Sales Compensation Plans

Savita Mahendru

Asst Lecturer in Commerce�HRMMV

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What is a Sales Compensation Plan?

• Compensation planning is a function of sales performance management to measure, manage and optimize sales results. A compensation plan is a set of rules and procedures for paying employees. The plan states how much a sales employee will earn and how that amount is determined.
• All sales compensation plans have a common goal to motivate employees to do their jobs well and to reward them when they do well. The success of a company lies in the hands of its sales team. So, you must have a sound compensation plan in place to help your sales force perform at their best.

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What are the Four Basic Types of Compensation Plans?

Sales force compensation plans are about making the job worthwhile for everyone involved. Most sales force compensation plans fall into one of four basic categories:

• Salary: You pay sales employees a fixed amount for their work, regardless of the number of hours worked or the quality of their performance.
• Hourly: You pay the employees based on the number of hours they work each week or month.
• Commission: Employees earn commission based on sales volume or revenue they generate.
• Bonus: You issue bonuses rewarding employees for meeting company goals or exceeding expectations during a specific period (e.g., year-end bonuses).

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Why Do You Need a Compensation Plan?

There are many reasons why companies need a compensation plan. Some of them are:

• Business planning

Sales force compensation plans help the company determine what employees should be paid for doing their job. It’s critical to have a system in place to enable the company to determine what it can afford to pay its employees. Managers can use this information when hiring, promoting, or making changes to their sales force compensation package year after year.

• Performance improvement

The right sales compensation models can fast-track the alignment of the interests of management and employees. Salespeople must have incentives to perform well, but they also need to be rewarded fairly if they do so. 

A fair compensation plan will help you create a positive culture where people work hard to achieve their goals while encouraging collaboration and teamwork.

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• Creating a culture of loyalty and satisfaction

Your culture is one of the most important aspects of your company. How you pay your employees can dictate their level of dedication, as well as their personal motivation and passion for their work. A well-structured compensation plan for sales managers can help to attract top talent — which means happier employees who are less likely to quit.

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How to Pay Your Sales Force: 9 Types of Compensation Plans to Implement

Salespeople are a unique breed of employees. They can be high achievers and highly motivated, but they also have a reputation for being unpredictable and difficult to manage.

Many companies have found that they must pay salespeople differently than other employees to get the most out of them. Here are some tips on how to pay your sales reps:

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1. Commission

• Companies pay out commissions as a percentage of sales. A salesperson may receive other forms of compensation, such as bonuses or salary, but a typical sales commission is usually the primary form of payment. 
• How to pay a salesperson’s commission depends on your budget and the scope of their responsibilities, among other factors. You should compensate them accordingly if they’re responsible for selling multiple products or services and making cold calls.
• This compensation plan relates directly to performance; the better a salesperson performs, the more they will be paid. Commissions can motivate sales teams to do everything they can within reason to increase their sales figure. But it also means that they might neglect non-selling duties (like customer service) if they do not contribute as much directly toward increasing their incomes.

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2. Straight salary

• A straight salesperson salary is a fixed amount of money earned each month, regardless of sales volume. In this case, the company has established a base rate for all employees in the same position and then pays incentives as needed or desired by management or shareholders.
• This type of plan does not reward employees based on their performance. Rather it provides one fixed amount regardless if an employee has had a good or bad year (or quarter). The main benefit of this type of compensation is that it can be easier to budget for and plan your expenses and payroll.
• However, it also has some drawbacks that should be taken into consideration. For example, if you have employees who work harder than others, they may feel underpaid compared to their peers. A salary-only structure can create a negative environment within your company as well as cause some employees to look for new jobs elsewhere.

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3. Salary plus commission

• Salary plus commission compensation is a common sales compensation plan for sales teams. The basic idea behind this structure is that the salesperson receives a base salary plus a percentage of the total sale. With this compensation model, you can pay commissions on either net or gross revenue.
• When determining when to pay commissions on sales, it is important to consider how long your reps take to close deals. The longer it takes, the more you should consider paying monthly rather than quarterly or annually.
• Monthly commission plans give salespeople instant feedback on their performance and allow them to see how their income is affected by their own actions. 

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4. Base salary plus incentives

• Base salary plus incentives is a compensation plan that ties the salesperson’s pay to the base salary and incentives. The employee receives a base salary typically paid monthly or weekly. In addition to the base salary, they also receive incentives based on performance.
• Incentives are payments given when a goal has been met or exceeded. Incentives are forward-looking and guaranteed in how they are tied to a specific goal. You can calculate the incentive amount as a percentage of the employee’s base pay or a fixed dollar amount. In either case, it must tie directly to specific goals that you have previously established.
• For example, you pay a sales employee $100,000 yearly as their base salary. If they work hard and help your company hit its year-end goal of increasing revenue by 25%, for example, they receive an additional $10,000 at the end of the year.

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5. Bonus structures

• A bonus is an amount paid in addition to a regular salary or wage. You might be familiar with bonuses as part of your work life, but they can also be used as a sales compensation plan. Many companies use bonuses as part of their overall compensation program for salespeople and managers.
• Bonus plans typically pay out when the employee reaches a specific goal or milestone (like reaching a certain number of sales). Bonuses are different from incentives in that they are not guaranteed. Employers usually offer the reward in cash after salespeople achieve a goal instead of adding it to base salary and commissions.
• Bonuses increase the likelihood that employees will stick around longer because they have something to look forward to. However, creating a fair bonus structure for everyone on your team may prove to be challenging.

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6. Piece rate or piecework plans

• Piece rate or piecework plans are payment methods that pay salespersons an amount for each unit sold. Piecework replaced hourly rates early when most companies had moved from manual labor to mechanized assembly lines.
• Companies realized that paying workers by the hour was inefficient and encouraged them to take longer breaks or speed up their production line pace. Instead of paying them by the hour, some companies began paying their workers based on how many products they produced per shift or day.
• An example of a piece rate plan would be paying salespeople $10 for every widget they sell this month. This kind of plan may be more practical at trade shows where you have limited inventory control over what gets sold (thus making it difficult to predict exactly how much revenue will come in).

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7. Combination plans

A combination compensation plan offers a mix of base salary and monetary incentives. These plans can help reduce turnover, attract top talent, and reward performance. A combination plan typically combines two or more elements of different plans. Combination plans can include any combination of the following:

•  A base salary
•  A commission
•  A performance bonus
•  Incentives

Combination plans are more effective in sales and marketing jobs where you can meet employees’ needs for motivation by both financial rewards and recognition for milestones achieved.

It provides security for employees whose performance may vary from year to year. They still have something to fall back on if they have a bad year. They benefit from their base salary, bonus, and incentives or commissions if they have a good year.

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8. Profit-sharing plans

• Profit-sharing plans are practical; you need to reward sales employees for contributing to the company’s profitability. The idea behind a profit-sharing plan is that you pay a percentage of profits to your salespeople. If the company makes money, everyone gets paid more! If it loses money, nobody gets paid anything at all.
• The main advantage of a profit-sharing plan is that it rewards employees based on their contribution — instead of just their hours worked. However, it can create a lot of administrative work for employers, with many employees participating in the program.
• Payroll staff will need to keep track of everyone’s contributions and calculate how much each person should receive each quarter or year.

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9. Sales incentives

Incentives are an important part of your compensation plan. Incentives can be cash, but you can also use non-cash incentives, such as gift cards or event tickets, to recognize an employee’s contribution to the company.

Sales incentives are great ways to motivate salespeople who feel they have made a difference in your organization. You can give out these awards for various reasons:

• Achieving sales quotas
• Achieving performance goals
• Meeting customer service standards

Transparency is key here. Employees need to understand exactly how much money they will make based on their performance each month (or quarter). The goal is to ensure everyone stays motivated by seeing the fruits of their labor come through in real-time.

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Sales Compensation Terms to Know

• Sales compensation is the pay that a company’s salesperson receives. Although compensation differs between companies, it typically consists of elements such as a base salary, commission, and incentives designed to drive the specific performance of a sales organization.
• Before going deeper into the topic of sales compensation, we need to explain and define some main terms.

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Sales Quota

• A sales quota is a target set by the company or sales manager for sales reps to hit in a designated period — either individually or as a team. Typical time constraints for quotas are monthly, quarterly, and annually. This ensures targets are met throughout the year. Plus, short-term and longer-term results are both rewarded.
• It isn’t unusual for multiple quotas to apply to the same rep at the same time. Examples of these might include things like topline revenue, account growth, margins, retention, and sales by product, geography, and activity.

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What is On-target Earnings

• On-target earnings (OTE) provide salespeople with a realistic projection of what their total compensation for a position will be when they hit their goals and quotas. OTE typically includes the base salary and the anticipated commission resulting from closed deals.

What is a Sales Accelerator?

• A sales accelerator kicks in when a rep on the sales team hits a specific amount over their quota. This is enticing to most reps, giving them a sizeable boost to their commission check when they have a highly successful month or quarter. So, it’s important to be careful when setting accelerators in terms of your resources and budget.
• An example of a sales accelerator is when a salesperson hits 110% of their quota by the end of the month. If you wanted to highly incentivize them, you’d pay 130% of their commission to exceed their targets. This type of bonus can be based on monthly, quarterly, or annual sales targets.

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What are Sales Decelerators?

• Sales decelerators have the opposite impact of accelerators. They penalize underperforming reps by reducing their commission. A decelerator may activate when a salesperson hits between 50–95 percent of their quota. For example, if a rep only hits 70% of their quota, they may get no commission, or a reduced multiplier such as 0.5 instead of 1.0 may be used to calculate it.

What are Clawbacks?

• A clawback occurs when a customer churns before hitting a specific benchmark, such as discontinuing the use of your product or service within a given time period. It results in the sales rep not receiving their commission. This is common practice for subscription companies to maintain high customer retention.
• Clawbacks are designed to encourage salespeople to focus their time and efforts on the best prospects that will most benefit from the product or service. This is also often included in compensation plans for customer success teams to reward them for their retention efforts.

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What are Sales Performance Incentive Funds? What are Sales Contests?

• Sales performance incentive funds (SPIFs) or sales contests are used to incentivize high performance among salespeople.
• These tactics are often used to change or encourage specific behavior(s). Rewards may be monetary or non-monetary. Examples of these bonuses include things like a $500 cash prize to the first rep who closes ten deals of a certain product or a nice dinner for every team that increases their retention rate by a designated amount.
• SPIFs and contests should run for short time periods of one to four weeks. If they run longer, these tactics become less effective because reps lose the sense of urgency created by these programs.
• It’s also important to remember to limit how many contests run throughout the year. And be sure not to run ones encouraging conflicting behaviors at the same time. This can be counter-productive and reduce overall results.

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Why Is the Sales Compensation Plan Important?

• Selecting the sales compensation plan structure for the organization is a major decision. The chosen plan needs to inspire your sales reps to adopt the desired behaviors to achieve specific business goals while also remaining profitable.
• Sales Compensation plays an essential role in attracting and retaining top talent, especially when it comes to building a sales team. That’s why getting sales compensation right can give a business a competitive advantage when recruiting. But sales compensation is specific to the organization and needs to be a good fit based on industry and company size in addition to the other factors mentioned previously.
• As the market fluctuates, it’s crucial to continuously evaluate your sales plans throughout the year. Are your compensation plans still on track to meet the goals you set out at the beginning of the year? Take this quiz for a quick assessment.

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