When it comes to sales compensation, there’s no shortage of options. Companies can choose from a wide variety of approaches to design plans that will reward their best performers and align the interests of top producers with those of other members in the organization. But just because you have lots of choices doesn’t mean that all plans are created equal. In fact, if you ask any successful sales leader, he or she is likely to tell you:
The only thing worse than having too many options is having none at all.
With that in mind, here are four strategies leaders typically use when designing their plan — and how each approach affects motivation and profitability.
Strategy #1: Pay a high base salary and commission on top of that
This approach is often used to compensate sales leaders or other managers whose responsibilities include both selling and managing others. It’s also an option for companies with limited budgets, since paying the same compensation to everyone is one way to spread fixed costs over a larger revenue base. However, plan design experts caution that this approach can work against you in two ways: it may cause your best producers to leave for greener pastures; and it can create low-performing salespeople who are just good enough at selling but have no incentive — or desire — to improve their performance or help others in their unit succeed by learning new skills or taking on additional responsibilities.
Strategy #2: Pay a low base salary with an incentive compensation plan built around commissions on top of that
This is the “pay for performance” approach, and it’s popular in companies where salespeople are judged primarily according to their individual results. However, managers must be careful about how they design this structure. Base pay should reflect what’s required to get the job done — for example, if your salespeople need to rely on outside resources like third-party marketers or computer software providers to make successful calls, you’ll want them compensated accordingly. And don’t forget about high performers — you can lose some of your best people by not having enough wiggle room in your budget for raises and bonuses.
Strategy #3: Make base pay a percentage of target revenue or profit contribution; include incentives but tie them most closely (50%-100%) to financial goals such as margins or operating income growth targets achieved over time rather than simply at year-end
This is the “incentive only” approach, and it’s the most common way to set up sales compensation plans today. It can be a good choice for companies where salespeople are expected to take on more responsibilities over time and deliver not only volume but also higher margins or operating income growth. However, when using this strategy, make sure your incentive plan includes at least some base pay — in fact, many experts recommend including 70% to 100% of total pay in the form of incentives — and that you tie them as closely as possible (50%-100%) to financial goals such as margin and operating income targets achieved over time rather than simply at year-end.
Strategy #4: Pay primarily based on fixed salaries plus performance-based commissions on top of that; include variable bonuses (e.g., profit sharing) if you must spend additional cash beyond what base salaries allow
This is sometimes referred to as “base salary plus.” To get started with this approach, managers typically need two things: a lot of runway from their existing payroll budget because they’ll probably have to hire new employees; and access enough additional cash so they can use variable payments like bonus payments or profit-sharing instead of paying out commission dollars earned during high-performing periods back into employee rewards programs when times turn rough again. Although this option was once popular among large multinationals who had lots of global operations in places such as Europe where corporate tax rates were often very high compared with those paid by individuals living there, it has become less attractive now that many smaller businesses want an uninterrupted flow throughout the year without having to wait until January for bonuses they may never actually see due to fluctuations between quarters hitting different parts of their business equally hard at different points in a given fiscal period.
You can use different strategies for different salespeople in the hierarchy to achieve the best results. Happiest sales teams bring you the most revenues. Apart from a suitable compensation plan, transparency about payouts is the key to make your sales team happy & motivate them.
With Elevate, you can plan, design & manage both commission plans as well as quota-based plans with the utmost ease.
Elevate aspires to bring transparency in sales compensation. Sales reps can view all details regarding their commissions’ payout, quota attainment & revenue goals. Leaders can track the performance of every team member, manage product-based & territory-based revenue targets.