In the competitive sales world, motivating your sales team is crucial for driving performance and achieving organisational goals. One powerful tool in your arsenal is an effective sales compensation strategy.
By aligning incentives with desired outcomes and providing a fair and rewarding compensation structure, you can inspire your sales force to reach new heights of success. This article will explore key sales compensation plans that can boost motivation, enhance productivity, and foster a high-performance culture within your sales team.
What is a Sales Compensation Plan?
A sales compensation program encompasses the financial incentives provided to the sales team for achieving specific sales objectives and driving revenue growth. It combines base salary, commissions, bonuses, and performance-based rewards.
To streamline the management of these rewards, the company typically designates a salary account as a dedicated repository for depositing and overseeing the funds allocated for sales compensation. It enables efficient tracking and distribution of earnings to sales representatives based on their performance and the agreed-upon compensation structure.
What are the Requirements for Crafting a Good Sales Compensation Plan?
- Total Rewards Package
A good sales compensation plan takes a holistic approach to designing incentives to attract and retain excellent employees. People in the sales department would expect to be rewarded for the target earnings they achieve. While monetary rewards are necessary to boost employee morale in your sales incentive plan, including other benefits beyond money, like gym memberships or pension benefits, should also be considered to make the sales employee feel valuable.
The next requirement for a good sales compensation plan is setting goals. These goals can be team or individual-targeted. Make them clear, achievable, and relevant, focusing on delivery and revenue targets.
One of the most essential parts of making a sales incentive plan is to be extremely clear about the revenue paid to the person. Based on the business, revenues are never the same. For instance, as compared to service revenue, product revenues attract higher commissions. So, this needs to be clear in the compensation strategy.
Types of Compensation Plans
Since a sales incentive plan is never a one-size-fits-all, adopting different types of compensation plans to suit your organisational needs is necessary. Here are some most common sales incentive plans to consider:
- Straight Salary
A straight salary sales compensation plan is a type of sales incentive structure where your sales employee receives a fixed salary as the sole form of compensation, without any additional variable pay such as commissions or bonuses tied to sales performance. In this plan, the salary remains consistent regardless of the level of sales the individual or team achieves.
This type of compensation plan is often used in organisations where sales cycles are long, products or services require significant technical knowledge, or where building and maintaining customer relationships is critical.
- Commission Only
A commission-only sales compensation plan is where salespeople receive their income solely through commissions based on their sales. This plan has no fixed salary component, and the salesperson’s earnings are directly tied to their sales performance.
This type of compensation plan is commonly used in industries where individual sales performance is a critical driver of success and where the sales cycle is relatively short.
- Salary Plus Commission
A salary plus commission sales incentive plan is a hybrid structure that combines a base salary with a variable commission component. Under this plan, salespeople receive a fixed salary as their guaranteed income, supplemented by additional commissions based on their sales performance. The commission portion of the plan may be calculated based on factors such as total sales revenue, gross profit margin, or specific sales goals.
It is well-suited for organisations that value a balance between stability and performance-driven incentives in industries where individual sales contribute significantly to the organisation’s success.
- Territory Volume
The territory volume sales compensation strategy is for sales teams working in defined regions. Compensation is based on sales volume in each territory, with equal distribution among representatives. This plan fosters collaboration, tying compensation to collective sales success. It ensures fairness, encourages cooperation, and drives a customer-focused approach.
- Tiered Commission
A tiered commission sales compensation plan helps your sales employee earn varying commission rates based on predefined tiers or levels of sales performance. As salespeople achieve higher sales levels, their commission rates increase progressively, and if they achieve lower than the target, they receive less commission.
The tiered type of commission plan is commonly used in industries such as retail, telecommunications, manufacturing, and business-to-business (B2B) sales, where sales volumes and incremental growth are important factors.
- Profit Margin
This type of compensation plan rewards sales employees based on the profitability of the sales they generate. Instead of focusing solely on sales revenue or volume, this plan considers the profit margin associated with each sale.