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A Guide to Sales Compensation Plans

Updated: Aug 4, 2023

Companies use sales compensation plans to encourage their sales team to accomplish goals and objectives, such as hitting sales targets, gaining new clients, or raising revenue.


Also, I believe that creating tough, yet realistic targets or quotas for your sales team is essential. The aggregate total of all your salespeople’s quota. In all the plans below, it is advisable to assume a quota will be set, and your representatives’ performance will be measured against these targets.


All sales compensation plans must meet the following criteria:

1. Be easy to understand. No complex calculations.

2. Must drive expected behavior- More sales, higher profit margins, etc.

3. Must be written and signed by the salesperson.

4. Must meet the company’s fiscal goals and responsibilities.

5. Must be equitable.


In terms of structuring your compensation plans it may be helpful to use the following guideline:

The industry average for sales commission typically falls between 20% and 30% of gross margins. At the low end, sales professionals may earn 5% of a sale… (source: Indeed).


Compensation plans come in a variety of forms that focus on driving the right sales behavior:


Flat Commission-Based Plans

One of the most popular kinds of sales compensation plans is commission-based. According to this arrangement, the salesperson gets compensated as a percentage of the money their sales bring in. For instance, a representative might receive an X% commission for each sale they make.

Pros:

The corporation benefits from commission-based plans because they encourage salespeople to close more deals, which boosts revenue.

Easy to manage and implement. Salespeople clearly understand what their earning potential is.


Cons:

As the business grows so will the commission amount paid. This can create the problem of overpaying your salespeople, especially if you don’t have a commission cap.

Commission caps can be a demotivator and encourage negative behavior like “Sandbagging” (deliberately slipping a deal into a future month to maximize their commission).


Ideal For:

Start-ups and early-stage companies

Short sales cycles and high-margin goods and services, like software sales, pharmaceuticals, trusts, estates, land leasing, and industrial banks to name a few.


Salary-Based Plans

Salary-based plans provide the salesperson with fixed pay regardless of how much they sell.


Pros:

Advantageous to the salespeople as they receive a steady stream of income, which can lower turnover. The behavior toward customers will be relaxed and less aggressive, especially in industries where sales representatives are annoying or feared.

The company realizes a fixed cost of sales which helps manage expenditure.


Cons:

Salespeople will lack the motivation to exceed their targets.

It becomes difficult to create a sense of urgency and commitment to reach the company’s revenue goals.


Salary-based plans work best in fields like retail, some automotive sales, or any industry that is perceived as having “pushy” salespeople.


Plan-Based Bonuses

Bonus-based schemes give the salesperson an additional incentive on top of their income or commission. According to this strategy, the salesperson receives a bonus for achieving particular performance goals, such as hitting a specified sales threshold or bringing in a predetermined number of new clients.

Tip: Bonuses can be combined with other plans to encourage a specific behavior.


Pros:

Bonus-based plans are advantageous to the business since they motivate salespeople to exert more effort to achieve certain objectives.

They can also be good motivators for sales management as they can be KPI (Key Performance Indicator driven).

Bonuses can also be contest inspired, motivating the whole sales team to hit certain targets.


Cons:

These plans can be expensive if the goals are not tough enough. It is difficult to withdraw if needed as the sales team becomes accustomed to them.


This type of plan can be used in any industry to drive specific representative behavior.


Plans Based on Profit

Profit-based programs provide the salesperson with a percentage of the gross profit or net profit on their sales.


This plan can also be in addition to their commission or compensation. Salespeople may also receive a portion of the company's profits.

Pros:

Profit-based strategies are advantageous to the business because they encourage salespeople to market goods and services with strong profit margins.


Cons:

A profit-based plan may be difficult to understand. Any plan that does not clearly outline goals and the attached commission is concerning as salesperson motivation will be lacking.


Profit-based plans work best in fields with complicated sales cycles that demand a lot of talent and work, such as financial services or consulting sales. They are also good for low margin industries.


Plans Based on Revenue

In revenue-based programs, the salesperson receives a share of the money made from their sales. With this arrangement, in addition to their commission or salary, salespeople also receive a portion of the sales proceeds.


Pros

Revenue-based programs are advantageous to the business because they encourage salespeople to close more sales of goods and services. Salespeople are motivated by them because the more they sell, the more money they bring in, and the more money they make.


Cons

It is easy to overpay sales people if there are too many commission plans attached to a single sale.


The best industries for revenue-based plans are those with short sales cycles and high volumes of goods and services, like retail or software sales.


The optimal sales compensation plan for a business will ultimately depend on a number of variables, including the industry, sales cycle, product type, and sales force structure. The correct sales pay plan can encourage salespeople to deliver better work, boost corporate income, and foster a supportive workplace.

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