Discover the different types of sales compensation, and find the right compensation plan for your team.
Sales compensation can make or break your sales team. Whether it’s a bonus for reaching quotas, commissions for making a certain amount of sales each month, or something entirely different, it’s important to understand how to calculate what (and how!) you should pay your sales team.
Having an attractive sales compensation plan is important to any business, but especially one looking to hire and retain top-tier talent. It helps you motivate your sales team, increase productivity, and increase sales.
In this article, we’ll look at the four main types of sales compensation and their benefits so you can determine which is the best type of sales compensation plan for your business.
What is sales compensation?
Sales compensation means different things to different people. At its core, sales compensation is a term used to describe the incentive structure that a company creates for its salespeople. There are two main types of sales compensation: salary and commission. Some companies also give bonuses or awards for special achievements.
Many people think that sales compensation is only about a set amount of money that people can earn. In reality, sales compensation is more than that.
Commissions, bonuses, trainings, raises, promotions, etc., are all considered forms of sales compensation….it isn’t just the money you pay, but the benefits (both tangible and intangible) your team gets from working for your business.
How does sales compensation work?
One of the most common ways to compensate salespeople is to pay them a fixed salary plus a commission. Many companies pay their salespeople a base salary and an additional amount of money to reward them with commission. It’s important to note that the higher the base salary, the less likely a salesperson is going to get a bonus.
Sales compensation should be determined based on the performance of the salesperson. If a salesperson is having a difficult time selling, their total compensation is likely to reflect that.
Let’s take a look at the four main types of sales compensation packages…
All Salary
We never recommend full salary for a sales role. Your sales team needs to have something to motivate them to go out and make more money based on their efforts. If you offer a 100% salary sales compensation package, it’s practically guaranteed you’ll get a bad salesperson who isn’t motivated to sell.
In addition, if you offer a salary-only compensation plan, you will have to offer a significant salary for that person to feel comfortable being a salesperson. Chances are good it will be difficult if not impossible to get a decent ROI on the salary you’re paying them.
A salesperson’s compensation is based on his or her performance. You need a method to motivate your salespeople to perform better. They aren’t there to receive a salary; they’re there to make money for your company, and they are motivated to sell more by being compensated for the revenue-generating work they do.
High Salary With a Small Commission
This option is better than all salary but still doesn’t fully incentivize people to get out there and sell. This option will require your team to be highly motivated. If they are not, there will be little success to speak of.
There are two sales team positions where this compensation plan makes sense, but businesses often use this for the wrong roles…
This compensation plan works well for an account manager or a farmer…someone who has a job to do but isn’t tied directly to the revenue outcome. They can be kept motivated with this sales compensation strategy and will continue to perform their essential sales role.
Low Salary, High Commission
A good sales compensation plan involves both salary and commission. You have to pay a salary so that your salespeople are comfortable making a living at their job. But it also has to have a component that makes them feel appreciated and rewarded for their efforts.
This is what I recommend…give people enough to live on, but if they want aspirational goals encourage them to get out there and sell…
Motivate them with money!
Everyone who goes into sales has a money-motivated mindset and this compensation plan is the best way to get their buy-in.
Give them what they need, but to get what they want, motivate them to get out there and work for it.
Full Commission
Straight commission is an option and one we do recommend with certain caveats.
The challenge is you lose control over the salesperson…you can’t tell them what to do, what hours to work, what process to follow, or who to target. You can make suggestions, but since they’re usually a contractor, you lose control over managing their process and their behaviors.
Additionally, this sales compensation approach creates little to no loyalty for them to stay with you and your business. They could easily leave you for another opportunity and you’ll have little to no recourse.
With this sales compensation strategy, companies also spend a lot of time training and onboarding the wrong people. While there can be significant benefits to offering a straight commission compensation package, you must evaluate this option carefully and make an educated and well-reasoned decision on whether it is right for your business.
Best Practices for Sales Compensation Plans
We always recommend our clients use a simple compensation plan that’s fair, transparent, and allows them to build up a solid sales team. Compensation plans help salespeople understand what their sales goals are, how they’re being measured, and what their results need to look like to earn raises, bonuses, promotions, or other incentives.
Sales compensation plans should allow salespeople to earn rewards based on their performance and progress toward their goals…they should be rewarded for their achievements.
Many companies offer incentive programs to their employees. For instance, some companies pay employees for each new customer they bring in, or for meeting their sales quotas.
These types of programs are designed to motivate salespeople to work harder and sell more products and services. Most companies set goals and create objectives to measure the performance of their salespeople. It’s good to have these goals and objectives, and it’s important to keep track of them.
Which sales compensation strategy is right for you?
As the owner of your business, you get to decide how your employees should be paid. But when it comes to deciding on the best sales compensation plan for your unique business and sales team, you need to consider several factors…
- What is the market currently paying for the level of salesperson you’re looking for?
- Which sales compensation strategy do you think will motivate your team the best?
- What do you sell and how difficult is it to sell?
- What are you able and willing to offer as a salary?
- Do you want a loyal team of in-house sales professionals, or are you comfortable with less control over your sales team?
- What type of benefits do you offer – insurance, training, non-tangible perks, and how do they affect your compensation strategy and plan?
Spend some time thinking about your answers to those four questions after evaluating the options for sales compensation…it’ll help you develop a sales compensation strategy that is right for your business.
In conclusion…
Your business has many options when it comes to sales compensation. The right compensation strategy can help increase sales productivity, motivate sales teams and incentivize employees to achieve their goals. Sales compensation strategy is an often overlooked factor in an organization’s success…without the right plan in place, you could fail to attract the type of top-tier talent you’d like to hire.
If you need support determining which type of sales compensation strategy is right for your business, contact us today for your free, 30-minute sales hiring analysis. We’ll help you attract, hire, and retain the type of Sales Superstars who are ready, willing, and motivated to sell for your business.