Businesses that create attractive sales compensation plans give the best talent a reason to stay with the company for the long term. The right compensation plan also encourages the right behaviors, minimizes risks, and increases revenue. 

In this article, we explore the key components of effective compensation plans, the different types of plans, and tips for managing your sales compensation plan.

What Is Sales Compensation?

Sales compensation is the pay that a salesperson receives. Although compensation differs between companies, it typically consists of elements such as a base salary, commission, and incentives designed to drive specific performance of a sales organization.

What Is a Sales Compensation Plan?

A sales compensation plan describes the mechanics of how the sales team will be rewarded for achieving their objectives. It includes details about pay structure like base salary, commission, incentives, and benefits.

The purpose of a sales compensation plan is to encourage specific sales behaviors and clearly communicate expectations and criteria for compensation of sales team members. This plan is designed to incentivize reps to reach their objectives and organizational goals.

Each organization has a sales compensation plan unique to its business. It is influenced by factors such as team structure, resources, goals, and company strategy. Plans are often further tailored to each sales role, experience or seniority, length of sales cycle, and type of customer engagement.

Other factors usually consider when designing sales compensation plans are company culture, competitors pay, and the local cost of living.

When developing an effective sales comensation plan, there are some key requirements to consider. 

The Key Requirements of an Effective Sales Compensation Plan

• Total Rewards Package: A competitive compensation framework should take a holistic approach to designing incentive packages to attract and retain talented employees. Beyond basic salary and commission, consider including health benefits, gym memberships, and professional development opportunities.
• Goal Setting: Goal setting is essential in realizing the full value of a compensation plan. Clearly define individual and team goals to align with company objectives, ensuring they are relevant and achievable.
• Sales Incentive Clarity: Clarity needs to be part of any sales incentive plan, and the most important point is that it needs to be clear what revenues a salesperson will be paid on. Specify which revenues will trigger commissions and ensure transparency to prevent disputes.
• Compensation for Onboarding: Employees cannot be expected to be fully productive on day one of their employment with their new employer. Consider offering new hires a minimum commission or a recoverable draw during their initial months, balancing integration and compensation fairness.

Different Types of Sales Compensation Plans and Models

Sales compensation plans are not one-size-fits-all. They are tailored to suit the specific needs of your organization and sales team. The most common types of payment included in comp plans are hourly wages or salary, commission, and bonuses. The percentages and inclusion of each vary based on many factors such as business type, industry, budget, and goals.

It is essential to carefully consider the structure of your sales compensation plan, since it will greatly influence and impact your ability to attract and retain top sales talent. This helps minimize recruitment and repeat onboarding costs.

The following are the most common types of sales compensation plans. Each example has a different structure. Use them as a starting point for customizing a plan for a specific sales team and business based on needs, resources, and goals.

• Straight Salary: Fixed pay without commissions or bonuses, suitable for roles where sales are not the primary focus or in team-based settings.
• Commission Only: Purely performance-based, this plan pays a percentage of sales, suitable for highly competitive environments but may lead to high turnover.
• Salary Plus Commission: Offers a base salary with added commissions, providing income stability while incentivizing performance.
• Territory Volume: Compensation based on sales within a specific territory, divided among team members, fostering a collaborative environment.
• Tiered Commission: Features increasing commission rates upon reaching sales targets, encouraging reps to exceed goals.
• Profit Margin: Rewards reps for selling at higher profit margins, discouraging discounting and focusing on high-value products.

Tips to Manage Your Sales Compensation Plan

A good sales compensation plan is a win-win-win: It is easy to implement and benefits everyone. Here are a few things to keep in mind when planning or updating yours.

• Explore options: Consider your company’s goals, budget, and competitive landscape when choosing a compensation plan.
• Set realistic targets: Ensure quotas are achievable for a majority of the team to maintain motivation and reduce turnover.
• Keep it simple and clear: A straightforward plan enhances understanding and effectiveness.
• Involve diverse team members: Tailor plans to different roles within the sales team to address varying needs and experiences.
• Focus on performance-based rewards: Use SPIFs and contests to drive specific behaviors, adding accelerators to encourage exceeding quotas.
• Determine on-target earnings (OTE): Calculate the expected total annual pay based on salary and incentives.
• Avoid capping compensation: Unlimited earning potential keeps top performers motivated and maximizes revenue.

A well-executed sales process with the right talent and a fundamentally sound compensation plan will provide the engine for sales growth. To learn more on how you can drive sales performance with your sales compensation plan and, most importantly, manage the payout process, all which leads to positive results, schedule a meeting here.