A Strategic Guide to Sales Compensation

Categories: Blog

Sales compensation includes a salesperson’s base salary, benefits, and any commissions they make. Sales compensation encompasses the overall pay package while sales incentives serve as extra rewards for meeting or exceeding sales goals.

When most people think of sales compensation, they think of commissions. However, that’s far from the only way to compensate your sales team.” – Larry Beers, Director of Consulting, JER HR Group

However, your sales compensation planning process must take both into consideration. It’s important to ensure that your sales team is fairly compensated for their regular work while balancing competitive sales incentives that your organization can reasonably afford.

This online guide is here to help you get started. We’ll offer some general tips and best practices for determining sales compensation plans that strike that delicate balance. Please note that our tips will be very general, and they should be used alongside an in-depth analysis of your specific organizational needs.

Types of Sales Compensation Plans

Base Salary Only

This plan provides your sales representatives with a fixed salary paid at regular intervals. It functions the same way that typical employee compensation does without variations based on commissions or performance.

Base Salary Plus Commission

In this system, your team members receive a guaranteed base salary and also earn additional commissions based on their sales. The commission is usually a percentage of the sales they generate. This is the most common type of compensation plan for salespeople, with 48.8% of organizations using this model.

For a more aggressive sales-driven approach, you might opt for a commission-only model, where salespeople’s earnings come entirely from commissions.

Variable Pay

Variable pay links compensation to achieving specific performance metrics, business goals, or milestones. This can include sales targets, project completion, or efficiency improvements. The specifics of what triggers variable pay can vary widely and are defined by the company.

Profit Sharing

Profit sharing involves distributing a portion of the company’s profits among your sales team, often in addition to their regular pay. This distribution can be based on the company’s overall performance and is typically paid out annually.

Territory Volume

This compensation model pays your sales team based on the total sales generated within a specific geographic area or territory. It doesn’t matter who made the sale; the total sales volume in the territory determines the compensation.

Determining The Right Sales Compensation Strategy For You

Before creating your sales compensation model, you should determine which type of strategy is best for your needs. Here’s an overview of the pros, cons, and ideal use case for the aforementioned described sales compensation plan types.

Plan Pro Con Ideal Use Case
Base Salary Only Provides financial stability. May not incentivize exceeding sales goals. Best when meeting set targets is not the primary goal.
Base Salary Plus Commission Balances stability with performance incentives. Base salary might limit potential earnings. Ideal when sales performance directly impacts revenue.
Commission Only High earning potential for top performers. No income stability. Fits aggressive sales environments with high earning potential.
Variable Pay Flexibly rewards employees for meeting specific goals. Complexity in setting and measuring goals. Best for dynamic sales environments with clear performance metrics.
Profit Sharing Aligns team’s interests with company success. Benefits depend on company performance. Ideal for teams closely tied to overall company performance.
Territory Volume Encourages team effort in specific areas. Individual effort might not match compensation. Works well for team-based sales strategies with clear regional divisions.

How to Create an Effective Sales Compensation Plan: Step-by-Step

1. Define Your Sales Goals

Start by setting clear, measurable sales goals that your team should achieve. These goals can be based on revenue, number of new clients, or specific product or service sales. Make sure these goals are aligned with your overall business objectives.

2. Understand Your Sales Team’s Role

Analyze the different roles within your sales team and their impact on the sales process. Understanding these roles helps you design a compensation plan that matches each role’s contribution to achieving your sales goals. For instance, your sales manager will likely make more than individual reps.

3. Choose the Right Compensation Structure

Evaluate different compensation models to find the one that aligns with your business strategy and motivates your sales team. Your choice should reflect the nature of your sales cycle, team dynamics, and how you want to incentivize performance.

4. Determine Compensation Levels

Set the levels of compensation based on your chosen structure. This involves deciding on base salary amounts, commission rates, profit-sharing percentages, or other relevant financial figures. Ensure these levels are competitive yet affordable for your business.

5. Set Clear Performance Metrics

Establish clear, quantifiable metrics that will determine how compensation is calculated. These could include closed deals, customer retention rates, or specific project outcomes. Make sure these metrics are fair, achievable, and directly tied to your sales goals.

6. Communicate The Plan

Once your plan is ready, present it to your sales team. Explain the compensation structure, performance metrics, and how they can maximize their earnings. Clear communication ensures everyone understands and is aligned with the new plan.

7. Monitor & Adjust as Needed

Regularly review your sales compensation plan’s effectiveness in driving desired sales behaviors and outcomes. Be prepared to adjust the plan based on new business goals, market conditions, or feedback from your sales team to keep it relevant.

Sales Compensation Planning Best Practices

Use Competitive Benchmarks

Research what similar companies in your industry offer their sales teams. This helps you set competitive salaries and commissions that attract and retain top talent. This can also help you decide what the best sales incentives should be. Having this knowledge is important because properly structured programs can enhance performance by up to 44%.

Offer Flexibility

Provide different compensation options when possible. Some salespeople may prefer a higher base salary with lower commission rates, while others might opt for higher commissions and a lower base salary. Offering flexibility allows your team members to choose the plan that best suits their financial needs and work style.

Reward Both Team & Individual Performance

Incorporate rewards for both individual achievements and team success. This balances the drive for personal sales targets with the overall goals of the sales department or organization.

Ask Our Expert Compensation Consultants How You Can Attract More Salespeople With Your Strategy

The best sales compensation strategy is one that drives long-term results – and the best way to achieve that is to craft a perfectly tailored plan for your specific needs. Start with the tips highlighted in this article, then ask expert sales compensation consultants for further advice.

JER HR employs these consultants. We can also assess your current commissions plan and HR practices to help you improve their effectiveness.

Start today by contacting us for your 3-minute HR assessment.

A Strategic Guide to Sales Compensation

Sales compensation includes a salesperson’s base salary, benefits, and any commissions they make. Sales compensation encompasses the overall pay package while sales incentives serve as extra rewards for meeting or exceeding sales goals.

When most people think of sales compensation, they think of commissions. However, that’s far from the only way to compensate your sales team.” – Larry Beers, Director of Consulting, JER HR Group

However, your sales compensation planning process must take both into consideration. It’s important to ensure that your sales team is fairly compensated for their regular work while balancing competitive sales incentives that your organization can reasonably afford.

This online guide is here to help you get started. We’ll offer some general tips and best practices for determining sales compensation plans that strike that delicate balance. Please note that our tips will be very general, and they should be used alongside an in-depth analysis of your specific organizational needs.

Types of Sales Compensation Plans

Base Salary Only

This plan provides your sales representatives with a fixed salary paid at regular intervals. It functions the same way that typical employee compensation does without variations based on commissions or performance.

Base Salary Plus Commission

In this system, your team members receive a guaranteed base salary and also earn additional commissions based on their sales. The commission is usually a percentage of the sales they generate. This is the most common type of compensation plan for salespeople, with 48.8% of organizations using this model.

For a more aggressive sales-driven approach, you might opt for a commission-only model, where salespeople’s earnings come entirely from commissions.

Variable Pay

Variable pay links compensation to achieving specific performance metrics, business goals, or milestones. This can include sales targets, project completion, or efficiency improvements. The specifics of what triggers variable pay can vary widely and are defined by the company.

Profit Sharing

Profit sharing involves distributing a portion of the company’s profits among your sales team, often in addition to their regular pay. This distribution can be based on the company’s overall performance and is typically paid out annually.

Territory Volume

This compensation model pays your sales team based on the total sales generated within a specific geographic area or territory. It doesn’t matter who made the sale; the total sales volume in the territory determines the compensation.

Determining The Right Sales Compensation Strategy For You

Before creating your sales compensation model, you should determine which type of strategy is best for your needs. Here’s an overview of the pros, cons, and ideal use case for the aforementioned described sales compensation plan types.

Plan Pro Con Ideal Use Case
Base Salary Only Provides financial stability. May not incentivize exceeding sales goals. Best when meeting set targets is not the primary goal.
Base Salary Plus Commission Balances stability with performance incentives. Base salary might limit potential earnings. Ideal when sales performance directly impacts revenue.
Commission Only High earning potential for top performers. No income stability. Fits aggressive sales environments with high earning potential.
Variable Pay Flexibly rewards employees for meeting specific goals. Complexity in setting and measuring goals. Best for dynamic sales environments with clear performance metrics.
Profit Sharing Aligns team’s interests with company success. Benefits depend on company performance. Ideal for teams closely tied to overall company performance.
Territory Volume Encourages team effort in specific areas. Individual effort might not match compensation. Works well for team-based sales strategies with clear regional divisions.

How to Create an Effective Sales Compensation Plan: Step-by-Step

1. Define Your Sales Goals

Start by setting clear, measurable sales goals that your team should achieve. These goals can be based on revenue, number of new clients, or specific product or service sales. Make sure these goals are aligned with your overall business objectives.

2. Understand Your Sales Team’s Role

Analyze the different roles within your sales team and their impact on the sales process. Understanding these roles helps you design a compensation plan that matches each role’s contribution to achieving your sales goals. For instance, your sales manager will likely make more than individual reps.

3. Choose the Right Compensation Structure

Evaluate different compensation models to find the one that aligns with your business strategy and motivates your sales team. Your choice should reflect the nature of your sales cycle, team dynamics, and how you want to incentivize performance.

4. Determine Compensation Levels

Set the levels of compensation based on your chosen structure. This involves deciding on base salary amounts, commission rates, profit-sharing percentages, or other relevant financial figures. Ensure these levels are competitive yet affordable for your business.

5. Set Clear Performance Metrics

Establish clear, quantifiable metrics that will determine how compensation is calculated. These could include closed deals, customer retention rates, or specific project outcomes. Make sure these metrics are fair, achievable, and directly tied to your sales goals.

6. Communicate The Plan

Once your plan is ready, present it to your sales team. Explain the compensation structure, performance metrics, and how they can maximize their earnings. Clear communication ensures everyone understands and is aligned with the new plan.

7. Monitor & Adjust as Needed

Regularly review your sales compensation plan’s effectiveness in driving desired sales behaviors and outcomes. Be prepared to adjust the plan based on new business goals, market conditions, or feedback from your sales team to keep it relevant.

Sales Compensation Planning Best Practices

Use Competitive Benchmarks

Research what similar companies in your industry offer their sales teams. This helps you set competitive salaries and commissions that attract and retain top talent. This can also help you decide what the best sales incentives should be. Having this knowledge is important because properly structured programs can enhance performance by up to 44%.

Offer Flexibility

Provide different compensation options when possible. Some salespeople may prefer a higher base salary with lower commission rates, while others might opt for higher commissions and a lower base salary. Offering flexibility allows your team members to choose the plan that best suits their financial needs and work style.

Reward Both Team & Individual Performance

Incorporate rewards for both individual achievements and team success. This balances the drive for personal sales targets with the overall goals of the sales department or organization.

Ask Our Expert Compensation Consultants How You Can Attract More Salespeople With Your Strategy

The best sales compensation strategy is one that drives long-term results – and the best way to achieve that is to craft a perfectly tailored plan for your specific needs. Start with the tips highlighted in this article, then ask expert sales compensation consultants for further advice.

JER HR employs these consultants. We can also assess your current commissions plan and HR practices to help you improve their effectiveness.

Start today by contacting us for your 3-minute HR assessment.