What is Sales Compensation?
Sales Compensation is the sum of money that a sales representative is paid per annum. The sum typically includes a basic salary, commission, and additional incentives for the purpose of motivation. The objective of the sales compensation program is to ensure growth and achieve revenue goals. A sales compensation program should lead to high performance and increased salaries for the employees.
Sales Compensation Plans
The combinations of base salary, commission, and incentives are what we refer to as Sales Compensation Plans. These plans are crucial. They are important for encouraging positive reflections in your reps that in turn, will boost your results and help achieve your overall organizational goals. They must be engineered in a way to harness maximum efficiency and increase revenue. There is no specific formula as to what should constitute your plan and in what ratio, but out of so many possible plans, we have hand-picked some of the widely used and effective ones.
Types of Sales Compensation Plans:
Using this structure, you’d pay your representatives a straight salary like all of your other employees. No bonuses or commissions. Sales incentives are also extremely rare. Straight Salary is common in organizations where salespeople are encouraged to prioritize other core challenges than making direct sales.
Salary plus Commission:
This is the most common type of commission plan used in the sales industry. Employees are provided with a basic salary and are also entitled to a commission for the sales made by them. The rate of the commission could be a percentage or fixed fee, according to the convenience of your company. This structure also offers financial security as salespeople will still receive their pay even if sales are low for some reason.
Commission-only sales compensation plans are completely what you think they are like, i.e., you simply pay your reps just for the sales they make. There is no guarantee of income and certainly no fixed basic salary. If a sales rep doesn’t make any sales, they will not be paid. Although this structure is simple enough to manage and allows complete control of earnings, it can be problematic to attract people to work under this plan. However, to achieve better value for your money, this is highly recommended.
Under the Profit Margin structure, sales reps are compensated based on the progress of the company. Salaries can fluctuate based on the overall company performance. Profit margin plans are widely used by startups and other setups that might have a lack of easily convertible-to-cash assets or simply a lack of liquidity. It’s advised to use the profit margin plan if you are sure of your reps’ survival through your lean phases. To the mutual benefit, you may also add long-term incentives such as stock shares.
Using target plans, you are required to pay your sales reps when they reach specific targets or milestones set by the company policies. Target Plans have the most simplified compensation structure and are easy to calculate. They generally result in good progress for companies. The reason is that compensation directly depends on the output of the work, and hence reps are usually highly motivated to achieve maximum output.
Your plan needs to offer motivation to salespeople while also ensuring you receive enough returns as well. Some scenarios could speak highly of the importance of incentives, whereas some might not. And hence, you will need to devise strategies and decide for your company what works the best for the overall goals and aims you set while determining the perfect Sales Compensation plan.