It’s simple, in a sales environment, compensation equals performance. In other words, the right on-target earnings (OTE) will motivate your sales reps and sales development representatives and drive them to perform better and make more sales. In turn, this allows your company to make more sales and increase its revenue.
But is it as easy as just throwing a figure out there and hoping for the best? Not exactly. You see, there are many factors that go into finding and implementing the right sales compensation strategy, not least of which is using the right sales compensation model.
So, when considering the right strategy for your company you should consider your products, your territories, your sales cycles, what your competitors are doing, and, maybe, more importantly, your sales reps’ expectations.
With that in mind, in this post, we’ll look at some of the most popular sales compensation plans and sale compensation plan examples you can consider when developing sales rep compensation or SDR comp plans.
What Is a Sales Compensation Plan?
Before looking at the different types of sales commission and compensation models you can consider using for your company, let's first recap what sales compensation plans are.
Simply put, sales compensation or sales comp plans for short are how you'll structure how much you'll pay your sales development representatives (SDRs) or sales reps based on their performance. In other words, your sales compensation plan determines the total compensation your sales reps will be able to earn and includes their base pay and variable pay including commission and other incentives.
Now, the question is why do they matter? Well, firstly, a well-thought-out and effective sales compensation plan drives positive behaviors. Simply put, with the right sales compensation plan, you'll be able to increase your sales teams' motivation, you'll drive them to perform better, and your company will be able to generate more revenue.
It doesn't stop there, though. With a well-thought-out sales compensation plan, you'll also know exactly what you'll pay every member of your sales team. This, in turn, makes managing your company's finances easier and allows you to plan and budget better.
Sales Compensation Plans: The Basics
The next step, before looking at the different models, is to understand some of the basic concepts you'll encounter when you develop or consider a sales compensation plan for your company. Keep in mind that, depending on how you want to structure your sales compensation plan, you might not encounter or use all of these concepts.
On-target earnings or OTE is the amount of base salary and incentive pay you’ll pay to your sales reps or SDRs when they meet their sales quotas or targets. So, for example, if you pay a sales rep an OTE of $80,000, it means that they’ll earn $80,000 per year if they meet their quota. This, in turn, allows them to see exactly what they'll earn if they perform well, which, in turn, motivates reps.
As mentioned above, the on-target earnings of a sales rep is the sum of base salary and variable salary. The pay mix, on the other hand, is the ratio of base pay to variable pay in which you’ll compensate your sales reps. In other words, if your pay mix is 65:35, you'll pay your sales reps a base salary of 65% of their on-target earnings and 35% would then constitute commissions.
Sales quotas are the targets or benchmarks you set for your sales reps and, if achieved, will enable them to earn commission. So, for example, if you set a target of 30 sales per month per sales rep, it would mean that they would need to close that number of sales before they would be eligible for commission.
Sales accelerators are added incentives that you could offer to your sales reps. These involve that, once they exceed their targets or quotas, they'll earn a higher commission.
For example, if a sales rep earns on-target earnings of $80,000 per year with a quota of $100,000 and, as part of this, you pay them a 10% commission on every sale they make, a sales accelerator could involve that you pay them 25% for every sale exceeding their quota.
In contrast to sales accelerators, sales decelerators don’t directly incentivize sales reps but rather penalize them. In other words, with a sales decelerator you'll lower the amount of commission a sales rep earns if they don't reach their sales quota.
For example, while a sales rep could earn 10% of every sale as commission when they reach their target, you can implement sales decelerators that limit their commission to 5% should they fail to hit their targets.
Another added incentive you could implement is sales contests. For example, you could implement a sales contest on a monthly basis that rewards the best-performing sales rep of the month with an added monetary incentive.
Clawbacks happen when a customer stops using your product or service. This is most often found with subscription products or services. For example, with these products or services, you might set a specific target of three months after a sale.
If the customer then cancels the subscription service within three months, the sales rep will lose their commission. This not only encourages sales reps to make more sales, but it drives them to make sales to the right customers, or in other words, those companies that are more likely to keep using your product or service.
Types of Sales Commission and Compensation
Now that we’ve seen what sales compensation plans are and looked at some of the basic concepts you'll encounter when considering sales compensation plans for your company, it's time to look at the different common types of sales compensation models used by companies and some sales compensation plans examples.
Here, it's important to remember that, no matter what type of sales compensation plan you use, it should be tailored to your specific business and your unique needs and requirements. As such, you’ll be able to use an existing model and tailor it to your needs.
With a salary-only compensation plan, you'll agree to an all-inclusive compensation with your sales team ahead of time. With this model, you'll pay your sales team only a basic annual salary with no incentives based on their performance.
The main benefit of this approach is that it allows you to manage your company's finances easily. This is simply because you'll know every month what you need to pay your sales reps and there will be no variation in their compensation.
Another benefit is that, with this compensation model, sales reps know what they'll be paid irrespective of how they perform. However, this compensation model comes with a significant drawback in that, when you don't pay any incentives or commissions to sales reps when they perform well, it could impact their motivation and productivity.
So, this could mean that, once sales reps meet their quota, they'll stop putting in any extra effort. In addition, most sales reps are in the industry because they like the excitement, thrill, and competitiveness of earning commissions.
So, if you take this away, it reduces their engagement and performance levels. This, in turn, could have a negative effect on your employee retention rates and your company's bottom line. It's for this reason that salary-only compensation plans are extremely rare in the sales industry.
Base Pay Plus Bonuses
To solve the problems mentioned above with salary-only compensation plans, many companies choose to implement a base salary plus bonuses compensation plan. With these plans, you pay your sales teams a basic salary, but they are able to earn a bonus when they meet certain sales quotas or targets. Typically, you'll agree with your sales reps on these bonuses beforehand.
An example would be where you agree to pay your sales reps a yearly salary of $60,000 or $5000 per month and then agree with them on a bonus of $1000 per month should they exceed a certain target like, for instance, making more than 50 sales for the month.
This plan has largely the same benefits as the salary-only compensations plans mentioned earlier. In other words, it gives sales reps a sense of stability because they know with reasonable certainty what they'll earn every month.
Also, because you agree to the bonuses upfront, you’ll be able to plan and budget better and keep your company's finances in check. For example, if you agree to pay your team of 10 sales reps a $1000 bonus if they meet the targets and 8 out of 10 consistently meet these targets, you’ll be able to budget for $8000 per month in bonuses.
An added benefit of a salary plus bonuses compensation plan compared to a salary only plan is that the bonuses serve as the incentive you need to drive better performance and motivate reps. This, in turn, means that you'll be able to generate more revenue.
Base Pay Plus Commission
With this plan, you'll typically pay your sales reps an annual base salary and a commission if they achieve a specified sales quota. Among all sales organizations, the base salary plus commission compensation model is probably the most popular.
One of the reasons for this is that the base salary gives sales reps a sense of stability. In addition, the commission component of the plan then incentivizes them to perform better and increase their income.
To illustrate how this model works, let's look at a simple example. Let's assume that you pay a sales rep a basic annual salary of $60,000. In addition, you’ll pay them a commission of 10% for all sales exceeding $20,000 for the year.
Now, if this sales rep sells products to the value of $200,000, they'll be able to earn commission on $180,000 for the year based on a commission percentage of 10%. This means they'll then be able to earn $18,000 in commissions for the year. As a result, their total compensation would be $78,000.
This plan has some of the same benefits of the salary and the salary plus bonuses models mentioned above in that allows you, with reasonable certainty, to know what you can expect to pay your sales reps. In turn, this makes managing your company’s finances easier.
However, before implementing this sales compensation plan, you need to give careful consideration to your on-target earnings and pay mix. Here, you'll typically need to consider factors like:
- How difficult the sale is.
- How much experience the sales rep needs to have.
- How long and how complex your sales cycle is.
- How much influence the rep has over the customers’ buying decisions.
- How many leads do your sales reps need before they’re able to make a sale?
Typically, to calculate your pay mix, you’ll need to look at the average for similar companies in your industry. This can give you a great starting point from where you'll be able to adjust the pay mix based on the factors mentioned earlier.
The most important thing, however, is that your on-target earnings and pay mix is competitive within your industry. This is the best way for you to attract and retain the best sales talent which will, ultimately, allow you to increase your sales and the revenue you're able to generate.
As the name suggests, with a commission-only compensation plan, you won't pay your sales reps or SDRs any base salary. As such, the only form of compensation they’ll get is the commission they earn on sales. Typically, with these plans your commission rate will be higher compared to base salary plus commission plans.
For example, if you pay your sales reps a commission of 10% and they make sales to the value of $500,000 for the year, you'll pay them $50,000 as compensation. Unfortunately, it also means that, if a sales rep does not sell any products or services within a particular month, quarter, or any other period, they won’t earn any income. As you might imagine, this compensation plan has several drawbacks.
For one, because sales reps know they won't earn any income if they don't make any sales, they'll often concentrate on high-volume, low-value sales. In other words, they might not focus on higher-value sales which could take a little longer to close.
Ultimately, this affects your bottom line. Moreover, this can have an impact on your sales reps’ motivation and morale. Another drawback of this plan is that, because of the risk involved in earning an income, you might struggle to attract the best talent. This is simply because the best salespeople would rather consider working at companies where they have some sort of base salary.
Another problem is that, although it may sound risk-free to implement this compensation plan because you’ll only pay your sales reps a salary if they make sales, it is very unpredictable. For example, a sales rep might make one or two sales in a quiet month but then make 30 sales the next. This means your expenses are difficult to predict which makes planning and budgeting challenges.
Gross Margin or Profit-Based Commission
It's important to remember that, apart from motivating your sales reps and driving them to perform better, your sales compensation plan should also help your company reach its revenue goals.
If you neglect this aspect, it could happen that your sales reps focus on low-value products that are easier to sell.
Another possibility is that sales reps often offer substantial discounts to customers in order to make a sale. It's simple, if they sell more, they'll be able to earn more, so they’ll do what it takes to make the sale.
To eliminate this problem, you might consider implementing a gross margin or profit-based sales commission plan. With this commission plan, your sales reps are not compensated based on the number of sales they make, but rather on the profit they generate.
Ultimately, this has a positive effect on your company's bottom line.
To illustrate this concept better let's consider a simple example. Let's say you pay commission to your sales reps of 20% of the profit they’re able to generate from sales. If a sales rep then sells products with a profit of $10,000 a month, they'll get commission of $2000.
Another benefit of this sales compensation model is that it gives you the ability to promote the sales of specific products. For example, you might have a product line that you want to promote in the market. You can then offer a higher profit-based commission on these products compared to the rest of your product line.
Obviously, with this model, sales reps will focus on selling those products where they’ll be able to earn the highest commissions. And when they sell products with higher profit margins, your company will be able to generate more profit.
There are however certain things you need to keep in mind before you use a profit-based sales compensation plan. The first is that your ultimate goal must be to generate maximum revenue. In other words, this compensation plan does not work well in situations where you want to create market share by selling a lot of products, often at lower profit margins.
Another aspect is that your sales reps need to have some control over product pricing. This means they should be able to sell several products all at different price points and profit margins.
Another drawback of this system is that it can become difficult to calculate commissions as profit margins differ regularly based on factors like distribution costs, rebates, different directories, and more.
A straight-line commission plan involves a consistent commission structure where sales reps are paid commission based on how they perform in relation to their sales quotas.
For example, if a sales rep reaches 50% of their quota, they'll be paid 50% of their commission. Likewise, if a rep sells 150% of the sales quota, they'll receive 150% of their commission.
One of the benefits of this plan is that it compensates sales reps no matter how they perform. For instance, if a sales rep has a bad month, they won't be discouraged because they'll still receive a commission for the sales they made.
Likewise, your high-performing sales reps or SDRs will be able to reap the rewards where they exceeded their quota significantly. This also makes a straight-line compensation plan the ideal solution when you have a sales team that's comprised of different personalities and experiences and skills.
A major drawback of a straight-line commission model is that you might end up with sales reps who are totally satisfied with only reaching 80% of their quota. In other words, they'll discount the income and only work on earning 80% of what they could.
This, ultimately, affects their motivation which causes them to sell less. In turn, it has a negative impact on your bottom line.
With an absolute or set rate commission plan, you'll pay your sales reps a set commission or amount for every product they sell. For example, you can pay them a commission of $100 for every product, service, or subscription they sell.
The benefit of this commission pay structure is that it enables you to implement different commissions on different products. In this way, you can focus or promote the sales of different products by offering higher commissions to sales reps for selling them.
As is the case with a set rate commission plan, these plans can be somewhat unpredictable. For example, a sales rep could sell them products in a bad month and then sell 60 of the same products the following month when it’s busy. This makes it more challenging to manage your company's finances and makes it difficult to plan and budget.
The benefit of this plan, though, is that because your sales reps know they’ll get a commission on every sale they make, they'll be more motivated to more sell products in order to earn a higher income. This, in turn, allows you to make more sales, generate more revenue, and grow your bottom line.
And herein lies another drawback of this plan. It doesn't take into account the number of opportunities a sales rep has. So, for instance, one rep might have a larger territory compared to other reps and, as a result, getting twice as money leads. Despite this, with this plan, you'll treat all your sales reps equally which could lead to some dissatisfaction.
Unlike an absolute commission plan, a relative commission plan uses a predetermined quota or target to determine how much commission a sales rep will earn. Here, you'll typically determine this quota based on:
- Revenue, or in other words the value of the sales they make, or the
- Volume, or in other words how much of a product they sell.
With this compensation model, you can then determine commissions above and below your sales reps’ quota. For example, if you pay a sales rep an annual base salary of $60,000 and they have a quota of $500,000, you can pay them a commission of 10% below quota and 20% above quote.
If this sales rep then makes sales to the value of $1 million, they'll earn $50,000 in below quota commissions and $100,000 in above quota commissions. This means that their total compensation for the year would then be $210,000.
This is the ideal strategy if you want your sales reps to focus on higher-value products which will allow them to generate higher overall earnings. In contrast, if you really want to increase the number of sales you make and drive customer growth, the absolute commission plan will be more effective.
Draw Against Commission
Draw against commission plans involve that you pay your sales rep their commission in advance. For example, with these plans, you'll pay a sales rep a quarterly commission in advance at the beginning of the quarter. This, in a sense, then emulates a regular salary but with the proviso that the sales rep pays back the advance payment by earning commissions during the period.
Here, it's important to distinguish between recoverable draws and nonrecoverable draws. With a recoverable draw, you'll basically pay out the commission for the entire period to a sales rep upfront. So, the payout operates almost like a loan.
For example, if the sales rep draws $2000 per month, they'll be expected to earn commissions of $2000 per month for the quarter. As a result, if they earn $7000 in commission for the quarter, they would have earned $1000 more than what was required. This $1,000 would then be paid out to them at the end of the period.
In contrast, if the sales rep only earns $5000 commission for the quarter, there will be a shortfall of $1000, which will then roll over into the next period. This then prevents that your company loses money, but the drawback is that if the sales rep has a few low-performing sales periods in succession, it could add up and could negatively affect their income. In turn, this impacts their motivation and performance.
Nonrecoverable draws are those payouts that you pay to sales reps and which you don’t expect to gain back. This is typically the case with new sales reps starting at your company. This is helpful for them because, when starting, they won't have as many leads or existing customers from which they'll be able to generate a commission.
With a territory volume compensation plan, you won't compensate specific sales reps but rather sales teams who work with customers and prospects within a clearly defined territory. With this plan, you would agree on a specific compensation period like monthly or quarterly.
Once the compensation period is complete, you’ll compensate all the sales reps within the team by splitting the total commission earned during the period between them.
To illustrate how a territory volume compensation plan works, let's consider a practical example.
Let's say you have a territory where you sell your products, and you have five sales reps in the team for that territory. Now, let's also say you pay the team a commission of 10% of their total sales. If they then make a total of $2 million worth of sales, you’ll pay them a commission of $200,000.
This then means that every rep on the team will get a commission of $40,000 for the period. If their base salary for the period is then $40,000, they'll earn a total of $80,000 for the period.
These plans are the ideal solution if you work with sales teams who focus on a specific territory or region or if you have a well-developed market that gives teams the potential of making more sales.
10 Sales Compensation Plan Tips
Now that you’ve seen the different compensation models you can choose from, it’s time to look at some actionable tips you can use when it comes to picking and implementing the right one for your company.
Picking the Right Plan
When picking the right plan for your company, the first thing you'll need to do is look at what you want to achieve. In other words, you'll have to determine your sales compensation plan goals. These goals can, for instance, include growing your company's revenue, increasing your cash flow, making more sales, lowering expenses, and many more.
The key is that, once you've determined your goals, you'll know how you'll need to compensate your salespeople to reach them. So, based on these goals, you can then choose a compensation plan that's right for your company. Here, you'll be able to use any one of the compensation models referred to above or you can tailor one specifically for your needs and requirements.
Generally, when you need to decide which compensation plan is right for your company, you'll also need to consider what your budget is, how many reps you have, how much experience your reps have, and what types of plans your competitors in the market are using.
By answering these questions, you'll have an excellent base from which to develop a compensation plan specifically for your company that will enable it to reach its goals.
Use the Right Timing When Paying Commissions
You should also decide when you'll be paying commissions to your sales reps. Typically, you'll have several choices. These include paying commissions when a customer signs a contract, when you receive a payment from a customer, or when certain goals are reached.
Here it's important to remember that there are no hard and fast rules when you should pay out commissions but, generally, the quicker the better. For example, if a client purchases a product and pays over a period of several months, it could impact a sales rep’s motivation if the commission is only paid at the end of the period. So generally in this case, you'll pay a commission every time the customer makes a payment.
The key takeaway is that you should decide on the timing of your commission payments based on your specific set of circumstances, the types of products or services you sell, and your sales cycle.
Determine the Right Sales Quotas
Another aspect you should consider carefully is determining the right sales quotas. Generally, you want your sales quotas to be achievable by most of your sales reps. In fact, the average in the industry is about 70%. In other words, on average, about 70% of all sales reps reach their targets.
This means that, ideally, you want your sales quotas to be achievable by about 60 to 70% of your sales reps. If it's lower than this, or in other words if your sales reps struggle to meet their quotas, it negatively affects their motivation and the overall morale of your company and sales team. This, in turn, affects their performance and leads thereto that you make fewer sales.
In contrast, if your sales quotas are too easily attainable, it will also affect sales rep performance and motivation because they'll reach their targets too easily which means, once they reach them, they won't make any further effort to make more sales.
In order to determine your quotas, it might be a good idea to look at your past sales figures from where you'll get a good idea of what is achievable and what not. If you don't have historical figures, you could look at the industry average and adjust your quotas from there based on how your sales teams perform.
Find the Right OTE
As mentioned earlier, you should also find the right OTE. Simply put, if you don't, you'll struggle to attract and keep the best sales talent. The first step in finding the right OTE is looking at what your competitors or other similar companies in your industry are paying to their sales reps.
From there you'll be able to adjust your OTE based on the products you sell, how complex they are to sell, your sales cycles, and the experience that a sales rep needs to sell your products.
Use the Right Pay Mix
Another important consideration when implementing your sales compensation plan is finding the right pay mix. Why is this important? Well, simply put, the pay mix determines the amount of risk that a sales rep will need to take in order to achieve their quotas.
You should also remember that the pay mix should be determined in accordance with the sales role. For example, if your sales roles are focused on selling high volumes, you could consider using a lower base salary component in your pay mix. In contrast, if you don't sell high volumes of products, you might have to consider using a higher base salary component.
Ultimately, apart from the sales role, you'll also need to consider the sales cycle of your products, and the complexity of the products or services your sales reps need to sell. Typically, complex products with a longer sales cycle will require a higher base salary component whereas products that are easy to sell quickly can involve a higher commission component.
Involve the Right Stakeholders
It's also important, when implementing and developing your sales compensation strategy, to involve the right stakeholders. This will typically be your sales teams, sales reps, and sales managers. This is simply because they are the ones who are going to be impacted by the strategy you implement. Considering this, it makes sense to involve them in finding the right plan that fits their expectations.
Consider Your Company’s Culture
You should also take your company's culture into account when developing and implementing your plan. For example, if your sales teams are focused on aggressive selling, you could, for instance, implement a plan with a higher commission component compared to the base salary.
In contrast, when your company's culture is all about selling high-value products with longer sales cycles, you should consider paying your sales rep a higher base salary.
Don’t Forget To Reward Retention
Although your sales compensation plan’s primary goal is to incentivize sales you should also develop it in such a way that it rewards the retention of existing customers.
The thing is, many companies are so focused on selling to new customers that they often neglect their existing customers. And, in uncertain times, customer retention is extremely important.
So, by implementing the right strategies in your sales compensation plan, you can reduce customer churn and retain your valuable existing customers.
Keep It Simple
One of the most important tips when implementing your sales representative compensation plan is keeping it simple. In other words, your plan should be easy to understand, and your sales reps and sales managers should know exactly what is required of them and their teams and how much they'll be able to earn if they meet their targets.
If it is, your sales reps will be more motivated to do what's required of them and you'll be able to promote the specific behaviors that allow you to generate more revenue
Review Your Sales Compensation Plan
If there's one thing certain in business, it's that everything evolves and changes over time. Therefore, your sales compensation strategy will not remain valid forever. As a result, you'll need to revisit your plan, review how it works, and change it where necessary to keep up with how your business and the market changes.
The Bottom Line
When you want to motivate your sales reps, increase their performance, and empower them to make more sales, it’s vital that you implement the right sales representative compensation strategy. If you do, your company will make more sales and you’ll grow your bottom line.
When developing the right sales pay structure, there are several factors you need to take into account, including the needs and requirements of your company and the expectations of your sales team. Hopefully, this post helped illustrate some of the ways companies deal with compensation for salespeople and gave you some tips for finding and implementing the right strategy.
Once you’ve decided on the right commission pay structure and fleshed out all the intricate details, you’ll need to implement it and calculate your sales rep compensation. That’s where we come in.
At Performio, we make complex commission calculations easier and allow you to automate your commission calculation which saves you time so you can focus on more important work. To learn about our platform, why not request a demo today.