Almost any business in existence hires sales reps. Your sales personnel are the people that harvest the low-lying fruits in your market. They’re the ones that bridge your solutions to your customers, and convince them to actually purchase your products.
Therefore, knowing how to pay a sales rep is imperative.
Because if they’re good, each sales bonus you give and every dime you spend are all worth the cost.
There’s just one problem: sales commission structures are not always clearly defined among companies.
That means there’s no effective bonus structure in place and, quite possibly, the salary is also meager at best. Sadly, if this is your company, you’ll have some trouble attracting, onboarding and retaining the best sales reps there is. Heck, they won’t even bother checking you out and simply go to jobs with the best bonuses instead.
A solid sales bonus plan is your one-way ticket to a highly engaged and motivated sales department. If you have no idea how to structure bonuses, we have you covered. Here, we’ll share the best sales commission structures and offer tips to help you out. Keep reading.
Sales Bonus Defined
First off, the sales bonus and employee compensation are two different things.
A sales bonus is the monetary incentive that a rep receives when they meet or exceed a pre-determined sales goal. Sales compensation, on the other hand, covers everything from the base salary, sales bonus and other commissions/incentives they receive.
The bonus structure normally varies from one company to another. Examples of sales bonus structures include a fixed dollar bonus or a percentage of the sales made. For example, you may award a sales rep $1,500 when they sell $20 thousand in revenue within 3 months. Or they may get 5 percent sales bonus for all sales under $50 thousand, and 10 percent for all revenue above 50k.
A commission structure may also not center around sales revenue per se. Companies may use other metrics like the number of units sold, contracts signed or deals made within a period.
It all really depends on the business in question. However, keep in mind that the lucrativeness or mediocrity of your sales bonus directly impacts your company.
Skimp on bonuses and you have employee attrition on your hands. Establish a desirable sales bonus structure and you hire talents that will stick with you for the long haul. If you want to create the perfect sales bonus for your business, Wizard of Sales® can help you. Book a call.
How Do Bonuses Work in Sales?
Sales bonuses usually come in the form of extra compensation that’s given to salespeople on top of their regular salary. This additional pay is typically given out based on performance; the better someone does, the more they get. Sales bonuses can be a great way to incentivize employees and help boost productivity and morale.
A study by Harvard Business School perfectly outlines the benefits of having bonus structures in place.
According to their findings, a sales bonus can indeed increase a sales rep’s productivity. Moreover, they found that quarterly bonuses are more effective in motivating salespeople than annual bonuses. Possibly due to the more instant gratification offered by a quarterly commission structure. Finally, the motivation doesn’t stop even after reaching a quota when the firm offers an additional sales bonus for overachievement.
Of course, employee productivity is merely a piece of a bigger puzzle, which is company success. The biggest impact of increased motivation is taking your business a leap closer to growing your bottom line. You also strengthen their loyalty to your company and cut employee turnover significantly.
To top everything off, your business bags the number 1 spot on top talents’ minds.
When Should Sales Bonuses Be Used?
Many companies offer a base salary, commission and additional incentives to motivate their salespeople to work extra hard. The reasoning is noble, but sometimes the execution is thoughtless. They believe that at-risk pay (a.k.a. sales bonus) always encourages the achievement of sales goals. That’s not always the case.
Harvard Business Review says businesses may be spending money on extra benefits that nudge little to no motivation. One way to address this is through accurate pay mixes.
What most businesses don’t realize is that a large percentage of sales come “free.” This means that salespeople can land buying clients with minimal effort because of two things:
- Franchise sales. People buy because of a business’s superior solutions, great service, incredible marketing, or favorable pricing.
- Carryover sales. People buy because they bought before and have witnessed how well a business operates.
Differentiating between genuine, unadulterated sales and free sales is key to knowing when a sales bonus should be used. Here are other viable reasons to implement a sales bonus reward for salespeople:
- Spur growth in a company
- Decrease churn rate
- Increase customer satisfaction
- Improve net promoter score
Depending on the industry, businesses may have either one of three basic compensation structures:
This is highly unusual but there are industries that offer only the base salary as the only compensation. No bonuses. No commissions.
There’s nothing inherently wrong with this system so long as the basic salary is competitive enough to be desirable. Motivating your employees to push through limitations to make sales will be the only hurdle with this setup.
This compensation system is most common among insurance companies, also called an aggressive mix compensation. It’s a highly results-focused structure wherein how much one earns is directly influenced by how much revenue they produce.
This is not effective in the residential home services industry. There won’t always be homeowners or businesses looking for repairs, upgrades or installments. With this system, There may be months when salespeople don’t bring anything to the table.
A commission-only income is also volatile and risky. One of the biggest issues of this payment structure is that high competition and overwhelming stress are likely. As a result, employee turnover occurs frequently.
Salary + Commission + SPIFF
A salary + commission structure is the most popular and common in the sales industry. Sales reps are given a base salary which then increases based on a commission of the solutions they sell. This pay structure is more stable than commission-only and more competitive than simply giving a high salary from the get-go.
The addition of Sales Performance Incentive Funds (SPIFFs) is another way to increase motivation. They are additional incentives earned on top of the regular commission rates normally for several reasons. Boosting sales is in the short-term one goal, motivating salespeople to hit specific targets is another.
Having SPIFFs in place is, of course, better than the salary-commission combo only.
Some Useful Tips for Creating Sales Bonus Compensation Plan
It’s high time your reward sales reps for their efforts, especially if you yearn for increased productivity and improved performance. If you’re looking to set up your own bonus structure, here are some tips to help you out.
Tip # 1 Keep it clear and concise
The sales bonus plan should be designed in a way that is easy for your sales reps to understand. Your salespeople need to know what exactly they must do to receive the sales bonus. That includes clarifying the parameters you’ll be using, setting the rules and making sure the reward is clear-cut.
When you leave no room for interpretation, you make the sales bonus more desirable and your salespeople highly motivated.
Tip # 2 Maintain transparency in distribution
Your reward system should explain exactly how the bonus would be calculated. Every qualifying sale, timeline and target that goes into the sales bonus should be transparent to your sales reps. This will help build trust and avoid any conflict down the line. Nothing breaks your people’s trust more than feeling they’re being cheated out of their hard-earned commissions.
Tip # 3 Consider the tenure and level
Sales experience, skills and expertise all play a role in how much of a bonus your sales rep should get. Your company’s longest-serving sales reps, as well as those who have closed more deals, deserve a bigger share of the pie. On the other hand, young talents who possess incredible sales skills should also be rewarded.
Remember, you want salespeople to keep doing what they do well and bonuses are the secret to motivating such behavior.
Tip # 4 Don’t overpay
Following the advice of Harvard Business Review above, don’t direct your resources on activities that don’t bear much fruit. A sales bonus should be dedicated when significant and unrivaled targets are hit, otherwise, you’re over-compensating. This will devalue the purpose of sales bonuses.
Additionally, you’ll only demotivate your team when you pay sales reps with bonuses for average performance. It sets a bad precedent for others to follow.
Tip # 5 Correlate pay and bonuses to an employee’s ability to grow
This goes back to our earlier point about making sure there’s a good reason behind every bonus you dish out. Sales reps should feel that they are being compensated fairly (and handsomely) for all the risks they take.
The best solution is to link an employee’s ability to grow the company with their pay and bonuses. This way, they’ll feel more responsibility over their work and be encouraged to put in the extra effort.
When crafting your bonus structure, keep these five tips in mind to create the perfect risk-reward balance for your team. With the right incentives in place, you’ll be sure to see an improvement in performance across the board.