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What Is a Commission Plan?
A commission plan is the monetary scheme to incentivize and motivate salespeople to meet their sales quota. Simply put, it is how you pay your salespeople for each sale they make.
Why Is a Commission Plan Important?
Your commission plan is important because it motivates your sales team to make sales, helps your salespeople set goals, and provides recognition for employees.
- Motivation. Money is a great motivator for many. It is especially true in sales. In a study done by Barnett Consulting, 74% of salespeople say that their primary career motivation is money. Having a strong commission plan in place motivates salespeople to achieve or exceed their quota.
- Goals. More than most professions, sales are driven directly by how successfully team members meet their goals. Your commission plan allows sales teams to measure the performance of their employees. It gives salespeople something to work towards. Setting goals or quotas also promotes healthy competition with other salespeople. It can drive the whole team to be their best.
- Employee recognition. Many different studies have been done to reflect the importance of employee recognition in the workplace. This is no different with salespeople. One of those studies was done by the company O.C. Tanner, where 37% of employees said that more personal recognition would encourage them to produce better work more often. Employees want to be recognized for their hard work. Employees can be acknowledged as top sellers through a clear commission plan.
Types of Commission Plans
There are many different kinds of commission plans, and it’s important to consider the best fit for your company. Here are four of the more common types. It is important to weigh the pros and cons of each plan, know how to track it, and understand how clear each one is. Commission software such as Spiff is used to track commissions.
Base Salary Plus Commission
Under this plan, a sales rep receives a base pay that they will get paid no matter what and then is paid commissions on top of that based on how many sales they make and whether they hit their quota or not. This provides employees a bit more stability while still having the potential to make extra money off the sales they make. The typical ratio for this plan is 60% fixed (base-pay) and 40% variable (commissions). It provides stability, opportunity for commissions (though maybe not as much as other plans), and is typically pretty straightforward and easy to follow.
In straight commissions, a sales rep is paid only based on the sales they make. As there is no base pay, their income is completely variable. However, some reps prefer this, as salespeople typically make more off each sale and there is potential for making more each month due to the higher percentage from each sale. All of their pay is directly correlated with performance.
Under this plan, the employee’s commission is relative to how much of their quota they hit versus the exact revenue amount. It can be a bit complicated to calculate and isn’t too common. The exact revenue amount is the amount of the sale, while the quota is decided by the company. This can be beneficial, as a rep who sells a big deal is rewarded more than they would for a smaller deal. As mentioned previously, it can be a bit complicated and hard to implement. It can also be hard for reps to follow.
Here, commission is based on certain goals and activities achieved by a rep. They might have goals for how many calls they make, new customers to sign, or sales qualified leads (SQLs) to obtain. This can be most effective when a company is trying to direct a sales team’s focus. It motivates reps to hit each of their goals, with each of those goals being directed towards the bigger goal. The downside of this plan is that there is more of an emphasis put on the different commissions; it can be hard to calculate and for each rep to follow.
How to Set Up a Commission Plan
There is a lot of planning that goes into a commission plan. Here’s how to get started.
Step 1: Do Your Research
Prior to coming up with a commission plan, do some market research to understand what companies similar to yours are paying and whether they are below or above market value. It’s also important to understand the basic requirements of a good commission plan.
Step 2: Outline Tiers
Not every rep should be held to the same expectations, as a rep who has been working five months will likely sell more than one who has just started. Outline different tiers or set up a ramping period for new sales reps. Those tiers will be different for each organization and are generally based on market research. For example, after a rep has been working for only a couple months, they might only be expected to hit a quota of five sales while a more experienced rep might have a quota of eight.
Step 3: Determine Pay
Decide how much you want to pay good reps by coming up with an On Target Earnings (OTE) number. This number reflects what a rep can make if they hit their quota each month.
Step 4: Choose a Type of Plan
Once you have an OTE, you need to decide what type of commission plan you want to use and how much more a rep can be paid for exceeding quota.
Step 5: Set Targets
After deciding on the type of commission plan and On Target Earnings, you need to set target sales, better known as quotas. Since there can be variance week to week when it comes to sales, these numbers are generally set monthly. It can be hard to know where to start when it comes to setting target numbers for a sales team; here is one source of guidance on how to set targets for a sales team.
Questions You’ve Asked Us About Commission Plans
Are commission plans based on gross or net sales?
Commissions are based on gross sales: the total sales unadjusted for the costs related to generating those sales.
Can a business offer various types of commission plans?
Yes. It is common for both inbound and outbound sales reps to work under different kinds of commission plans.
Who within a company should be part of creating a commission plan?
Commission plans should be created by the executive team, including the VP of Sales or Director of Sales, as they will understand the needs of the company, the company’s budget, and what will be realistic for salespeople to attain.
Tanner has over 4 years of HR professional experience in various fields of HR. He has experience in hiring, recruiting, employment law, unemployment, onboarding, outboarding, and training to name a few. Most of his experience comes from working in the Professional Employer and Staffing Industries. He has a passion for putting people in the best position to succeed and really tries to understand the different backgrounds people come from.