A tempting sales commission plan can attract top talent and motivate reps to perform at their best. Even more so, a good compensation model is critical for organizations with aggressive sales goals and high quotas.
When an organization is creating or restructuring a compensation plan, they need to consider their job market, the length of the sales cycle, and the impact of different products, services, verticals, and territories on success rates. Leaders must also ensure their compensation structure is fair for everyone, simple and easy to understand, and motivating. To determine the best commission structure for your organization, first you need to understand the options:
Types of Commission Plans
Commission is a payment to an employee based on their sales or other completed tasks. Deciding which to include in your compensation package means considering your overall budget, the local cost of living, your sales process, and the culture of your organization.
Flat Rate or Revenue Commission is a payout of a set percentage on the sale. For instance, if the rate is 3% and you sell $10,000, your commission is $300.
Placement Fees, aka Absolute Commission, is a fixed amount per meeting, customer, or deal. Pay-per-appointment operations like BPOs or automotive sales tend to use this scheme.
Tiered Commission is revenue commission, with the added variable of higher percentages for higher sales. For example, some teams will offer 5% on deals up to $100,000 and 7% on deals over that.
Straight Line Commission is based on what a sales rep closes against their quota. If they are at 75% of quota, they receive .75 of their commission payout.
Gross Margin, aka Net Sales Commission, is based on the company’s profits on a sale or the total revenue generated by a rep. This structure is most common in highly negotiable sales, where reps have autonomy over discounting.
Capped commission is a ceiling on the amount a rep can earn and gets based on total compensation and not commissions alone. Some companies will offer alternative benefits if a rep meets the cap, such as stock options or annual bonuses.
Uncapped commission places no ceiling on what a rep can earn and is significantly more attractive to prospective hires.
Before we get to the overall best commission plan, we need to cover the most common compensation structures:
Types of Sales Compensation Structures
Commission is just one part of the compensation equation. There are several plans out there that vary depending on what you sell, the average sales cycle, how complex the sale is, and the stage of the company.
A commission-only plan means that a salesperson is only paid based on the business they generate. That means if a rep has a rough month, they could be bringing home a paycheck for $0. On the flip side, if they have an excellent month or year, these plans rarely have a cap, making it extremely lucrative for good sellers.
Straight commission plans offer the company the benefit of only paying for results. This structure most often gets used with independent contractors. The payment gets based upon contract size, new logos or customers, or upsells and cross-sells. It may be a percentage of the revenue or profit or a fixed amount.
The drawback of commission-only plans is that they can lead to high burnout and turnover. Reps may also default to closing bad customers or using nefarious tactics to get their paycheck.
The opposite of straight commission is a salary only plan. It’s incredibly uncommon to find a salary only comp plan in sales these days, but they are out there. Reps receive a set annual salary or hourly rate with no variables except for perhaps the occasional SPIFF.
Salary only has a significant drawback in that reps aren’t motivated to sell because they have no incentive to do so.
Salary Plus Commission
A blended compensation structure helps companies retain some level of control over sales execution while incentivizing reps to perform well. The challenge is to find the right balance of base pay to commission to hit on target earnings (OTE).
If the base salary represents, for instance, 10 percent of total pay, this token amount probably won’t motivate the sales rep to follow company recommendations or directives. On the other hand, if the base salary is 90 percent of total pay, the token sales commissions probably won’t push the rep to sell more merchandise and sell at higher prices. Industry-standard is a 60/40 base pay to commission split. For many organizations, the ideal split might resemble the optimal talk:listen time for their cold calls–more transactional sales will have lower base pay and lower talk time.
The most substantial benefit of a blended compensation structure is its flexibility. More junior reps will have a lower base salary and commission percentages. As they progress in-role or get promoted, both figures increase. There can also be variances between enterprise and mid-market teams, new sales versus expansions, specific verticals, and more.
Additional Sales Incentives
Outside of commission and salary, there are other ways to add to the total compensation package. These can be monetary or take the form of prizes like trips, tickets, and more. Here are the four most common additions to compensation plans:
Adding the opportunity of bonuses to your compensation structure is a great way to provide additional flexibility to the program and motivate the team to hit their targets. Bonuses may get applied across organizational revenue goals, quota attainment, customer retention, and more.
Sales Accelerators & Multipliers
Another excellent incentive method is sales accelerators and multipliers. For reps that go over quota, you can add an accelerator that provides a set dollar amount or percentage payout based on how far they exceeded quota. Multipliers get placed on things like customer firmographics renewals, or other specific objectives that increase the reward across the entire team, not just top performers.
SPIFFs & Contests
Creating short term goals with nominal prizes or bonuses can help drive excitement on the floor and amp up the energy. These usually coincide with goals further up the funnel, such as the number of dials, emails, and conversations. Contests like “Call of the Month” are another great way to drive friendly competition on the sales floor. Some rewards for SPIFFs and contests include an exclusive weekly happy hour or gift cards near the holidays.
Personalized Incentives & President’s Club
The more personalized the prize, the higher the motivation to earn it. Sales leaders who get to know their reps can leverage things like sports or concert tickets, weekend trips, meals out, high-end home goods, and other personalized incentives for short and long term goals. These rewards provide an extra boost for those who aren’t necessarily money motivated. President’s Club trips are also a fantastic incentive because it comes with recognition and prestige for the sales rep.
In some organizations, negative incentives are in place to help keep reps motivated while providing the company somewhat of a safety net for underperformance.
Decelerators reduce a sales rep’s payout if their performance falls under a certain threshold. For example, if the threshold is 60% performance against the plan with a decelerator of .5x, the commission payout on a rep who hits 54% of quota would be a 27% payout.
Clawbacks center around customers churning or a reduction in the annual contract value in a specific period, which can be as short as one month or as long as multiple years. Sales reps, and sometimes the customer success manager, will have to pay back their commission on the deal.
In addition to selecting commission structures and compensation plans that make sense for the business, sales leaders must also consider potential challenges.
Sales Management Conflicts
Sales leadership is put in a difficult position when it comes to designing a compensation package. It requires working closely with finance to manage budgets and decide when to payout whether it’s upon contract signature or payment. It also requires a little finesse when it comes to scenarios where product A guarantees more commission, but the overall organizational goals depend on higher sales of product B.
The other extremely challenging part of compensation packages is hiring. How much flexibility can you offer in base pay and commission payouts before it becomes unfair for existing reps? What happens to reps who have a lousy territory or vertical? Establishing guardrails of how much room is available for negotiation is critical.
Now, The Best Sales Commission Structure Is…
Dependent on your organization. The reality is that most sales teams will thrive with a blended model. Where sales leaders need to spend some serious time considering is how they introduce new hires into the commission structure.
One way to implement a blended commission pay structure is to start reps on a full salary, introduce commissions after initial training and onboarding is complete, and then reduce the salary monthly or quarterly until the rep is on full commission. This structure is different from draw compensation plans where the rep owes the money back to the company.
Starting reps unblended then moving to a blend is the best sales commission structure because it has a couple of significant advantages:
- It reduces churn, a serious problem for companies that start reps on full commission or mostly commission. New reps have a hard time earning enough in those critical first months to remain at a company. If the rep receives accounts expected to produce sales, those accounts may be put in jeopardy because the rep lacks the experience to manage them. Without the pressure of earning commissions from day one, the new rep will absorb training better and have a much higher chance of succeeding.
- It gives the company time to have control over new sales rep activity, which helps the rep to understand the value of company sales management and marketing objectives. Later, when the rep is earning commissions, this base of knowledge will foster a sense of being part of the team, not an independent agent.
Use an Incubator When Testing Sales Commission Structures
There are many pros and cons to each sales commission structure. Searching for the perfect compensation plan for sales reps is like looking for the pot of gold at the end of a rainbow. It just isn’t there. Testing new systems in a small control group is an excellent way to discover better commission pay structures without disrupting the entire sales force. Changes to sales compensation, even minor ones, can cause confusion and quite severe morale problems among the reps. However, if a new system can be approved by a control group, broader implementation is a far easier sell.
Building a sales compensation plan is a difficult subject for many organizations. With the right goals and stakeholders, leadership teams can develop competitive pay structures that attract and retain top salespeople while growing the bottom line for the business.
Originally written on 11/2/17, updated 11/21/19
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