Sales compensation strategy is a critical component of any company's sales operations, as it directly impacts the performance and motivation of sales representatives. A well-designed compensation plan should focus on the company's overall objectives and provide sales reps with the resources they need to perform their best.
In this blog, I’ll cover what an effective sales compensation strategy is and the key facets you should keep in mind while creating your compensation structure. I’ll also provide a quick review of 8 common sales compensation plans, namely, base salary + commission, base salary + bonus, commission only, salary only, tiered commission, gross profit margin, draw against commission, and set rate.
Sales reps are the lifeblood of any business. They’re responsible for driving revenue and helping the company achieve its goals.
To motivate these essential team members, it's important to have a sales compensation strategy that aligns with the company's objectives and rewards sales reps for their hard work.
However, creating a sales compensation plan can be complex, with many options and variables to consider.
In this blog, I’ll highlight everything you need to know about sales compensation strategy, what it is, and the steps for creating a successful one. I’ll also walk you through the various compensation plans and their benefits.
Let’s get started.
What is a Sales Compensation Strategy?
A sales compensation strategy is a plan that outlines how salespeople are compensated for their work. It typically includes a combination of base salary, commission, bonuses, and other incentives such as stock options or profit sharing.
It may also include performance metrics and targets tied to compensation, such as:
- Sales quotas,
- Customer retention rates, or
- Revenue growth, and more.
An effective compensation strategy should align with the company's overall business goals and values, as well as the needs and motivations of the sales team. It should be designed to attract and retain top talent, motivate salespeople to perform at their best, and provide a fair and transparent compensation system.
How to Create a Sales Compensation Strategy?
Here’s how you can create an effective sales compensation strategy that seamlessly integrates with your overall business goals and provide a fair and transparent compensation system.
1. Use a sales compensation planner
A sales compensation planner can help outline the sales goals, key metrics, and the compensation plan that aligns with those goals. It allows you to calculate the commission rates and quotas based on the chosen compensation plan.
You can use a planner to provide a clear compensation plan overview and communicate with the sales team.
2. Determine compensation plan goals
The company needs to determine its sales goals, such as increasing revenue, acquiring new customers, or increasing market share.
Your compensation plan should align with these goals and motivate the sales team to achieve them. The goals should be specific, measurable, achievable, relevant, and time-bound (SMART).
Once the goals are determined, you can choose a type of compensation plan in line with the set goals.
3. Choose a type of compensation plan
There are various compensation plans to choose from, such as base salary + commission, tiered commission, salary only, and more. You must choose a compensation plan that focuses on your sales goals and motivates the sales team to achieve them.
And while each type of plan has its own advantages and disadvantages, you need to choose the one that fits your needs and budget.
4. Decide when to provide compensation
Organizations need to decide when to provide compensation to the sales team. This could be monthly, quarterly, or annually, depending on the type of compensation plan and the sales goals.
For example, a commission-only plan may be paid monthly, while a base salary + bonus plan may be paid annually.
5. Set quotas and expectations for compensation
You should base your sales quotas and expectations on the overall business goals and key metrics.
What are quotas?
Quotas are the minimum sales targets each salesperson must achieve to earn their commission. The quotas should be challenging and motivating yet achievable.
Additionally, communicating clear expectations for compensation to the sales team, including the commission rates and the conditions for earning, is important. This clarity helps avoid confusion and ensures the sales team is motivated to achieve the sales goals.
8 Common Sales Compensation Plans
Here are the common types of sales compensation plans:
1. Base Salary + Commission
In the base salary + commission plan, salespeople receive a fixed base salary and a commission on their sales. The base salary provides a stable income for the salesperson, while the commission provides an incentive to make more sales.
This plan motivates salespeople to increase their sales volume while providing a stable income.
2. Base Salary + Bonus
Salespeople receive a base salary and a bonus based on their performance. The bonus can be tied to achieving specific sales goals or targets.
Like the base salary + commission plan, this strategy provides salespeople a steady income and motivates them to keep closing.
3. Commission Only
Salespeople receive no base salary in commission-only plans and are compensated solely based on their sales performance.
This plan motivates salespeople to make as many sales as possible but also carries the risk of lower income in periods of lower sales volume.
4. Salary Only
Salespeople receive a fixed salary without any commission or bonus in this plan.
Companies with a stable and predictable sales environment chose this compensation strategy. It helps them focus on maintaining customer relationships and providing excellent customer service.
This particular plan should also be thoughtfully designed to suit your representatives. Your reps can quickly lose motivation, as this plan doesn’t provide any distinction in salary between a rep who closes 10 deals and the one who closes two.
5. Tiered Commission
In tiered commissions, salespeople receive a commission rate that increases as they reach higher sales levels or targets.
This plan motivates salespeople to reach higher sales levels as they will earn a higher commission rate.
Moreover, it helps companies that want to motivate their sales team to reach specific sales targets while providing a clear incentive for achieving higher sales volume.
6. Gross Profit Margin
In this strategy, salespeople receive a commission based on the gross profit margin of their products or services.
Gross profit margin motivates salespeople to sell products with a higher profit margin as they will earn a higher commission.
It also helps companies strategically sell items with higher profit margins than smaller purchases. This, in turn, increases the company’s revenue.
7. Draw Against Commission:
Salespeople receive a draw against future commissions, an advance on their earnings. For instance, a salesperson may receive a draw of $2,000 per month and then earn commissions that counteract the draw.
Companies with long sales cycles or new salespeople who may not earn commissions immediately can choose this plan.
8. Set Rate
In this plan, salespeople receive a fixed commission rate on all sales made, regardless of the sales volume or type of product sold. This plan is straightforward to administer but may not be as motivating for salespeople.
This plan doesn’t distinguish between the best and average sellers in your team, as everyone will be making the same commission.
This can also lead to talent churn as salespeople will look at more lucrative plans as other plans offer higher commission rates for higher sales volumes.
All sales compensation plans should also be regularly reviewed and updated to ensure that it remains relevant and effective in an ever-changing business environment.
You can also use our sales compensation templates to get started.
Wrap Up
A well-designed sales compensation strategy can motivate sales teams to achieve their goals and drive revenue growth for the company.
You use a sales compensation planner to:
- Determine compensation plan goals.
- Choose a type of compensation plan.
- Decide when to provide compensation.
- Set quotas and expectations for compensation.
By following these steps and considering the specific needs and goals of the company, a sales compensation plan can be created that aligns with the company's overall strategy and encourages sales reps to perform at their best.
Create the best sales compensation strategy to drive sales growth and hit your goals. Happy strategizing!
