Every human resource manager knows the importance of employee compensation. Compensation forms and amounts vary depending on the industry and position. Sales organizations require a different approach when it comes to salesperson compensation.
Several sales compensation models exist. From base pay to commissions and bonuses, most organizations try to link positive behaviors with sales compensations. This way, they’re able to reward the most productive salesperson the most.
Many businesses offer commission plans to either supplement a base salary or as the sole means of compensation. Learn how to balance the two and create a sales compensation plan that rewards and motivates your sales reps.
What is Sales Compensation?
Sales compensation takes many forms. In general, it refers to the manner in which an organization pays its employees. It includes how much and how often a salesperson gets paid. Compensation takes the form of either base salary, commissions or an hourly wage.
The majority of sales organizations include some sort of commissions-based pay to incentivize performance. Retail establishments, on the other hand, typically offer hourly wages to their staff. Finding a balance in sales compensation means keeping employees satisfied while also incentivizing them.
What is a Sales Compensation Plan?
A sales compensation plan focuses on driving sales performance. Organizations want to encourage their employees to do their best while keeping enough profits to make it worthwhile. Sales compensation plans require a balance between the needs of the employees and those of the business.
Plans typically include set rates and wages for their employees. Many businesses give their employees the option to choose the plan that works best for them.
Common Sales Compensation Terms
Before jumping into compensation plan development, you need to understand a few important terms. These will help you develop an understanding of the factors that go into compensation plans.
The term sales quota refers to a set number or volume of sales a representative needs to hit within a specified time period. Quotas ensure that your employees do not waste time—especially when offering them a base salary. All sales quotas should be reasonable and attainable. However, they also should push employees to step just a little bit out of their comfort zone.
You should insert a sales quota when offering hourly or salary wages. Fully commission-based compensations do not require sales quotas. However, they can still help get the most out of an employee beyond the promise of a financial benefit. Many businesses set quotas around their set operating costs.
Sales accelerators apply to all sales beyond a salesperson’s set quota. They typically take the form of additional compensation for post-quota sales. For example, each sale after meeting a quota might result in twice the commission rate. The sales accelerators reward employees for pushing themselves to go above and beyond.
Sales decelerators penalize representatives when they do not meet their quota. So, when an employee only reached 75 percent of a quota, they might only receive 75 percent of their pay. Sales accelerators act as positive reinforcement, whereas decelerators act as negative reinforcement.
Use caution when implementing sales decelerators, as they aren’t always an effective means of motivation.
On-target earnings are a kind of estimate to give employees an idea of potential earnings. It includes all commissions and base pay amounts an employee would expect to earn. This helps when attracting new employees, as they will want to know how much they will make. On-target earnings take into consideration the earnings of current employees and set quotas.
A clawback occurs when a customer stops using the service. In this case, the employee loses their commission from this customer. Many subscription-based companies use clawbacks in order to retain customers. They typically result in a salesperson giving more attention to customers after making the sale.
For a clawback policy to work, employees must receive steady commissions from subscribers.
Sales Performance Incentive Fund
The sales performance incentive fund, or SPIF, allows organizations to reward employees for stellar performance. The fund helps set up prizes and other awards beyond regular compensation. Many organizations use SPIFs to stay within budget when compensating their employees. They help businesses make good on any promised rewards.
The size of the SPIF depends on how many prizes your organization will deliver. You can set a steady number for a year or period and only offer prizes based on this number. Additionally, you can add to the SPIF based on company performance. When your sales team outdoes itself and exceeds its goals, deliver a fitting reward.
Make sure you budget correctly with your SPIF. Otherwise, you could end up making promises you’re unable to keep.
Sales Compensation Plan Examples
To get an idea of the kinds of sales compensation plans already in place, here are some examples. When you pick a sales compensation plan, do not feel tied to the idea. Rather, adjust as you see fit. Just make sure you keep your employees informed about any changes.
Implement as few or as many plans as you like to appeal to all of your employees.
Salary-Only Compensation Plans
A salary-only compensation plan means that a sales representative earns a set amount. They are not paid based on their sales numbers. Salaries help provide security and stability. However, they do not incentivize employees to perform beyond their quotas.
Commission-Only Compensation Plan
Whereas salaries provide security, commission-only plans put the salesperson in charge of their earnings. Commissions are derived from a portion of the amount the salesperson sells. This means that your organization needs to only pay them directly based on performance. Sales reps compensated exclusively through commissions tend to have a higher drive.
Organizations offering commission-only plans must be sure to provide enough sales opportunities for their employees to take advantage of. If a lack of earning potential exists in your organization, you will lose team members, creating a higher turnover and stifling growth. You can still implement a sales quota to make sure your business meets its financial needs.
Commission rates depend on your industry and capabilities. Typically, rates range from five percent to 45 percent. You want to deliver enough compensation to make it worth your team’s while and leave enough for the business as well.
Base Salary Plus Commission Plan
Many organizations opt for a combination of the first two plans. A base salary gives employees some sort of safety net and consistency, while commissions motivate them to do their best. Like with any base salary, you should implement a sales quota. This plan typically includes a lower base salary, which commissions can supplement.
This plan also typically calls for less commission from each sale than a purely commission-based plan. Many organizations use this kind of plan to cover both bases and give employees a solid option. Commissions incentivize sales representatives to perform beyond their quota, but the salary keeps them financially secure.
Base Salary Plus Bonus Compensation Plan
Similar to the previous plan, base salary plus bonus gives employees a salary plus extra when they meet a goal. For instance, you can offer a base salary of $50,000 and give a bonus when a certain number of sales are achieved.
Make sure that you budget adequately for making good on promised bonuses. The bonus can apply when a sales rep meets all of their quotas or exceeds it by a certain mark. You want to keep the bonus attainable so that employees do not leave when they realize they cannot reach it. Unfortunately, this plan does not really push reps to work any harder after they meet the bonus requirements.
Absolute Commission Plan
An absolute commission plan sets specific milestones at which an employee receives compensation. This means that you pay them a certain amount when they reach a certain target. So, instead of paying them a portion of the amount they sold, you pay them a set amount regardless of the sale.
For example, an absolute commission plan might mean paying employees $1,000 when they attract three new customers. Some absolute commission plans also include a percentage of the revenue from the sale, following a more traditional commission structure. These plans might result in unfair results for employees who do not get the same number of leads.
Relative Commission Plan
Relative commission plans pay employees based on their performance in relation to their quota. They usually also include some sort of base salary. To get their full on-target earnings, they need to meet their quotas.
Territory Volume Commission Plan
In this good team-based strategy, employees work a specific sales territory and split the total sales from that area. This helps when pairing employees together to hit a certain area. It also contributes to a strong reliance on teamwork. However, individual sales reps might feel like their individual efforts aren’t being rewarded.
Straight-Line Commission Plan
A straight-line plan compensates employees directly in relation to their sales quota. So, when a rep reaches 90 percent of their quota, they earn 90 percent of their commission rate. Or, when they hit 200 percent, they make 200 percent. The biggest downside to this plan is that your business will lose out on profits when employees overperform.
Gross Margin Commission Plan
This plan revolves around paying reps based on revenues. When a sales rep sells a product with higher profit margins, they earn more.
“Draw Against” Commission Plan
This plan provides stability by paying employees an advance on their commissions. Recoverable draws act as a loan that the rep has to pay back through sales. Nonrecoverable draws do not count against a rep’s earnings, which means the business might lose money if the rep does not make it back.
Steps to Create Sales Compensation Plans
Now that you know many types of compensation plans, you can create your own. Follow these steps to develop a plan that works for your employees and your business.
Step 1: Who, What and Why
Consider who you will compensate, what you will compensate them with and why you compensate them. If you have sales reps, consider all forms of compensation and what they need to do to earn it.
Step 2: How Much and How Often
Next, consider how much you will pay your employees and when you will pay them. Account for when customers pay you and how much revenue you make.
Step 3: Represent all Company Functions
Take care to develop a plan for all of your employees. You cannot compensate support staff like you would sales reps.
Step 4: Consider Compensation by the Competition
To retain and attract employees, offer a competitive compensation rate. This cuts into profits but helps you retain talented staff.
Step 5: Timely Reviews
Every now and then, review your compensation plan. You can always make slight adjustments to your plan as your business and workforce each evolve.
Step 6: Set Attainable Goals
When it comes to quotas and targets, be certain that your employees are equipped to consistently reach them. Otherwise, you will see high turnover rates and lose talented staff.
Step 7: Invest in Job Analysis
When you gain a thorough understanding of each position you need to fill, create a plan based on that information. Consider responsibilities and qualifications and ensure compensation is commensurate with these factors.
Step 8: Pick a Payroll Software
Keeping track of the payroll for any sizable staff takes up a lot of valuable time. Good payroll software will keep track of employee performance so that you can pay them what they earn.
Step 9: Maintain Your Plan
Do what it takes to keep employees happy while looking out for the longevity of your business.
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