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Sales commission: attract star sellers with an effective sales compensation plan

Sales commission compensation plan
Topics
5 questions you should ask about sales compensation plans
Communicating your sales commission and compensation plan with sales reps
Sales commissions summed up
How to set up a sales commission plan
Communicating your sales commission plan with sales reps
Sales commission FAQs
Final thoughts

When it comes to retaining top sales talent, competitive and effective sales commission and compensation plans are key.

Commission models show your team that they’ll be rewarded for hard work and appreciated for the time they put into their roles. That way, they’re more likely to do their best to hit revenue targets and increase your bottom line.

In this article, you’ll learn about the different types of sales commission plans and how to create one that motivates and rewards your team.


5 questions you should ask about sales compensation plans

A sales compensation plan outlines your employees’ base salary and the company’s commission and incentive program. The commission sales structure should incentivize employees to reach their objectives and earn a deserved reward.

There are many types of compensation structures to choose from. As a sales leader, you should implement a plan that aligns best with your team’s specific needs.

Before we explore the types of sales commission plans, you need to know some concepts and key terms.

1. How do you build a sales compensation plan?

Sales compensation plans vary depending on your team’s structure, budget and goals.

For example, one company might offer a low base salary with a hefty commission package. On the other hand, another may provide a mix of a medium-sized salary, competitive targets and sales career growth opportunities.

The kind of compensation plan you decide on depends on your product, sales process, clients and company culture.

However, there are several factors you should consider when drawing up your team’s compensation structure.

Here are some questions to ask yourself:

  • What is your current average sales commission?

  • What are your company’s overall sales goals?

  • How much revenue do your salespeople bring in and how does it impact your bottom line?

  • 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 a better offer?

  • What is the cost of living for in-house reps where your company is based?

Understanding these factors and team members’ expectations makes it easier to build attractive compensation packages to appeal to high-quality candidates and employees.

2. What are clawbacks?

Some compensation plans require that a new customer stays with your company for a period of time before a rep is entitled to their sales bonus.

If a customer churns before the period is up, you can include a clawback. When this happens, the sales rep may have to return the commission they earned on the sale.

Clawbacks can sound harsh, but – done right – they’re a fair way of protecting a company’s revenue. You can’t sustain a business that pays out its reps but struggles to complete sales or prevent returns. Salespeople usually have no issue with clawbacks if you clearly explain them in advance.

For example, a deal could fall through after you’ve paid the rep but before the customer pays their full subscription. In this case, you could deduct the returned commission from the rep’s next incentive payment.

Clawbacks can also be 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 to reap the benefits of their sales commission rates.

There’s a lot to consider before adding a clawback clause, and your business model may not even need one, but it’s an important term to learn.

3. What are on-target earnings (OTE)?

On-target earnings (or OTEs) are realistic goals of what a rep will earn if they perform well and achieve set sales objectives.

A rep’s OTE is a sum of their base salary and commission earned from closed deals.

For example, you may give a sales rep a base salary of $60,000 and expect them to reach $40,000 in commission in one year. Therefore, their OTE would be $100,000.

OTEs should be as practical of a projection as possible, so it’s good practice to set realistic numbers when trying to attract new or retain current sales talent.

4. How do you include incentives and contests?

Sales incentives and contests can be compelling ways to reward top performers.

Companies often pay out incentives as a dollar amount but you can present them in more creative formats like dinners and excursions. You can also set up short-term incentives, called a sales spiff, to promote a specific product or encourage a push during a certain period.

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 gets a collective weekend away at a spa.

Employees who feel valued are more likely to work harder and stay longer, which saves your business time and money on turnover. According to Gallup research, companies with highly engaged employees see an 81% decrease in absenteeism and 14% higher productivity levels.

5. What are sales accelerators and decelerators?

You can implement sales accelerators when reps close more deals than their quota requires. They are a great way to entice your top performers 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 they achieve above their required sales quota.

For example, if a rep closes 115% of their quarterly sales quota, they might earn a 12.5% commission on the extra 15%. If they close $10,000 worth of extra sales, their accelerated commission could be $1,250.

There are also more complex models introducing a tiered commission rate up to the quota.

Sales decelerators result in less compensation for reps who don’t hit quota. However, it’s important to note that these could potentially be demotivating.


Here’s an example of what an accelerator structure might look like for a sales rep:

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 commission 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 and does little to encourage employees to overachieve.

Example: Each rep in your company earns a straight salary of $75,000 a year or $1,440 a week (gross), and you’ll pay this amount regardless of how many deals they close.


2. Base salary plus commission

If you choose a base salary plus commission plan, you’ll pay reps with a combination of a straight salary and performance-based rewards.

The base pay is typically less than a straight salary, whereas the commission is usually uncapped to incentivize selling.

This setup can work well for companies that want an easy-to-implement compensation structure but still want to motivate and reward employees.

Example: Each sales rep earns a base salary of $40,000 a year. On top of that, reps can earn a percentage-based commission on each sale they make. If you set a commission percentage of 10%, reps will earn an extra $50 for every $500 deal they make.


Communicating your sales commission and 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.

Example: If your company sells a service for $1,500 and your straight commission rate is 15%, your rep will earn $225 from each deal. They’ll need to close an average of three deals a week to earn an annual base salary of $35,000.


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 when they need a reminder of how their sales commission and compensation package works.

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.

Not having clarity regarding how their sales commission is structured defeats the purpose. You want your employees to have a clear understanding of what they’ll receive in return for hard work and closed deals.

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 and sales commission plans

Introducing sales commission 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.

Sales commissions allott for optimization of performance, especially when they are laid out clearly and effectively from the beginning.

Sales commissions summed up

The backbone of every successful sales team is a happy, motivated salespeople.

Developing your compensation plan will take hard work, careful planning and constant monitoring and tweaking, but it will pay off greatly. No sales commission 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 team and business as a whole will run like a well-oiled machine.

Example: You pay a rep a $4,000 draw each month. In January, the rep makes $5,000 and keeps the remaining $1,000. In February, the rep only makes $2,500 commission and so theoretically owes $1,500 to the company, but they won’t pay it back until they’ve earned more than the draw again. In March, they make $6,500 and pay back the $1,500 they owe.

Month

Draw paidCommission madeOwed to companyExtra commission earnedEarnings
January

$4000

$5000-$1000$5000
February$4000$2500$1500-$4000
March$4000$6500$1500$1000$5000
Totals$12000$14000-$2000$14000

5. Tiered commissions

A tiered commission structure can be one of the best plans to encourage top performers to keep selling because it incentivizes reps to sell beyond their quotas.

Once a sales rep hits a certain number of deals or revenue, you can move them onto a higher commission rate. The more deals they close, the more money they’ll earn.

A plan like this can encourage reps to push sales through strategies like upsells and cross-sells.

Example: Your sales rep currently earns a 9% commission on every sale they make up to $20,000 a month. Once they cross the $20,000 threshold, they 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. The success of a plan like this depends on how hungry your team is to meet its quota.

If a sales rep is continuously hitting 65%, they may be content with that amount. They might not feel incentivized to sell more and it could be hard to push them without introducing an accelerator.

On the other hand, your team may be keen to hit 100% whenever they can.

Example: If a rep has a quota of $10,000 in monthly sales and only sells $8,000, they would have made 80% of their quota. Therefore, they’ll get paid 80% of their commissions


7. Gross margin commission

Gross profit margin plans center around the overall sales performance of a company. A rep will earn a commission on profit margins in a sale instead of the overall price of a product.

Typically, startups and bootstrapped companies that don’t have a lot of liquidity use these plans. In other words, a full-priced sale will result in a higher commission over one closed with a heavy discount.

Example: Your sales reps earn a 10% commission on their gross profit margins and two closed 10 deals each this month. One rep didn’t discount any, worth $1,000 each for total sales of $10,000, while the second discounted five by 20% for a total of $9,000. The commission paid to the first rep will be $1,000, while the second rep will earn $900.


8. Residual commission

Instead of one-time payments, reps continue to earn money from past sales with residual commission plans.

They act like a long-term bonus and can encourage salespeople to build stronger client relationships. The more that customer spends, the more money the rep makes.

Residual commission plans can be most effective for subscription-as-a-service (SaaS) companies where customers pay monthly or annually over a longer term.

Example: A rep sells a product worth $8000 and gets a residual commission of 0.5% per month. For every month the customer remains subscribed, the rep gets $40.


9. Territory volume commission

Territory volume commission plans tie earnings to the sales success within a specific geographic area.

Reps earn commissions based on how many products they sell within their assigned area or territory as a team.

It’s often used by larger enterprises that trade in multiple regions and can encourage healthy competition between teams.

Example: A manager sets a commission rate of 10% and a target of $100,000 in one location across a quarter. If three members of a team of five collectively hit that target, the commission is still split equally between the five.


Here’s a table to help you work out each sales compensation plan’s effectiveness for your needs.

Pros

Cons

Commission can be extremely motivating for sales reps

Commission structures can be complicated, especially if the buying journey is complex

Pay is tied to revenue, so the more your reps make the more money your company makes

Sales-based commission can lead to overly aggressive sales tactics, so it needs special training to mitigate unwanted behaviors

Higher earning potential can attract top sales talent

Some salespeople don’t enjoy working under quota pressure

Can be more economical for the company

Has the potential to create an environment that is too competitive, so needs careful managing

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How to set up a sales commission plan

One common error sales organizations make is not crafting a sales commission plan that’s motivating or rewarding in the right ways for your sales team.

To ensure your sales compensation plan’s effectiveness, you can ask yourself these questions:

  • Is our cost of sales appropriate and competitive?

  • What are the company and the team’s business goals?

  • How can I succeed in motivating both personal success and the success of the team?

  • How will each sales role impact the company and team’s success?

  • How can I find the perfect balance between performance and pay?

Once you answer the above, 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, as this will vary depending on your industry.

For example, the estimated total pay for a rep at a cloud-based computing company is $261,897 per year, whereas an agricultural sales rep’s salary is $96,361.

Job review sites like Glassdoor, LinkedIn and similar platforms can 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 become 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 and tiered commission combination?

You should base your pay mix on what you expect your reps to achieve. For example, if you task sales reps with closing deals and building customer relationships, you may want to give them a base rate plus a residual commission to encourage after-sales service.

On the other hand, sales management might get a larger base salary due to their responsibilities and you could structure their commission based on overall company profits.

Step 3: Choose your measurement methods

Measuring each rep’s success is crucial. However, the sales metrics you choose will give you a more in-depth look at what’s working and what isn’t.

Start by choosing what key performance indicators (KPIs) you will measure and how they will affect your sales rep’s pay packages and sales commission.

The most typical sales performance measures organizations use are:

  • Revenue from new business vs. revenue from existing customers

  • Average lifetime value (LTV) of a customer

  • Net Promoter Score (NPS)

  • Deals won vs. deals lost

  • Cost of selling vs. revenue earned

  • Market penetration

  • Growth over time

You should also consider that different KPIs should be tracked and awarded to the correct employees. For example, a KPI like growth over time is better suited to a sales manager with more control over their own deals every quarter.

A CRM like Pipedrive can help you set benchmarks and automatically track metrics like the number of deals closed, company growth and LTV. Use it to help you map out your sales cycle and customer journey to consistently hit revenue targets with less effort.

Pipedrive new lead performance report

Step 4: Set targets for every sales position (not just the reps)

Positions like sales support, managers, vice presidents (VPs) and field reps should all have individual compensation plans drawn up.

When creating the outline for each plan, try to include performance review periods, commission payout schedules and OTEs that distinguish each person’s role and responsibilities.

Try to set achievable targets and choose a goal around 70% of your reps can either meet or exceed.

Doing so can help to ensure:

  • Reps are more likely to surpass targets and overachieve

  • Each team member maintains a good level of motivation by continuously hitting their goals

If it better fits your business model, you might use an activity-based selling structure instead and tie commission to the number of activities completed rather than the number of sales made.

Pro tip: Try to balance fair, achievable targets with numbers that still healthily challenge and motivate your reps to hit personal development and revenue goals.


Communicating your sales commission plan with sales reps

Avoid new compensation plans meeting resistance by spending time explaining to your team how they’ll work.

Steve Marley from ZS Associates says sales organizations spend an uneven amount of time developing commission plans instead of focusing on how they’ll be rolled out. Marley explains:

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.


To ensure your whole team is on the same page, you should start introducing your compensation plans during the evaluation process.

The best way to communicate your new plan is with transparency through three key stages.

Stage 1: Kick off communication as a group

Start by gathering your sales team and letting them know you’re reviewing commission and compensation plans. If your team is remote and spread out geographically, you can hold a video call.

Try to make sure everyone, including your VP of Sales and new hires, is present and involved in the discussions.

When the meeting wraps, send everyone on the team a copy of the outcomes so they can refer back when they need a reminder of how their new sales commission and compensation package will work.

Stage 2: Distribute your new revenue commission documents and speak with each team member

After the meeting, your reps may have more questions about their compensation plans.

If you manage a sales team, approach each rep individually to ensure each person feels heard. Allow them to talk about any quotas or targets in place and ask for their thoughts on the new compensation plan.

These individual meetings will help your senior sales team determine which commission your reps will be happy with and which could rock the boat.

Try to give each person 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 sign off on it.

By the end of two weeks, your employees should clearly understand what they have to do and what they’ll receive.

Stage 3: Make sure to monitor your sales commission agreement

Your senior management team should manage and measure the new commission plan’s introduction to make sure it’s 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 – this can be a lot of information for people to get their heads around initially.

Your management team can use these expectations to coach reps to perform better. If people are consistently missing their quota, take the opportunity to check in and see how you can help support them and fix it.

New sales commission plans can eventually optimize performance, especially when earning potential is laid out clearly and effectively from the beginning.


Sales commission FAQs

  • What does commission mean in sales?
  • What is commission pay?
  • What is a multiplier commission structure?


Final thoughts

The backbone of every successful sales team is happy, motivated salespeople.

Developing your compensation plan will take hard work, careful planning and constant monitoring and tweaking, but it can pay off greatly.

However, remember that no sales commission 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 reps feel motivated to work hard and know you’ll reward them for a job well done, your sales team and business can run like a well-oiled machine.

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