When it comes to retaining top sales talent, competitive and effective sales compensation and commission plans are key. Employees who feel valued are more likely to work harder and stay longer, which saves your business time and money on employee turnover.
Research from Tinypulse found that 43% of people would leave their companies for just a 10% salary increase elsewhere. Meanwhile, research from the Boston Consulting Group shows that across the board, the happiest employees are the ones who feel appreciated.
Competitive compensation plans for salespeople are a great way to show appreciation, and happy employees often feel motivated to go the extra mile for your company. Creating a compensation plan that rewards hard work, account growth and a job well done should be at the top of your priority list as a sales business owner.
In this guide, we’re going to look at:
Everything you should know about compensation plans
A sales compensation plan outlines your employees’ base salary as well as the company’s commission and incentive program. The commission structure should incentivize employees to reach their objectives in order to earn a deserved reward.
There are many types of compensation structures to choose from, and sales leaders should implement a plan that aligns best with their team’s specific needs.
First, it’s important to understand where and how sales efforts fall short and create a plan to address these shortcomings with enticing rewards that drive results.
How sales compensation plans are built
Sales compensation plans vary depending on team structure, budget and goals.
For example, one company might offer a low base salary in combination with a hefty commission package, while another may provide a mix of a medium-sized salary, competitive targets and career growth opportunities.
There are several factors you need to consider when drawing up your team’s compensation structure:
- What are the goals you have for your sales team?
- What are your company's overall goals?
- What revenue do your salespeople bring in?
- How much of your budget can you afford to allocate to compensation packages?
- How much are your main competitors paying their reps, and are you prepared to make your reps a better offer?
- If your reps are working in-house, what is the cost of living where your company is based?
Understanding expectations makes it easier to build attractive compensation packages that will appeal to high-quality candidates, as well as your top-performing employees already on the payroll.
First, let's look at some important terms you'll need to know when creating compensation plans.
Some compensation plans require that a new customer stays with your company for a period of time before a rep is entitled to their bonus.
If a customer churns before the period is up, you can include a clawback. When this happens, the sales rep will have to return the commission they earned on the sale. Clawbacks are a helpful way to incentivize reps to focus on customer retention and deal quality over quantity.
On-Target Earnings (OTE)
OTE’s are a realistic goal of what a rep will earn if he/she performs well and achieves set objectives.
A rep's OTE is a sum of their base salary and commission earned from closed deals. For example, a sales rep may be given a base salary of $60,000 and expect to reach $40,000 in commission in a one-year period. Therefore, their OTE would be $100,000.
It’s unethical for companies to advertise unrealistic OTE numbers to attract reps if they don’t plan on compensating them at that figure. OTE’s should be as practical of a projection as possible.
Incentives and contests are compelling ways to reward top performers.
Incentives are often paid out as a dollar amount but can be presented as other reward types like dinners and excursions. For example, team leaders might set up a contest where the first sales rep to close 50 deals for the month earns a $1,000 bonus. Or, the first team to upsell 100 subscriptions will get a collective weekend away at a spa.
Sales accelerators are used when a rep closes more deals than their quota requires. They are a great way to entice your top-performing sales reps to keep selling if they’re running hot.
An example of a sales accelerator might be a rep closing 15% above their quarterly quota. To reward them, the company will pay an accelerator fee for each percentage above their required quota. For example, if a sales rep closes 115% of their quarterly quota, the rep might earn a 12.5% commission on the extra 15%. If they closed $10,000 worth of extra sales, their accelerated commission will be $1,250.
Sales decelerators, then, penalize reps who don’t reach their quota by paying them less compensation.
Here’s an example of what an accelerator/decelerator structure might look like for a sales rep:
Seven common example compensation plans
There are many types of sales compensation plans that you can choose for your business. You may need to trial and error a few plans before picking the best fit for your company.
Let’s dive into the seven most common compensation plan types.
1. Straight salary
The most uncomplicated sales compensation plan is a straight salary; reps are paid a set sum and don't earn commissions.
This type of compensation plan isn’t widely used in sales as it doesn’t incentivize reps to sell more. However, it can work for smaller companies where there is a lot of cross-collaboration between departments. For example, if an employee spends half of their week selling and the rest of it in customer care, this structure might work well.
Example: Each rep in your company earns a straight salary of $75,000 a year, or $1,440 a week (gross). On a straight salary, they will be paid this regardless of how many deals they close.
2. Base salary + commission-based pay
If you choose this plan, you’ll pay your reps using a mix of base salary and performance-based rewards. The base salary is typically less than a straight salary and the commission should be uncapped to incentivize selling.
This setup usually works well for companies that want an easy-to-implement compensation plan.
Example: Each sales rep will earn a base salary of $40,000 a year. On top of that, your rep will earn a percentage-based commission on each sale they make. If you set a 10% commission rate, your rep will earn $50 for every $500 deal they make on top of their base salary.
3. Commission only
With a commission only plan, your sales reps will only make money when they close a deal.
Commission only plans are typically used by new companies without a lot of financial backing. Although this model can help you attract reps who are eager to close deals, it can also lead to staff burnout and high turnover rates. Commission only plans can also create a cut-throat sales environment, where sales reps are focusing more on closing deals than nurturing customers.
Example: Your sales reps earn a commission rate of 15%. If your company sells a service for $1,500, your rep will earn $225 off each deal. They’ll need to close an average of three deals a week to earn an annual base salary of $35,000.
4. ‘Draw Against’ plan
This plan allows reps to draw against their future commission earnings and have it paid out early.
This plan is essentially an ‘IOU’ from your sales rep. The ‘draw’ is a set amount of money that needs to be paid back to the company under predetermined conditions. If a rep’s commission is less than the amount drawn, they keep their commissions, and the difference is calculated from the draw.
5. Tiered commissions
A tiered commission structure is one of the best plans to encourage top-performers to keep selling.
It incentivizes reps to sell beyond their quotas. Once a sales rep hits a certain number of deals or revenue, they are moved onto a higher commission rate. The more deals they close, the more money they’ll earn. This plan can encourage sales reps to push sales through strategies like upsells and cross-sells.
Example: Your sales rep currently earns 9% commission on every sale they make up to $20,000 a month. Once they cross the $20,000 threshold, they will then earn an 11% commission on any deal they close.
6. Straight-line commission
Straight-line plans pay out a rep’s commission based on how much of their quota they sell.
Example: If a rep has a quota of $10,000 in monthly sales and they only sell $8,000, they would have only made 80% of their quota. Therefore, they'll only get paid 80% of their commissions.
This plan is tricky, and it only works if your reps are hungry to sell their whole quota. If a sales rep is continuously hitting 65%, it might turn out they’re content with that amount. They won’t be incentivized to sell more, and it will be hard to push them without introducing an accelerator.
7. Gross profit margin
Gross profit margin plans center around the overall performance of a company.
Typically, these plans are used by startups and bootstrapped companies who don’t have a lot of liquidity. A rep will earn commission on profit margins in a sale instead of the overall price of a product. So, sales reps will earn a higher commission on a full-priced sale over one that they closed with a heavy discount.
Example: Your sales reps earn a 10% commission on their gross profit margins. You have two sales reps who each closed ten deals for the month. On closer inspection, you can see that one rep didn’t discount any of their ten deals, worth $1,000 each for a total of $10,000. The second rep also closed ten deals, but they discounted five of them by 20%. Their total sales were $9,000. The commission paid to the first rep will be $1,000, while the second rep will earn $900.
How to set up a sales compensation plan
In an article for Forbes, Sales Xceleration co-founder Mark Thacker said there is one critical error most sales organizations make: not crafting a sales compensation plan that effectively motivates and rewards performance.
“This is often the case because the people who are creating the plan have never been paid in a similar manner,” he says.
To create a plan that will work successfully, ask yourself:
- Is our cost of sales appropriate and competitive?
- What are the company and the team’s business goals?
- What balance do I want to create between motivating personal success and the success of the team?
- What impact will each sales role have on the company and the team’s success?
- How can I find the perfect balance between performance and pay?
Once you answer these questions, it’s time to build your compensation plan.
Step 1: Decide on your target pay
Any compensation plan should start by looking at what the market is paying.
This will depend on what industry you’re in. The BLS shows sales reps in natural gas and equipment manufacturing average double the annual earnings of those working in business support. Glassdoor can also give you an idea of the average sales rep salary based on your geographical area and industry.
Target pay for each role should also take into account commissions. Once you’ve decided on a number, this will give you the base of your compensation plan.
Step 2. Decide on a pay mix
Are you going to use a straight salary or a base salary + commission combination?
Your pay mix should be based on what you expect your reps to achieve. For example, if your sales reps are going to be tasked with closing deals, you may want to give them a base salary and commissions. On the other hand, your sales managers might get a larger base salary due to their responsibilities, and you could structure their commission based on company profits.
Step 3. Choose your measurement methods
Measuring each sales rep’s success is crucial.
Choose what KPIs you will measure and how they will affect your sales rep’s pay packages. The most common measures used are:
- Revenue from new business vs. revenue from existing customers
- Average lifetime value (LTV) of a customer
- Net promoter score
- Deals won vs. deals lost
- Cost of selling vs. revenue earned
- Market penetration
- Growth over time
You can also consider tying in activities that make sense for individual performances. For example, a KPI like growth over time is better suited for a sales manager rather than a sales rep. A CRM like Pipedrive can automatically track KPIs like the number of deals closed, company growth, and LTV.
Step 4. Include every sales position—not just the reps
Positions like sales support, managers, VPs and field reps need to have individual compensation plans drawn up. When you’re creating the outline for each plan, make sure you include performance review periods, commission payout schedules and OTEs.
Step 5. Set your quotas and targets
The next step is setting quotas for each position.
Avoid setting unachievable targets. SalesLoft recommends setting targets that 70% of your reps can either meet or exceed. This will ensure:
- Your reps are more likely to beat their targets and overachieve
- Your team will maintain a level of sales motivation by continuously hitting their goals
Or, you might want to go with an activity-based sales model instead. This ties sales compensation to the number of activities completed rather than the number of sales made. And, it can have surprisingly good results.
Pro-tip: Make sure you revise this part of your compensation strategy if you need to. Overly generous plans with easy to achieve targets can negatively impact revenue.
Communicating your compensation plan with sales reps
New compensation plans may be met with resistance if you don’t spend enough time explaining how they work.
Steve Marley from ZS Associates says that’s because when plans are created, an uneven amount of time is devoted to developing them instead of focusing on how they’ll be rolled out.
“Assuming a 12-week timeline, this means that 10 weeks will be spent on strategy development, data collection, plan designs and plan modeling—and only two weeks will be spent developing the communication and training documents needed to roll out the plan to the sales force,” he says.
Because of this, you should start introducing your compensation plans during the evaluation process. If you wait until the end of the development phase to begin introducing the plan your leadership team will be forced to play catch up.
The best way to introduce your plan is with transparency through four key stages.
Stage 1: Kick-off communication as a group
Gather up your sales team and let them know that sales compensation plans are being reviewed. If your team is spread out geographically, hold a video call.
Make sure everyone from your VP of Sales to your sales reps are present and involved in the discussions. When the meeting wraps, send everyone on the team a copy of the meeting outcomes so they can refer back to them.
Stage 2: Communicate with each rep individually
After the meeting, your reps might have more questions about their compensation plans.
Have your management team approach each rep individually to ensure each rep feels heard. Talk about any quotas or targets that are in place, and ask the reps for their thoughts on a new compensation plan. These individual meetings will help your senior sales team figure out what compensation your reps will be happy with and what will rock the boat.
Stage 3: Distribution
Each rep should be given the new compensation plan as a complete document to review. It’s a significant change, so make sure your reps have sufficient time (two weeks or so) to review it and sign off.
Stage 4: Make sure you monitor your compensation plans
Introducing compensation plans to your sales teams isn’t a ‘set it and forget it’ type of event.
Your senior management team needs to manage and measure them to make sure they’re effective. Each plan will have incentive payments built into it, as well as expectations of how much a rep needs to sell and who they will be reporting to.
Make sure your senior management team uses these expectations as a chance to coach reps to perform better. If reps are consistently missing their quota, senior management can use this as a way to check-in with the rep to see how they can fix it.
The backbone of every successful sales team is a happy sales team.
Developing your compensation plan will take hard work, careful planning and constant monitoring and tweaking. No sales compensation plan is perfect, and your company will likely change its goals over time. Keeping communication open is the key to making your strategies successful.
Once sales reps feel motivated to work hard and are rewarded for a job well done, your sales business will run like a well-oiled machine.