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Creating a strong sales compensation plan ensures that the organization is able to plan for and manage a successful sales strategy as well as attract and retain motivated sales professionals who directly contribute to the profitability of the company.
What Is Sales Compensation?
Sales Compensation is a pay-for-performance strategy that aligns with an organization’s business objectives and profitability. The most successful sales compensation plan is easy to manage and easy for employees to understand.
Sales compensation plans use multiple variables which differentiates sales compensation from other types of compensation plans.
How Sales Is Compensated Differently from Other Employees
Forms of pay-for-performance may be used in other compensation plans. But pay-for-performance is the primary objective of sales compensation. The strategy is to motivate salespeople to meet defined goals that impact the organization’s bottom line.
Why It’s Important to Get It Right
Sales compensation plans can be complex for HR to manage and for employees to understand. Incentives, especially when they are complicated, must be clearly communicated and monitored by HR to ensure that the plan achieves the stated business goals. Although that should be good practice with any strategy, many sales compensation plans fail because important basics are overlooked.
There are 6 critical points to consider as you build a successful sales compensation plan:
- Measurements: Some plans fail because key performance indicators (KPIs) are not clearly defined or aligned with variable pay. In some cases, sales employees are unclear about the expectations.
- Competition: Successful salespeople are often competitive by nature and motivated by the potential of earning higher pay and rewards. With this in mind, your plan must be competitive with other businesses in your field in order to attract and retain the best salespeople.
- Fair and equitable: Compensation structures should measure and reward good performance and correct poor performance. There’s nothing more demotivating for successful performers than to see poor performers rewarded at the same level.
- Strong incentives: Retaining top sales talent can be the key to record quarters and expanded markets. Have a plan in place to keep compensation competitive so your Sales team sticks with you no matter what. According to a report by HubSpot, the average turnover rate for sales employees was almost three times higher (35% in 2019), than the more standard 13% for all other industries. Building a strong sales compensation plan can help to retain your best salespeople.
- Evaluation: Regular review of your plan ensures that it is still aligned with business objectives and provides the opportunity to make adjustments as necessary and avoid costly issues.
- Budget: Although sales compensation plans can be costly to create and maintain, they can also make it easier to plan your budget with predictable and measurable sales goals in place.
As we’ve seen, sales compensation plans require more variables and incentives than standard compensation plans, making it a business imperative that they drive the behavior necessary to positively impact the company’s bottom line.
What Makes Up Sales Compensation
There are many ways to structure a sales compensation plan. Some are more successful than others, but the design depends on your organization’s unique needs.
The most common plans usually include the following key elements:
1. Base Salary
The base salary is typically an annualized amount paid on a weekly, biweekly, or monthly basis prior to payment of bonuses, commissions, incentives or benefits.
A commission is an incentive-based payment based on meeting a specific sales objective or on the percentage of sales made by the employee. Commissions are considered variable pay.
3. Sales Bonus
A sales bonus is an incentive payment that may be paid on a one-time or scheduled basis (monthly, quarterly, annually) when an employee meets or exceeds a goal or a predefined sales quota. Employees may also receive bonuses for activities not directly correlated to sales, such as customer management or retention strategies.
4. Non-monetary Incentives
In addition to monetary payments or incentives, sales compensation plans may include a variety of other incentives such as trips or gifts.
Types of Sales Compensation Plans
Building on the core elements of a base salary, commission, sales bonus, and non-monetary incentives you will be well-equipped to create a sales compensation plan that fits your organization’s goals. Next, we’ll explore some of the most common types of plans to help get you started.
Base Salary + Commission
Base salary and commission is the most common type of sales compensation plan because it provides the best of two options. The salesperson receives a regular and stable source of income while also receiving incentives.
While good sales people are motivated by extrinsic rewards of compensation, great salespeople have intrinsic motivations of achieving and surpassing goals.
However, it also introduces some unknowns into the employee’s compensation expectations. There can be many reasons why an employee is unable to meet the goals that are required to earn the commission such as a downturn in business, the loss of a significant client, or events in their life that negatively impact their ability to meet expectations.
Base Salary + Bonus
The base salary and bonus plan is a hybrid of the salary + commission plan. It is often used to compensate for the lack of high commissions by offering a higher base salary from the start.
It can be attractive in the right circumstances. The bonus portion of the plan should be clearly defined and communicated to the employee so that expectations are understood. Tying the bonus to a measurable goal ensures that the employee has some control over receiving it. It may have a larger scope than commissions as bonuses aren’t always tied directly to the amount of sales made.
A commission only plan can work very well in some circumstances. The employer potentially saves on compensation costs if the employee fails to make their quotas. And it can be attractive to highly driven salespeople due to a potentially higher payout than other variable pay plans.
But it’s also one of the riskier plans for an employee. There is no guarantee of pay which makes it difficult to maintain a standard of living, which means the employee is betting their livelihood on all conditions being favorable to meet their goals and receive high payouts.
A salary only compensation plan is uncommon in the sales field. It provides some certainty for employers in predicting costs and number of sales employees needed and can be attractive to employees due to the stable income provided by a salary.
However, since it doesn’t provide the typical performance incentives, it’s not a true pay-for-performance plan.
How to Develop and Roll Out a Sales Compensation Plan
Now that you understand the most common types of sales compensation plans, it’s important to remember that while plans can be somewhat complex, they must be easily understood, manageable, and measurable.
Building a compensation plan for your sales team involves research and planning, as well as collaboration with leadership, finance, and sales management. This collaboration will help to identify relevant business objectives and growth strategies. The end result is a plan that aligns with the business goals.
Depending on a variety of factors, you may design the plan in-house or consult with a sales compensation specialist and external resources. We’ve identified the necessary 6 steps to consider if you decide to create the plan with internal resources.
Step 1: Job Design
The Global Sales Operations Association recommends beginning with job design. The success of the compensation plan depends heavily on the alignment of the job design with sales goals that will ultimately impact the overall profitability of the company.
Create new sales job descriptions or review your current ones to ensure the right match between design and compensation before moving on to the next step. Once you’ve determined that the job design supports the sales strategy, make the business case to ensure support and alignment to the shared objectives.
Step 2: Benchmarking
Benchmarking is a great resource when designing sales compensation plans. However, it’s important to remember that it is not a “one size fits all” solution.
As we’ve discussed, there are multiple variables involved in creating the plan, including:
- Size of the organization
- Industry, type and cost of products, and resulting sales cycle
- Size and type of customer organizations
- Primary and secondary business objectives
- Company culture
- Trends is sales compensation and business in general
It’s always a good idea to see what the competition is doing and compare it to your objectives, customizing it afterwards to fit your organization.
Step 3: Determine the Type of Compensation
There is no one right compensation plan that fits all companies or even all companies like yours. Your organization, location, culture, and people are unique. So, your sales compensation should be designed for your reality.
As we’ve reviewed, there are several common structures that can work well. But it’s also important to keep in mind that you may need to build some flexibility within the program. People are motivated in more than one way and that can change over time depending on personal circumstances. Determining what motivates your sales team will provide useful information about the right mix of strategies.
Review the possibilities and, once you’ve determined eligibility (see Step 4), test it out. It may take a few tries to get it right but if the result is a strong motivator that has a significant positive impact on results, it’s a win-win.
Step 4: Eligibility
In general, jobs that are eligible for the sales compensation structure have a direct impact on the company’s revenue. However, it’s also common for the following groups to receive some type of variable compensation such as bonuses or a percentage of sales..
- Individual members of a team
- Teams as a whole
- Employees in the sales department who also train or have additional administrative duties
- Employees who are involved with strategies related to customer satisfaction, new customer sourcing, or related but less direct sales objectives
Step 5: Document and Communicate
These last two steps might seem obvious but, unfortunately, the importance is not always well-understood or practiced. As we’ve identified, sales compensation plans involve more complexity in design, tracking, and measuring than compensation plans for other types of roles.
Managing your plan will be much easier if it is clearly and concisely written with well-defined parameters and expectations. The second piece is to communicate the plan clearly and receive feedback from your sales teams to ensure that they understand, embrace, and are motivated by it.
Surprisingly (or not), organizations don’t always get this part right. It’s not a “fix it and forget it” strategy. It’s a dynamic plan that must adapt to changing realities or needs.
Step 6: Evaluate
The seemingly logical follow-up to Step 4 is evaluating the plan as often as necessary, especially in the beginning and again at predefined intervals after rollout. Check in with employees on a casual but frequent basis to gauge their understanding and acceptance of the plan. Build in more formal monthly, quarterly, and annual reviews with sales management.
Continue to monitor how well your sales team is satisfied with the compensation plan, and make adjustments as needed. Frequent evaluation and refinement of your plan will contribute to its overall success. Keep it fresh by reviewing current trends and adapting to your organizational needs
Congratulations! You have now learned the ins-and-outs of sales compensation, its key elements, and how to build an effective plan that is clearly aligned with business goals. These well thought-out plans will help to motivate employees to meet and exceed expectations, which in turn will contribute to the growth and culture of your business for years to come.
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