Best Types of Sales Compensation Plans

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Hand with Dollar Bills - Best Types of Sales Compensation Plans
Ruth Albertson
Ruth Albertson
September 29, 2020
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Category:
Human Resources

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UPDATED:
October 14, 2020

Whether you are building your first sales team or are planning to restructure your commission plan soon, you should understand the basics of the best types of sales compensation plans used today as well as the best practices for implementing a new compensation plan. While many industries pay their employees a yearly salary or an hourly wage, the world of sales is far different from its numerous compensation plans. Although each option has its merits, not all will be right for your business.

As you read through the following examples and tips, one particular plan may stand out to you immediately. On the other hand, you may feel that two or three programs would work for your business. Take some time to consider your business’s goals and objectives, create a performance estimate for the upcoming year and determine how a compensation plan could best incentivize the behaviors you want to see to help you meet your goals.

The Nine Best Types of Sales Compensation Plans

You have plenty of options when it comes to paying members of your sales team. Ideally, your chosen compensation plan will incentivize your employees to work even harder and make even more sales while also improving your business’s financial bottom line. Consider the following most commonly utilized plans to determine which one would work best for your business.

1. Straight Salary

Woman holding a check

Perhaps the easiest option is a straight salary plan that pays your sales professionals whether or not they make sales. This is an incredibly straightforward plan that eliminates many questions and gets rid of variable paychecks. These plans are best for employees who want to know exactly how much they can expect to be paid.

While this plan was relatively uncommon in the world of sales just a few decades ago, it is beginning to be more frequently seen. Part of the reason for this is the incredible pushback that many sales teams face from customers who do not want a particular product or service forced on them. Creating a straight salary eliminates the need to be the top worker and to close the most sales and instead lets the sales team cater more to the desires and goals of the clients or customers.

A straight salary plan is typically a good option for smaller sales departments and teams that work together on numerous projects. This is also a smart choice for employees who perform many other tasks other than just selling regularly.

2. Base Salary Plus Commission

Another incredibly common compensation plan is the base pay plus commission plan that combines a salary and additional commission-based payments for performance or sales. This is a good option for hardworking employees who are actively looking for ways to increase their paychecks. They also appreciate having the security of a base income. You could consider various commission plans as detailed below based on whether you want to compensate sales members on the number of products they sell or as a percentage on the dollar amount they sell.

Paper with the words "Commission Agreement"

3. Commission-Only Plan

If you only want to reward the actual performance you see from your sales team, you may prefer to consider a commission-based compensation plan alone. With this plan, sales members are only paid when they sell something, meaning that they could potentially earn nothing in a month during which they sold nothing. Standard commission rates vary greatly depending on what you are selling but usually range from 5% to 45%.

The benefit for you is that there is virtually no risk with this plan. You will only be paying employees when you have the sales revenue to do so. However, many potential employees may shy away from this plan because it lacks any security for them.

4. Draw Against Commission Plan

If you are optimistic that each employee will make sales throughout the pay period, you may want to create a draw against commission plan. This compensation plan gives your employees income at the beginning of the month, creating a security cushion for them. When their commission is figured at the end of the month, the original payment will be deducted from the commission, and they will be paid the difference.

One potential problem with this type of plan is that your employees could end up owing you money if they do not make enough sales. If this happens for enough months in a row, you could hold a significant amount of debt over them.

5. Territory Volume Plan

If your business is large enough to have several teams of people working in two or more territories, you should consider the territory volume compensation plan. With this plan, the entire team that covers a particular region will be rewarded based on all of their sales added together. This is also a great option if you have several different team members, such as sales managers, business reps, and customer service reps, who are jointly over a territory. Choosing this option would reward all of these individuals equally.

Man writing "Profit Margin"

6. Profit Margin Commission Plan

With this plan, also known as net profit margin, you would pay your sales reps a commission percentage that is based on how well your company is doing overall rather than only on how many total sales reps have made. Profit margin is defined as the amount your company makes per dollar sold. Costs other than just the prices of the products sold will need to be considered to get the net profit amount.

7. Gross Margin Commission Plan

The gross margin commission plan is similar to the profit margin except that the commission is only based on the amount of revenue minus the cost of selling. This type of compensation plan can be a smart move for companies unwilling to let their sales reps discount products or services without their input. This encourages team members to keep margins high while also working hard to sell product lines with the highest profitability.

8. Capped Commission Plans

Sales reps earning capped commissions often receive a salary alongside their commissions. However, there will be a limit placed on how much commission they can make in a pay period. While this can decrease the incentive to work hard among specific sales reps, it can also help you more easily stay within your budget.

9. Tiered Commission Plan

With a tiered commission plan, each sales rep has the opportunity to earn a higher commission percentage, the more sales he makes. For example, while you may only pay a 5% commission on the first $50,000 in sales, you may increase that to 7% for sales over $100,000 and 8% for sales over $150,000. This type of commission plan can increase motivation among your workers to hit that next level, especially as the pay period approaches.

Man looking at money bags and question marks

How to Choose the Best Type of Compensation Plan for Your Business

All types of compensation plans have their strengths and weaknesses, and none of them are inherently better or worse. However, you must keep in mind that what works well for one company may not work well for your company. The compensation plan you choose must hit a few key points, including providing fair compensation to every member of your sales team, helping you create significant profit margins for your business, and incentivizing good work to motivate employees. Here are a few tips on choosing a plan that will check all of these boxes for you.

Consider Your Industry

First, consider the area of sales on which your company focuses. Some industries tend to pay far more than other sectors, often based on the types of products or services being sold. For example, manufacturing sales and financial sales rank far higher in commissions and salaries than door-to-door sales or insurance sales do.

Look at the Competition

Man looking through the window with binoculars

Second, look at the competition in your specific industry. By ensuring that you match industry-specific commission rates, you can more easily keep your current sales reps happy and potentially save yourself the money and frustration of having to hire new talent. Also, a competitive commission rate will make it easier for you to attract new talent in the future. With research showing that many sales reps leave their current jobs for others, offering them more money, you want to make sure that your compensation plan is current and competitive.

Of course, it can be incredibly challenging to determine the exact rate to keep everyone happy while ensuring that you keep high-profit margins. Although you may need a give and take at first, you should be able to settle into a healthy going rate after reaching out to others in your industry.

Consider Variable Factors

Third, there are plenty of variables that could affect your compensation plan now and well into the future. Your company’s economic health and even your state or the nation at large can undoubtedly affect the amount of salary or the rate of commission you can safely offer. Your quarterly or yearly operating budget will also need to inform your compensation plan. Whatever compensation plan you offer, be sure that you are upfront with your sales reps from the beginning so that they know what to expect.

Incentivize Your Best Sales Professionals

Many sales reps are eager to increase their regular earnings. Providing regular incentives to motivate sales amounts and team behavior can be enormous in increasing your profits. Reward your top performers with higher commission rates, such as by using a tiered commission plan. Consider which sales behaviors create the best results, and create a rewards program to motivate sales reps in that direction.

As you consider incentives, be sure that they follow your regular sales cycles. For example, you may want to institute a quarterly incentive plan rather than a monthly program. Ensure that you communicate this to your team while also letting them know the expiration date for each incentive plan.

Create a Plan That Works for Your Sales Team

Group of people representing Sales Team

Every team is different. It is not just your industry or the size of your business that sets your team apart. Instead, the product or service you are selling, the area of the country you are selling in, and the team dynamics in your workplace will have much to do with setting the tone for your entire business. Be sure that your compensation plan adequately addresses the way that your team is unique.

While it can be useful to reward top performers for a job well done, it is usually even better to create a team-based compensation plan that rewards teamwork and overall team performance. This type of program will help even your low-performing reps take their skills to the next level.

How to Get Started

Head-knowledge of sales compensation plans is good, but sometimes it can be challenging to get started. Start with the basics when getting things done by creating a written plan with specific timeframes listed and by accomplishing small steps every day. This little yet significant progress will motivate you to continue working hard to create a great plan and improve your business’s profitability.

Get Help from Human Resources

Fingers pointing to a giant speech bubble that says "Human Resources"

Depending on your business’s size, creating a new compensation plan may not be something you can undertake independently. If you have a human resources department, you will want to rely on it to help you develop an appropriate and legally sound compensation plan. Also, HR should be able to help you regularly assess the effectiveness of your current plan and make tweaks to keep employees happy. If you do not have an in-house HR department but feel uncomfortable working on a compensation plan on your own, you could consider outsourcing this job to compensation administrators.

Be Clear with Expectations and the Compensation Plan

All team members should thoroughly understand how they will be compensated and when they can expect to receive their earnings. Failing to communicate this properly can lead to unhappy sales reps that ultimately leave your business for a competitor. Sharing your compensation plan does not have to be complicated. Instead, create a simple table with explanations in writing, and ensure that each employee receives it and has a chance to ask questions.

Choose the Right Software

Once you have chosen your compensation plan, do not assume that your work is over. You must now consider how you will integrate the plan you have selected into your company’s finances. The right software can put your plan to work, handling payroll and even benefits while performing automatic calculations and ensuring that all numbers are accurate.

Regularly Evaluate the Plan

Even if you are delighted with your business’s compensation plan, you will want to make sure that your sales reps are as well. Unhappy employees are incredibly likely to head over to a competitor, ultimately costing you tens of thousands of dollars as you hire and train new team members. In your evaluation, ensure that employees understand the compensation plan thoroughly, that quotas are fair and reasonable, that performance is fairly compensated, and that sales territories are equally balanced among sales teams.

As a small business owner, you certainly have plenty on your plate without having to worry about your business’s compensation plan. By following these quick steps, you can reduce much of your stress and ensure that your sales reps continue working for you thanks to a compensation plan that pays them what they deserve. If you need help growing your small business, contact E-Marketing Associates today.

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