Any salesperson will tell you that when they’re looking for new opportunities or considering their current job - that their compensation is one of the most important factors to them.
As a sales team leader, you already know how important compensation is when attracting and retaining talent on your sales team.
That's why getting your organization's sales compensation right is crucial to your success - you want to attract the best talent to join your team and for your current employees to stay with your company long-term.
However, sales compensation can be really tricky to get right. Should you pay sales commission or have a higher base salary?
It’s often the case that salespeople can spot and work around loopholes in your pay and commission structure, so you need to get the balance right in order to motivate the team long term and stay profitable.
Commission versus target-based plans
Your company’s sales compensation plan should achieve three important things.
- Encourage positive behaviors on the team
- Set expectations and standards for compensation
- Drive results to achieve your organizational goals.
The ideal structure of your sales compensation plan will depend on your resources and goals.
A company might offer a higher base salary, while another might prioritize commission based on their budget, business structure, employee needs, and team targets.
Your sales compensation plan, whether you choose commission structures or not, needs to consider the personal situation of every sales team member and their target accounts.
The salesperson’s role, experience, length of the sales cycle, and the type of deals they engage in will all influence their ideal compensation structure.
Here are some other factors to consider while thinking about your sales compensation plan:
- What’s your industry like? High growth or maturing?
- What’s your margin per deal? How much can you afford to pay in commission?
- What are living costs like in your area?
- How does your company culture affect sales plans?
- What are your competitors paying?
Sales compensation structures: 5 examples
- Salary-only compensation
- Commission-only compensation
- Target plan
- Base- salary plus commission
- Base-salary plus bonus
Here’s a deeper dive into these 5 sales compensation structures.
1. Salary-only compensation plan
With a salary-only structure, the employment contract with your salespeople determines their annual salary. This is agreed in advance of the contract being signed and does not change, no matter how much or little they sell.
Having set take-home earnings provides consistency for people, but it’s very uncommon to have a salary-only compensation plan for sales teams. That’s because, without performance-related pay - such as commissions and bonuses, salespeople are usually less motivated to go the extra mile.
After they've hit their monthly quota, there's no incentive or reason for the salesperson to continue driving sales - they’ll just save potential customers for their next quota - so they often take work at a slower pace.
2. Commission-only compensation plan
Having a commission-only structure is otherwise known as performance-related pay.
This means you only pay sales reps for their performance.
If they drive $100k in business during a month and their commission percentage is 20%, then they take home $20k as their pay that month.
If they don't sell anything during the month, their pay is $0.
Commission-only plans are very low risk for the employer, as you only pay your sales team if they succeed and drive revenue for your business. If they achieve nothing, you don’t have any salaries to cover without any revenue.
Commission is also motivating to salespeople as you give them the freedom to earn as much money as they can.
However, commission-only plans can make it challenging to forecast your expenses and can also be very stressful for your team - leading to high turnover and burnout.
3. Target plan
A target plan requires you to pay your sales team when they reach specific targets or milestones. For example, you might pay $2,000 for every new customer or 10% of upsell and cross-sell revenue that a salesperson delivers.
Target Plans are easy for sales reps to grasp and can typically drive good results for companies that implement them because the output is directly tied to salary, so reps are usually highly motivated to do well.
However, you will need to strategically consider what's best for the overall goals and objectives of your company when determining the commission and targets you set.
If, for example, you're trying to drive the sales of a certain product line or drive a promotion, then you'll need to adjust your compensation and targets for these initiatives in order to motivate your sales team to prioritize them.
4. Base salary plus commission plan
Now we’ve hit the most common sales compensation pay structure, which is the base salary plus commission plan.
This compensation structure provides your sales team with a fixed base salary as well as the opportunity to earn a commission.
It’s the best of both worlds as your team gets the security of a steady income with the economic incentive to sell.
This plan is ideal for most businesses because you benefit from greater clarity into your expenses (since there's less variability) and the opportunity to hire highly motivated, competitive salespeople.
Salaried staff may also then perform some non-selling tasks such as training new team members and taking part in the training. This is also a great way to ensure your sales team is a part of your overall company culture.
In this plan, the commission percentage is lower because of the base salary and the industry standard is 60:40 — meaning 60% fixed to 40% variable. A less aggressive ratio (think 70:30 or 75:25) is common when reps are required to teach the prospect because they're most likely selling a highly complex or technical product.
5. Base salary plus bonus
Awarding bonuses as well as paying a base salary is another popular compensation structure for businesses. This approach offers a super high level of financial predictability, doesn’t come with the high expense of commission payments, and still motivates your reps to close sales
For example, you might pay a $40k base salary and a $20k bonus for selling X target per year.
It’s important not to set targets too high, as this can demotivate salespeople as they feel they are unobtainable.
It can also be more rewarding to receive bonuses throughout the year, in order to keep motivation levels high.
Which of these sales compensation structures will you choose for your business?
How to design an effective sales compensation plan
Setting clear and realistic objectives:
Setting clear and realistic objectives is a crucial step in designing an effective sales compensation plan. By clearly defining the objectives of the plan, you provide a sense of direction and purpose for the sales team. It is important to align these objectives with the overall business goals and sales strategy to ensure synergy across the organization.
When setting objectives, it is recommended to follow the SMART principle: specific, measurable, attainable, relevant, and time-bound. Specific objectives provide clarity, while measurable objectives allow for tracking and evaluation of progress. Objectives should also be attainable, striking a balance between being challenging and achievable. Relevance ensures that objectives directly contribute to the desired outcomes, and time-bound objectives establish a sense of urgency and focus.
Furthermore, effective communication of objectives is essential to ensure that everyone understands what is expected and how their efforts contribute to the overall success of the company. Transparent communication fosters a sense of clarity, aligns expectations, and promotes engagement among sales representatives.
Establishing performance metrics and targets:
Performance metrics and targets serve as the foundation for measuring sales performance and determining the success of the compensation plan. It is crucial to identify key performance indicators (KPIs) that directly align with the objectives set in the previous step. These metrics should be meaningful, actionable, and relevant to the desired sales outcomes.
Consider metrics such as revenue, profit, customer acquisition, market share, or specific product or service targets. Each metric should be chosen based on its ability to reflect the performance of sales representatives and their impact on the organization's overall success.
Setting targets for these metrics is another critical aspect of designing an effective plan. Targets should be challenging yet attainable, taking into account historical data, market conditions, and the capabilities of the sales team. Fair and motivating targets provide a clear incentive for sales representatives to strive for excellence and contribute to the overall success of the company.
Regularly communicating and reinforcing performance metrics and targets to the sales team is important for maintaining focus, accountability, and transparency. By providing ongoing feedback and updates on performance, you create a culture of continuous improvement and encourage a results-oriented mindset.
Balancing risk and reward:
Balancing risk and reward is a key consideration in designing a sales compensation plan. The goal is to motivate sales representatives to perform at their best while managing the financial risks for the company.
To strike the right balance, it is essential to determine the appropriate mix of fixed and variable components in the compensation plan. Factors such as industry standards, sales cycle length, and revenue predictability play a role in making this determination. Offering competitive base salaries provides stability and attracts top sales talent, while the variable component, such as commissions or bonuses, provides meaningful incentives for exceptional performance.
Designing the variable component to reward desired behaviors and outcomes is crucial. It should be structured in a way that encourages sales representatives to focus on activities and results that align with the company's objectives. This can include tiered commission structures or performance tiers, where higher levels of performance are rewarded with increased compensation. Such structures promote continuous improvement and motivate sales representatives to exceed expectations.
Ongoing evaluation and adjustments:
Designing an effective sales compensation plan is an iterative process that requires ongoing evaluation and adjustments. Regularly assessing the plan's effectiveness and impact against the established objectives and performance metrics is essential for identifying areas of improvement.
Collecting feedback from sales representatives and sales managers provides valuable insights into the strengths and weaknesses of the plan. This feedback can help uncover potential issues, areas where the plan may be falling short, or opportunities for optimization.
Analyzing sales data and performance results is also crucial for evaluating the plan's effectiveness. By monitoring sales performance and comparing it to the established targets, you can identify trends, patterns, and areas of underperformance or overachievement. This analysis informs decision-making and helps determine necessary adjustments to the plan.
Additionally, conducting periodic market research and benchmarking studies can provide valuable insights into industry trends and competitor practices. Staying informed about the evolving sales landscape ensures that your compensation plan remains competitive and relevant.
Continuous communication of updates and changes to the sales team is vital throughout this process. Transparency and buy-in from the sales representatives foster a sense of trust and engagement. By involving the sales team in the evaluation and adjustment processes, you can tap into their expertise and gather valuable input to enhance the plan's effectiveness.
You can also help your sales team close more deals by equipping them with an eSignature solution like Signeasy. As a seamless and quick way to get contracts signed by prospects and minimizing the need for paper - Signeasy is an awesome tool to help your sales team grow and prosper.