team.
How to Retain Sales Reps with the Right Sales Compensation Plan
In order to retain sales reps in your company, your sales representatives must feel appreciated. There are many ways that a company can show its appreciation for the work of their employees, but it is important to remember that each individual has different needs so there’s no one size that fits all approach.
1 Don’t hire talent just to fill gaps
Treat every hire like a superstar in the making. Typically, when a rep leaves, it is often common to conclude that they just weren’t right for the role. But it may not have been about the role, but the compensation you were offering.
The people you hire are just as much of a controllable factor as any of the other buckets presented below.
Rep turnover is a vicious cycle. One leaves, so you scramble to replace them. In that rush, you hire the wrong person — or maybe even the right person but fail to adequately onboard them.
They soon leave, too, and off you go once again.
Put as much work and effort into hiring the right sales reps as you do in keeping them around. Adapt the mindset that you aren’t just looking for someone to fill a vacancy or a stop-gap — you’re looking for your next superstar.
2 Remember that no new hire is immune from improvement.
Whoever you think is the best quarterback to have ever played the game of football would have failed miserably had he been never taught how to properly handle the team’s playbook.
And the best actor? Nothing without months of preparation for their roles.
No matter how talented your reps are, they need proper onboarding. In fact, it’s the number one reason reps leave their jobs voluntarily.
Not salary. Not bonuses. That’s right, it’s nothing to do with your sales compensation plan. It’s… development.
One-third of employees reported having left a job within six months of commencement, according to a survey led by BambooHR. And worse, between 16-17% of respondents did so between the first week and third month at their new companies.
Thus, there isn’t time to waste.
Your goal should be to get reps to quota-bearing status quickly, but thoughtfully, and then coach them to succeed and maintain constant development.
With crystal clear product messaging, a complete competitor landscape, a well-designed sales compensation plan structure, and a bulletproof sales process.
And most importantly, you’re doing all you can to pass that info along quickly, yet thoroughly.
3 Hold up your end of the bargain
A dangled carrot loses its appeal if it’s delivered stale, half-eaten, or not even given at all. Meaning, while incentives drive behavior, if they are not adhered to, not paid accurately, or even on time, rep satisfaction is sure to decrease.
Automation leads to faster payouts and greatly improves that figure, while also providing access to what-if scenarios regarding potential payouts and real-time visibility for increased motivation.
In the end, you can dangle whatever you want, but poor execution is de-motivating and difficult to come back from.
4 Sales compensation incentives should be motivating but complemented
There must be balance, and this point is twofold.
“Balance” needs to be found between the base of a salary and variable incentives being offered, meaning if your variable piece is lacking, the overall pay mix might not be motivating enough.
But balance here also means it isn’t always about the money, and you need to steady your attack of retaining reps by figuring out financial compensation & providing the opportunity for reps to grow professionally in a positive working environment.
Again, we all know these things are important, but unfortunately, knowing isn’t even half the battle.
Stats aside, “people leave managers, not companies” as mentioned here on Forbes.
Employees simply can’t progress in their careers if their managers don’t make sufficient training and coaching top priorities.
5 Answer questions and calm fears
Consider this scenario:
You’re a rep with an incentive plan, and you know payments are coming.
In your mind, you rationalize that you should have a check by the end of the week, and in the amount of $10K.
Well, the target date passes, and no check.
Where does your mind go?
Probably a million different directions, naturally. Then, the check finally comes, but only for $5K.
Now, what are you thinking? Again, a million different things. You just can’t help doing so.
Point is, it’s human nature to assume the worst at times.
If you don’t communicate with reps a clear commission schedule template, and how the incentives process work, you’re inviting them to think in negative “what ifs,” which can run a mile long.
The only way to curb questions, doubts, and confusion is to embrace transparency with your plans.
Informing reps on what’s coming down the pike in terms of payment, increases their motivation, driving higher performance.
To do so, systems must be accessible — giving reps, managers, and finance the ability to easily view compensation wherever and whenever they want and track their performance.
6 Praise and recognize performance
Sales reps are determined and competitive. They drive hard to the hoop and have thick skin. Thus, if you don’t praise or recognize their performance, they’ll just brush it off, right?
Not quite right actually. It’s for all those reasons that would make you lose reps fast. Anyone of competitive spirit wants their victories recognized, broadcasted, and rewarded.
They work hard for achievement, but they also want that achievement paid for.
But before a rep can win a contest or outrank their peers, they need to be given the opportunity. Use contests, SPIFs, and gamification in any fashion to feed their competitive spirits, only then, they will be praised for their results.
With all the above points, even a small misstep can have consequences on your sales compensation plans.
Drive Rep Performance With the Right Sales Compensation Plans
Designing sales compensation plans has to take many components and factors into consideration. It’s true it takes money at first, but most importantly you have to implement continuous development and retaining processes for salespeople.
There are so many sales compensation models floating around, but most will not apply to your business. So adopt the right sales compensation plan based on your company’s needs and workflow in order to attract and retain sales talent.
The last thing you need is unhappy employees who don’t care about what they do because they’re not getting paid enough. That’s why it’s important to take time out and think about which sales compensation model would work best for your business.
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