What is a Sales Compensation Plan?
A sales compensation plan is mainly the payment package or scheme of sales department staff. Meaning, what compensation structure companies adopt in terms of reps’ payment methods, how they can earn bonuses, salary increase, and receive incentives.
The sales compensation model consists of wages, salaries, and benefits.
Sales manager compensation plan sample needs to balance between sales force performance and financial remuneration.
The combination of components that shape the sales compensation plans differ from one plan to another based on many factors such as the type of the compensation itself, the retaining approach adopted, and other variables that we will get into as we move forward in the article.
Why are Sales Compensation Plans Important
A company is nothing if it doesn’t have sales.
There are plenty of ways to automate and utilize inbound methods. But having salespeople (sales & business representatives) take control of the leads, conduct prospecting techniques, turning prospects, and close sales opportunity deals with outbound leads, aside from what you’re already conducting digitally, have and will always be a key component of your sales funnel.
Building sales compensation plans for reps can be a difficult task.
Because guess what?
In fact, reps’ financial-situation terms with the company are considered to be factors of motivation in the line of salespeople.
Reps are stimulated to excel in sales once they’re satisfied with the compensation model a company’s adopting. Sales people compensation is a core element. Being fairly rewarded and appreciated drives them to put more selling efforts and hit better sales-strategy results.
And that’s exactly why SCPs are important!
More sales results mean more profit.
Designing sales compensation plans in a way that ensures fairness, toward both company and rep, will decrease the rates of your turnovers.
Taking all of those variables into consideration, coming up with a fair, profitable, and efficient compensation plan that motivates and rewards reps for their efforts can take many forms.
A plan that rewards the best performers will attract quality sales reps and keep turnover low.
Here’s one of the sales compensation plan examples, imagine you’re adopting a compensation model that rewards top reps the same as underperforming ones, there will be a lot of turnovers.
You will need to understand the cost of sales.
A simple way to figure it is to take an individual’s base salary, plus commissions earned at 100 percent of quota, their potential bonus opportunities, and then divide by that salesman’s revenues to figure out the percentage that sales cost.
Note: In Reps case, the salary-only plan means the company will pay its employees based on their annual wage or hourly rate with no commission payment given to them at all.
This kind of plan may seem like it would motivate people to put more effort into their work because there won’t be any reward if they don’t sell anything, but this type will actually do the opposite of what’s intended to do.
It will discourage salespeople because their compensation plan is solely based on what they are making.
If Reps don’t make any extra money whenever they increase prospects turning rates, generate more sales opportunities, close more deals, and provoke sales for the company, then there’s no reason to try at all!
How to Create a Sales Compensation Plan For New Reps
When it comes to designing sales compensation plans, there’s a series of questions that you must ask yourself before you set up a sales compensation model.
- The first consideration is if your company is a startup or an established business
- What is the length of the sales cycle
- The delivery cycle
- What is it you’re selling
- Who are you selling to, C-level prospects, vendor managers, or small, one-man shops
- What is the pricing model because there’s a difference between selling jumbo jets and a monthly SaaS service
- How are the leads coming in
- Are you utilizing inbound and email campaigns
- Are sales being initiated through outbound calling
- How can you balance between sales team performance & payment
- What can you offer as a motivational factor for the success of reps
There are several steps to keep in mind when putting a sales compensation plan together.
Step 1: Setting your payment target
Start with identifying the market’s average pay offered, all depending on the industry you’re in and geographical area.
When you’re setting your pay target, you need to take into consideration commissions.
You need to be accurate in choosing your target pay because it is the base of your compensation plan structure.
Step 2: Sales compensation package you’re adopting
Decide which compensation regime you’re going for. It can be either a straight salary or a base salary + commission plans for sales.
Your sales compensation plan should be set based on the roles of hired reps and expected achievements.
For example, you might want to offer sales reps base salary + commissions because they are responsible for closing deals. On the other hand, for a sales manager compensation plan, you can offer a large straight salary due to their position responsibility or you can offer a large base salary with a sales commission structure.
You can take a peek here for sales compensation plan template excel.
Step 3: Make sure to include every person of your sales team in your sample compensation plan.
When it comes to designing sales compensation plans, you shouldn’t focus just on reps in terms of commission structure template. You need to enroll all sales people in your sales commission structure in order to provoke motivation and insert fairness in your compensation package template.
Then you need to communicate your sales commissions rates template to inform employees how the sales bonus structure works, and when commission payouts are made through a commission schedule template.
The commission plan template is set based on position rank, generated influence in sales, projected objectives, and milestones reached.
Step 4: Set up your metrics system
Best compensation plans need measurement. That’s why you need to choose your KPIs based on coordination between sales generated by reps, and the compensation package offered.
Mainly, these are the measures used:
- Sales growth rate
- Profit margin
- Prospects turned to sales opportunities
- Average deals made by size
- Customer Lifetime Value (LTV)
- Onboarding rates & demo calls made
- Leads Conversion & Prospecting time
- Closed sales by each rep
- Potential customers deals won vs deals lost
- Market penetration
You can integrate a CRM solution to keep track of your KPIs such as sales growth rate, closed sales, LTV…
Step5: Set up Quotas and Targets for sales people
Once you set up quotas and milestones, the sales manager starts to measure performance and communicate reports in order to keep track of sales people’s performance and evolvement hitting pre-determined key objectives.
You can use resources to have an idea of how to set up quotas when it comes to sales.
Or you can use Reps Activity-Based Sales model also referred to as Activity Based Selling. It consists of believing that a chain of pre-set activities is what triggered sales, not quotas.
This technique works better in terms of hitting milestones and short-term goals.
Sales compensation models are an important component for companies and should not be taken lightly. It’s a factor of motivation for sales employees!
4 Sales Compensation Plan Examples & Models
By understanding the different types of comp plans, you can create one that suits your needs perfectly! Here are some types of sales compensation plan example:
1. Profit-Based Plan
Commission rates will change as profit margin levels increase. These types of plans will usually be based on invoice, product, or monthly averages of profit margins generated. The greater the profit, the greater commission – it scales – but it can be a double-edged sword because razor-thin profit margins mean razor-thin commissions.
2. Revenue/Quota Based Plan
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 payout 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
Compensation is based on a combination of profit margin, revenue, and a third variable, like a targeted number of new clients or a targeted number of upsells, or a specific product or service the sales rep has been tasked with selling.
4. Group/Team-Based Plan
Bonuses go to all team members when monthly or quarterly sales goals have been achieved. This creates accountability and motivation for each member of the group or team because additional compensation is based on the continued efforts of each rep. This plan can either create a very competitive and productive sales team or one that can suffer from disharmony due to reps not pulling their own weight. Take caution when implementing this plan. It is a great motivator but can be counter-productive with the wrong team.
1. Solely Sales Commission Plan
It’s based on offering sales people incentives for every achieved goal or milestone, for example, you can either pay a specific amount of money for each new customer reps generate or offer them a percentage of cross-selling & upsell revenue.
Generally, this type works well with reps who usually drive good results.
Keep in mind that your compensation plan needs to align with your overall sales rates because each sales increase campaign, for a certain product or service, requires a compensation model that adapts accordingly to your objectives & numbers.
2. Gross Margin Commission Plan
It’s 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 which generates less gross margin than the other.
This sales commission structure example eliminates discounts due to the fact that many reps tend to turn to discount offers in order to close deals, which can be bad for your business.
3. Commission-only plan
It’s where employees receive a wage plus commissions for every sale that happens.
The downside of this type of plan is it creates an inflated risk for your organization because as soon as reps stop selling or end up not working out in general, you’re stuck paying them even though they aren’t providing anything useful to the team anymore.
4. Territory Volume Commission Plan
This includes payments that are given to reps as an incentive for them for closing sales deals of their company’s product or service to prospects who are located in a specific region only. Reps are paid based on a territory basis.
Once the compensation period has passed, a pre-set margin of sales profit will be divided between representatives of that region.
This sample compensation plan is effective for team-based sales organizations. In which we find reps working each one separately but all towards a common goal, all done with focusing on a specific territory.
Aiming to reach and maintain effective sales performance rates?
You need to lay a suitable ground for reps in terms of offering a fair sales compensation package.
Other than financial plans, you might want to consider furnishing reps with technological tools and software that enables them to fully perform, exploit leads and obtain results. Because it all starts with leads for sales people in order to qualify them and turn them into a sales opportunity.
LeadFuze solution offers reps real-time verified leads information such as emails, mobile numbers, social platforms. Besides, It enables sales people to build and trigger auto-pilot search lists of accurate leads and integrate them automatically with sales outreach tools.
You can manage Fuzebot’s auto-pilot settings on your own.
6 Reasons Why Sales Focus is Lost With Complex Compensation Plans
Additional considerations to keep in mind are, if the majority of sales are coming from a few long-term steady customers, the sales effort is minimal and the compensation should reflect that lower threshold of effort on the salesman’s part.
Also, inbound and marketing automation creates a larger pool of leads for a salesman. Sales incentive plan template should act accordingly. Outbound sales people who generate not only leads but also turn prospects and close deals.
The benchmarking effort was focused on sales compensation plans administration within sales organizations of 20 – 500 payees.
The benchmarking study consisted of approximately 30 confidential, in-depth interviews with participating companies.
The scope of the interview covered the following topics:
- How companies develop, implement, and administer sales incentive programs
- How companies view sales incentive compensation; as a tactical administrative tool or as a strategic sales performance tool
- The costs associated with sales incentive program administration
- The issues and challenges faced in incentive compensation plan template design, implementation, or administration
- The characteristics and potential value of systems to help better and manage more cost-effectively sales incentive programs
The report goes on to detail how organizational complexity reduces sales productivity due to the high likelihood of having complex sales compensation models – the number of unique plans within an organization with different types of sales forces, incentive/bonus measures, and formulas to determine levels of compensation.
The more complex sales compensation plans are, the less productive sales force teams are. Click To Tweet
This is due to the ‘pain’ felt by the different divisions of the company – Executive Management, Finance, IT, Human Resources and Sales Administration.
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 (e.g., show progress to all plan elements with updated credits/returns)
- 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 N°6 is exactly what LeadFuze sets out to provide for you.
LeadFuze is a software solution that provides reps a base of verified leads to work with. Build lists of accurate leads automatically, and most importantly integrating lists with sales outreach tools.
The more variables worked into a sales compensation plan, the more the chance of creating uncertainty in the sales force.
If salesmen 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 an unpredictable and unproductive sales force.
Designing a sales compensation plan can surely be a difficult endeavor, but when you put one together that addresses the delicate balance of complexity vs. simplicity, it will be the kind of plan that drives and rewards performers who want to do well and not just pick up a paycheck every month.
It can mean the difference between a high-performing and low-performing, frustrated sales team.
6 Ways on How to Retain Sales Reps with Compensation Plans
In order to retain sales reps in your company, you need to have sales representatives feel appreciated and engaged. 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 approaches.
1. Don’t draft talent just to fill gaps
Treat every hire like a superstar in the making. Typically, when a rep leaves, there is often misplaced comfort placed in a conclusion like “oh well, they just weren’t right for the role.”
It wasn’t anything with their role, the compensation you were offering, or the culture you created.
They just didn’t fit, and oh well. That shouldn’t be the case.
The people you hire are just as much of a controllable factor as any of the other buckets presented below.
It’s a vicious cycle, though. The rep leaves, so you scramble to replace them, and hurriedly, you hire the wrong person — or maybe even the right person but fail to inadequately onboard them.
They soon leave, too, and off you go once again.
Simply, 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 a crystal clear product messaging, a complete competitor landscape, a well-designed sales compensation plan structure, and a bulletproof sales process.
And most importantly, that 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, or 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, how 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.
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.
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.
Want to help contribute to future articles? Have data-backed and tactical advice to share? I’d love to hear from you!
We have over 60,000 monthly readers that would love to see it! Contact us and let's discuss your ideas!