A Guide To Improving Sales Compensation Plans

Improving Sales Compensation Plans

Improving compensation plans can help inspire your sales team. As a great sales leader, your key performance indicators include sales volume, sales revenue, profitability, return on investment, market penetration and market share. You must therefore provide your sales team with the resources necessary to achieve these objectives. This includes financial resources. Is it possible your sales compensation plans could be uninspiring to your sales team without you even knowing it?

Also read:

What is Sales Compensation?

Sales compensation is simply the amount of money a business pays a salesperson. In addition, sales compensation usually depends on the company but will generally offer a base salary, commissions and further incentives such as luxury trips.

What is a sales compensation plan?

A sales compensation plan is your strategy to propel and motivate your sales team. Thereby hopefully increasing their performance, and consequently, your revenue. It’s imperative to note that you should have an individual sales compensation plan for each sales team employee.

To do this, you can complete a comprehensive job analysis and revisit their job descriptions regularly to ensure their accuracy and relevance. Your sales team must be appraised and compensated according to clearly defined (and clearly understood) objectives. Remember that improving your compensation plans could help inspire your sales team and improve customer loyalty.

7 Sales Compensation Plan Examples

Not only is commission an excellent incentive for your sales reps to sell more, but it also helps you retain the best talent with competitive commission packages, which could actually end up saving you money in the long term. However, there are several compensation plan packages that you can offer your team; we weigh up the effectiveness of their features below:

1. Commission Only

In a commission-only sales compensation plan, sales reps only earn an income directly related to their sales. Therefore this structure allows sales reps to be in control of their success. Many companies don’t limit how much commission reps can earn, meaning that the sky truly is the limit for those who work hard enough. Therefore a commission-only sales compensation plan is great for sales reps looking for a high-earning potential.

Furthermore, this structure offers the fastest route to market. For this reason, commission-only compensation plans are most desirable for startups. However, companies need to consider that commission-only sales reps are actually independent contractors and aren’t actually in-house employees.

Industry average sales rep commission rates

Calculating your sales rep’s commission rate is entirely dependent on your business. However, typically if companies provide a generous base salary, they’re more likely to offer a lower commission rate of around 5%. In comparison, sales reps with a lower base salary can find themselves on a commission rate of anywhere between 20 and 40%. 

Overall, the most significant factor in determining how competitive your commission rate is your company’s industry. So, According to the BLS Occupational Employment Statistics (OES) survey, below is industry-specific average sales rep commission rates for 2012:

  • Engineering: $112,780
  • Securities, Commodities, and Financial Services: $93,090
  • Wholesale and Manufacturing, Technical and Scientific Products: $92,980
  • Insurance: $67,780
  • Advertising: $64,660
  • Real Estate: $62,060
  • Retail: $29,360

2. Base Salary Only

In a salary-only sales compensation plan, your sales reps have a fixed income that is agreed upon ahead of time, therefore it doesn’t matter how much your sales reps sell. Naturally, this doesn’t motivate your sales reps to push past their sales quota and for this reason, the use of this sales compensation plan is fairly uncommon in sales teams.

More so, a lot of salespeople enjoy the thrill of pressure, high stakes and the competitiveness of earning a commission. By taking these elements away, you may find that your top-performing sales reps are looking elsewhere for that commission.

Ultimately, base salary-only sales compensation plans are useful for those looking to make simple calculations about expenses and hiring needs. However, they may not be for those looking to reach new heights with energetic, motivated and passionate salespeople.

3. Tiered Commission

A tiered commission sales compensation plan is for companies that are seeking a great way to motivate sales reps while simultaneously rewarding top-performers. Therefore, in this sales compensation plan, once sales reps have closed or won a specific amount of deals, the sales reps commission rate increases. For example, sales reps could earn a 4% commission on all of their sales up to $10,000. However, once they pass this – they can earn an extra 6% commission on all other sales during this period.

4. Base Salary & Commission

However, this sales compensation plan’s base salary isn’t a sustainable income for most sales reps, therefore meaning that they still heavily rely on commission, spurring their motivation. On the other hand, the base salary acts as something to fall back on if there’s a change in the market and sales slows down.

5. Revenue Commission

Regardless of whether you choose to opt for a commission-only or base salary with commission – you’re going to need to set your commission rates. For this reason, the revenue commission model is a popular choice for companies who are looking to sell products with set price points. Furthermore, companies use this method to grow their market share or even enter new territories because they’re not as focused on profit as they are on larger business goals. So, for an example of commission revenue, if your sales rep sells a $1,000 product or service, they could get a 10% commission.

6. Gross Margin Commission Model

Now, a variation of the commission revenue model is the Gross Margin commission model. It’s very similar to the model mentioned above. However, it considers the expenses related to the products you sell. Rather than earn a percentage of the revenue, sales reps can earn a portion of the profit.

Furthermore, this is a favourable model because it ensures every sale maintains the company’s bottom line by stopping sales reps who prefer to offer discounts to close a quick deal.

7. Commission Draw

A commission draw model contains elements of the commission-only and the base salary pay plus commission structures. So, how does it work? All sales reps received a set guaranteed salary every month – regardless of how much they sell.

However, suppose they earn less in commissions than the draw amount. In that case, they’ll keep their commission and the difference between the draw amount and the commission. Furthermore, these draw payments are in advance and must be repaid by the sales rep.

Still, considering that it takes some time for sales reps to be fully productive, in the meantime, this allowance gives them some assurance.

Overall, this commission model is complex for everyone involved, especially when tracking and predicting earnings. Furthermore, if your sales reps have several bad sales periods – well, they’re now in debt to you.

How to design and set an effective Sales Compensation Plan

When designing and establishing compensation plans, most organisations look at either fixed salary, commission, or combination plans. That seems easy enough (or does it?) But how do you determine what compensation plan would truly inspire your sales team?

Sometimes it helps to differentiate between existing accounts and new accounts. However, it’s important to compare the value of each sale dollar produced from existing accounts to new accounts. You could also look at the effort needed to maintain existing customers versus acquiring new customers. Do your existing accounts essentially take care of themselves, or are they high maintenance?

Overall, discover how to create and set an effective sales compensation plan below:

1) Determine how to balance base salary and variable earnings

Settling on a balance between base salary and commission is a tricky task. For example, if your base salary is too low, reps likely won’t be motivated enough and will ultimately leave the organisation entirely.

Yet, if the base salary is too high relative to variable earnings, reps won’t be hungry for even meeting, let alone quota. As a result, finding the right balance depends on the length of your sales cycle.

Companies with short sales cycles often do well with a lower base salary and high variable earnings. In contrast, larger companies with longer, complex sales cycles, like most SaaS companies, will find that a higher base salary is necessary to retain hard-working reps.

2) Research industry salaries

Not only does it help you remain competitive, but you get a good idea of what other reps in your industry are making. Yet, to retain reps, you should offer salaries comparable to what your competition offers. For this reason, you’ll want to look at salary averages not only for the national level but for your region. You can easily use Glassdoor to research average sales rep salaries in your area. 

3) Identify the factors that impact variable earnings

Sales reps will prioritise their time based on how you structure their sales compensation plans. So you must prioritise the tasks that make the most sense for your sales model. For example, many companies incentivise revenue-generating activities and incorporate them as part of the compensation plan. These factors and activities can include:

  • Meetings scheduled
  • Meetings completed
  • Meeting with qualified prospect completed
  • Opportunities created
  • Number of deals
  • Revenue generated

Overall, you want to keep it simple. For this reason, don’t choose more than two factors to focus on, with one being revenue. Select the other factor based on what’s most important for your business’ revenue generation

4) Consider the range

Now you’ve identified the factors that impact earnings. You must define what different levels of achievement mean in your company. You’ll want to consider a ballpark figure for each level. For example:

  • What do the numbers look like for top performers? 
  • Mid-performers? 
  • Poor formers? 

From this point, work backwards to identify an effective sales compensation plan, looking at historical data to help inform your decision making.

5) Run the numbers

You want to make sure your potential compensation plan is viable, so using real (past) data only makes sense for running the numbers. Use your comparison to determine whether what you’re offering is competitive enough in your industry’s job market.

6) Build in growth opportunities

Rewarding your hardworking sales reps appropriately is the key to any compensation plan. If you don’t show your top-performers their worth, they’ll likely leave. As a result, you’ll have to start over again with hiring, training and getting another rep up to standard, which isn’t cost-effective.

If you want your sales team to exceed expectations, you can elect to offer a higher commission rate once specific revenue targets have been met.

7) Summarise the compensation plan

Lastly, formalise your compensation plan in a shareable document. Make sure that the document is easy to read and understand by anyone who reads it. Too many sales compensation plans fail because they’re simply too complex. For instance, it’s probably too difficult for the average reader if it exceeds a single page.

The importance of a well-considered sales compensation plan

Great salespeople who are uninspired seek out new employers, and since they’re great at building, developing and nurturing relationships, they often take “their” accounts with them. One way to help inspire your sales team is to establish compensation plans commensurate with the effort required to achieve the organization’s objectives. 

What’s the most common sales compensation plan?

So while you’re still trying to feel out how your sales compensation plans should be structured, take note of this statistic. According to the Harvard Business Review, the most common structure is a 60% base salary in the US and a 40% variable.

How to set sales quotas

Sales teams can’t function without a sales quota; they are the basis of everything that a sales team does. That’s why they’re tied so closely to compensation – because you need to reward your sales reps for reaching benchmarks and milestones. Not sure how to set your sales quota? Read on to find out below.

What is a sales quota?

A sales quota is a financial goal that sales reps or teams need to reach within a specific time period, usually once a month or quarter. These are the goals that you are directly compensating for.

What’s the difference between sales quotas and sales goals?

At the outset, the two seem very similar, but they are not. You see, sales quotas are the series of actions taken by salespeople to achieve a specific goal. That’s why it’s common to have sales quotas directly linked to compensation plans to reward achievements. 

Types of sales quotas

Small companies often just set sales quotas based on selling a single product or service at a fixed price. For example, how many units a sales rep must sell every month. However, there are plenty of variations that contain their benefits. Read on below to discover a sales quota that works for you:

1. Profit Quota

A profit quota ensures that sales representatives have to earn a specific revenue for the company by selling products or services for a defined amount of money. This type of sales quota is common among companies that have several target markets and price points.

2. Activity Quota

Activity sales quotas are dependent on the actions or milestones that a salesperson needs to make and reach during a particular period—for example, making a certain number of calls, emails or visiting clients. The purpose of this sales quota is to improve sales and monitor the performance of sales reps.

3. Volume Quota

Volume quotas reward sales reps for the number of deals or qualified leads they generate – regardless of deal size.

4. Forecast Quota

Forecast sales quotas are dependent on the sales that a manager and their team achieve in a particular territory. Therefore, the forecast is determined by the historical performance of the sales team. For this reason, forecast quotas enable leaders to assess where influences on the company’s revenue exist – and how this will affect them.

5. Combination Quota

Combination sales quotas are a mix of strategies that are utilised during the lead up to the close of sales. However, they’re also particularly popular among sales managers who want to improve a variety of skills in their sales team.

Also read: 6 Types Of Sales Quotas That Help Sales Teams Win MORE Deals

How to set a sales quota

With only 60% of sales reps meeting their quotas – you must set a sales quota that will motivate and incentivise your sales team to reach or even exceed targets. We’ll show you how below: 

Choose a sales quota strategy

The sales quota strategy you choose to implement depends entirely on your goals – and industry. So it’s important to first consider which you will use because ultimately this will track and affect your sales team’s performance

Decide on a review period

Usually, your review period will depend on the length of your sales cycle. However, typically these are traditionally either weekly, monthly or quarterly or a combination of all three. Different review periods have their benefits. For instance, short reviews are great for catching problems and taking suitable measures to fix that. Whereas more extended review periods allow sales reps to make up for lost deals and get that last close in.

Set expectations

Not only do salespeople feel more engaged when they know what their priorities are and what they‘re assessed on (KPIs), but without clear expectations, staff are left confused, unmotivated and distressed. So ensure you set expectations for your sales team so that they can either reach the bar – or raise it.

Current median sales pay by industry (source):

  • Wholesale and Manufacturing Sales Representatives: $61,660
  • Insurance Sales Agents: $50,600
  • Advertising Sales Agents: $51,740
  • Real Estate Brokers and Sales Agents: $50,300
  • Securities, Commodities, and Financial Services Sales Agents: $64,120
  • Door-to-door Sales Workers, News and Street Vendors, and Related Workers: $26,430
  • All other: $33,200

Other perks and benefits to consider

While considering your reps’ sales compensation plan, it’s also helpful to note that you can also create value for your team with other incentives. Your hardworking team sure won’t say no to healthcare plans, retirement plans, and paid time off!

If you want to go the extra mile for your team, you can also provide essentials such as phone and data plan reimbursement. And even a computer and data connection.

Organizations are beginning to move away from fixed prize giveaways and gift cards and moving toward online points-based compensation and incentives catalogues. These catalogues could include tickets to concerts and sporting events, travel packages and even products on Amazon.com.

Gain essential skills to cultivate high-performance teams

Leading a team to new heights requires navigating uncharted territory and constantly inspiring them to reach their maximum potential.

SOCO’s® Management Mastery Training supports managers in developing the skills they need to bring out the best of their team, whether they’re working in the office, at home, or in a blended environment.

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