Everything you should know about sales compensation plans and sales commission
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. Using tools like Pipedrive can help you pinpoint those areas that are lacking, so you can effectively use sales commission to promote hard work.
How sales compensation plans are built
Sales compensation plans vary depending on your team's 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. What kind of compensation plan you decide on all depends on the product, process, clients and company culture.
There are several factors you need to consider when drawing up your team’s compensation structure. Here are some questions to ask yourself when mulling over your sales commission 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. They also act as an incentive to stay with your company in order to reap the benefits of their sales commission.
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. If you plan on doing this, it won’t work in the long-run, and you’ll find that quality salespeople won’t join, or stay on your team. OTE’s should be as practical of a projection as possible.
Incentives and contests are also 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 sales 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:
|71 to 100% quota||1.67||8.3%|