Sales Compensation 101 – Key Elements You Need to Know

For most people, navigating through the world of sales compensation can seem overwhelming. There are nuances to developing a competitive sales compensation plan. Businesses must consider the appropriate balance for budgeting and sales motivation. The sales program has to reinforce organizational goals and provide incentive for overall growth. Where to begin? In this Astronology®, we briefly discuss some popular sales compensation models and some steps to consider when building a robust sales compensation program.

What Makes a “Good” Sales Compensation Plan? What are the Different Types of Sales Compensation Plans?

As mentioned in a previous Astronology® article, “regardless of the type of compensation you are trying to develop, a fleshed-out and comprehensive strategy should give employees insight into why their contributions are valued and align them with their job roles. With a clear understanding of what their jobs are, why they are important, and how much value they bring, employees are further motivated to continue doing hard work.” Keeping this in mind, a good sales compensation plan should achieve the following:

Encourage positive and focused behavior across the sales team
Set expectations and standards for compensation for all salespeople
Drive sales for the entire business

Sales compensation specialist and Astron Solutions’ National Director Michael Maciekowich states, “The most important thing to remember in designing an effective sales compensation program is to focus on the return on investment (ROI) for the organization and a win-win result for both the organization and the sales employee.” A good sales compensation plan needs to balance profit and sales motivation. Business owners should keep in mind realistic factors such as industry trends and cost of living. Some popular sales compensation models include the following:

Salary Only: This structure is not used often. While a set salary can give sales employees a sense of security and lower stress to meet project targets, it also could lead to workers becoming stagnant. Employees will be inclined to slow down once the required quota is achieved. With no extra incentive, an employee’s effort to do more will wane.
Commission Only: Since employers only pay when an employee makes a sale, a commission only pay structure allows employers to forgo a lot of risk. This structure also can motivate sales employees to give their all. It is difficult to budget commission-based plans, however. Expenses are difficult to forecast in this work environment. Additionally, it is difficult for new / inexperienced employees, as well as all employees in a down economic environment, to earn enough to ensure they can meet their basic needs.
Base Salary Plus Commission: Many sales employees prefer the base salary plus commission structure. Employees enjoy the security of an estimated steady income but there is also the incentive to do more in order to increase their income. Businesses are enjoy advantages as well. The structure allows employers to better forecast expenses and budget more effectively. The general standard for this structure is typically 60:40 (60% fixed income to 40% variable).
Base Salary Plus Bonus: When sales employees are able to consistently reach pre-set targets, a base salary plus bonus salary structure may be ideal. Due to the high predictability of this plan employers have the confidence to forecast expenses, and there is still a monetary incentive for the sales team to do more.
Absolute Commission: An absolute commission structure works for businesses looking to pay workers for achieving specific targets. Businesses looking to increase customer numbers or upsell product may find this form of compensation helpful…however, be mindful of costs. For instance, if a business sets a target goal to sell a specific product, but that product has a low price, a company could be paying out more to cover the incentive than the selling price of the product, and as a result lose more than they gain.
Draw Against Commission: The draw against commission model is based entirely on commission. The sales employees are given an advance amount that will be deducted from their commission at the end of their pay period. A serious drawback from this plan is that during “leaner” seasons / months an employee could owe a company money.
Territory Volume Commission: The territory volume commission model is based on sales teams being assigned clients and prospects on a territory-wide basis instead of individual sales. Total sales are split between the representatives working that territory. This model creates a culture of collaboration and relieves some of the pressures of individual selling. Some sales employees, however, may not like splitting commission if it feels as though the commission is not equally generated.
Straight – Line Commission: The straight – line commission model reward sales workers for a percentage of their quota. If an employee reaches 30% of their quota, they will receive 30% of the commission. If they reach 200% of their quota, they will receive 200% of their commission. Similar to commission only models, straight line commission plans have unpredictable expenses, making it difficult for businesses to properly budget.
Gross Margin Commission: Sales workers are rewarded based on their profits in a gross margin commission model. An example of this can be seen in car dealerships. While the sales representative is given the ability to negotiate a car price with a customer, their commission will lower as the car price lowers. This approach allows employees to focus on profit, which ultimately benefits the business. The downside to this model is that employees may find it challenging to sell, as customers may expect discounts and won’t buy unless they are given some form of reduced cost.

How Do You Develop a Sales Compensation Plan?

As mentioned earlier, there are a variety of factors to consider when developing a sales compensation plan. Some simple steps to consider are

Grasp the necessary values: List out the basic requirements and main ideas the plan should include. As you begin to build the compensation plan, make sure to refer to this list to ensure alignment.
Determine sales compensation plan goals: These goals should align with your organizational goals. Identify key objectives for the sales compensation plan and make sure they move towards the organization’s bigger picture. If they do not fit, reevaluate. These sales goals will help you to create incentives and rewards.
Identify sales roles: By clearly defining the sales roles, you are able to establish the level of experience, responsibilities, and customer interaction each role should have and, as a result, determine how to compensate appropriately.
Choose the type of compensation plan: Based on budget, industry trends, number of sales workers, and expectations, you should be able to select a compensation plan that works best for your business.
Determine on-target earnings, base, and variable pay: Use market research to determine on-target earnings. This research should include geographic cost of living, experience, education, and industry. The value you choose for on-target earnings should reflect the amount you have in the budget for salaries. You can then divide these earnings into base and variable pay.
Decide when to provide compensation: Businesses usually take three routes when deciding sales compensation payday:
1. When a contract is signed / a customer signs on. While the immediate payout can be motivating for an employee, there could be significant time between contract signing and payment. This could cause cash flow issues.
2. When you receive the first payment. This could help sales employees to focus on customers that have a true need and will make a timely purchase.
3. Every time a customer pays. While this approach ensures a positive cash flow, it can become complicated depending on how often a customer has to renew and pay.

What is Expected to Come for Sales Compensation in 2021?

Despite the challenges of 2020 slipping into 2021, there is a lot of optimism for sales compensation this year. The Alexander Group’s 2021 Sales Compensation Trends Report gives us a good idea on what sales compensation looks like in 2021:

41% of participants say they will make changes to their 2021 plan to improve strategy alignment
66% of survey participants will grant a base pay increase in 2021
100% of survey participants say they plan to make changes to their next fiscal year incentive program
62.6% say goal / quota setting is the top challenge for 2021

Astron Solutions provides consulting for companies looking to overhaul or adjust their sales compensation plan. Why not send in a request to learn more?