Sales Compensation Plan

Sales compensation plan is the combination of base salary, commission, and incentives that constitute a sales representative’s earnings. They are designed in such a way as to drive performance and increase revenue. There are many different ways to structure a sales compensation plan to suit different organizational and employee needs.

Sales compensation plans are important.  They are key to encouraging the positive behaviours in your staff that are necessary to achieve your overall organizational goals and results.

Purpose

The purpose of a sales compensation plan is to encourage positive behaviors across your team, set expectations and standards for compensation for all salespeople, and drive results to achieve overall team and organizational goals.

Structure

The structure of a sales compensation plan varies by business and is typically based on team organization, resources, and goals. For example, one sales organization might offer a higher base salary, while another might prioritize commission based on their budget, business structure, employee needs, and team targets.

There should be a compensation plan for every member of the sales team based on their role, experience, length of the sales cycle, and the type of deals they engage in.

Structuring Sales Compensation Plans

As mentioned above, there is no one-size-fits-all structure when it comes to sales compensation. As well as considering the factors specific to individual reps, business owners will also need to consider aspects such as industry, company size, territories, and more.

Since straight salary plans aren’t very common, they won’t be discussed here, but they do have a place in some industries where direct sales may be prohibited.

Different Ways to Structure Sales Compensation Plans

1.      Revenue/Quota Based Plan

A popular structure for many organizations, in a revenue/quota based sales compensation plan, a lower base salary is used alongside a commission rate based on the sales volume/percentage of quota achieved over the previous sales period. Setting quotas is a strong motivator as reps will track their sales throughout the period against their targets.

2.   Straight Salary

Straight salary sales compensation plans aren’t very common, but they do have a place in some organizations. With this type of structure, you’d pay your sales people a straight albeit competitive salary like all of your other employees, and nothing else. No bonuses, no commissions, and few, if any, sales incentives.

This type of compensation plan is most often used when the industry you operate within prohibits direct sales, when sales people work as part of small groups or teams and all contributions are equal, when your sales team is relatively small.

3.      Profit-Based Plan

The difference between a revenue and a profit-based sales compensation plan is that in the latter, commission rates will change as profit margin levels increase. Therefore the greater the profit, the greater the amount of commission.

But on the other hand, in situations where the profit margin is slim, the rep’s commission will be similarly small, and this may be demotivating. This type of plan works well in the services sector where there are no fixed costs.

4.      Balanced Plans

In balanced plans, sales compensation is calculated through a combination of revenue, profit, and other variables, such as target number of new clients or upsells.

5.   Salary plus Commission

Salary plus commission sales compensation plans are possibly the most common plans used today. They’re structured in a way that sales people receive a lower base salary along with commission pay that makes up the majority of the total compensation.

Organizations use salary plus commission sales compensation plans when there are opportunities to support all sales people on this structure and when there are proper metrics in place for tracking sales to ensure that the splits are fair and accurate.

6.   Commission Only

Commission only sales compensation plans are exactly what they sound like—you pay your sales people for the sales they bring in and nothing else. There is no guarantee of income.

These types of plans are easier to administer than salary plus commission and provide better value for your money paid as they are based solely on sales achieved. They also tend to attract fewer candidates.

7.   Territory Volume

Territory volume sales compensation plans are most often used in team-based corporate cultures. They work through the calculation of territory volume at the end a compensation period.

8.      Profit Margin
Last but not least, we have profit margin sales compensation plans. These plans compensate sales people based on how well the company is performing. Profit margin plans are most often used by startups that have a lack of liquidity.

Sales Reference