Choosing the right sales compensation plan is essential to ensure your business is competitive when recruiting and retaining talented employees. In addition, a well-designed compensation plan encourages your current sales staff to maintain and surpass existing standards and land new accounts. While it can be difficult to determine the right balance between commission and base pay, once identified, there is compensation plan to suit all organizations and their unique circumstances.
Let’s examine four of the most commonly used compensation packages, as well as how they can best be implemented to benefit your employee’s bottom line.
1. Straight Salary
Sales employees who are compensated with straight salary plans, earn the same amount weekly, monthly and yearly, regardless of how low or high their sales numbers are. While they are unable to earn any commission, they are often entitled to bonuses. This type of compensation provides advantages for both the employee and employer. For example, it offers the employee financial security and provides them with the opportunity of working without the added pressure of meeting strict quotas. Conversely, straight salary plans often leave sales professional unwilling to continually surpass their sales goals, as high numbers don’t result in additional compensation. Companies will often find that salary plans produce lower turnover rates; however, they are committed to paying a set salary, regardless of how many sales are made.
2. Commission Based and Salary
Considered the most popular sales compensation plan, a combination of commission based and salary is just as it sounds. An employee is paid a set salary, considered the “base” amount, as well as commission based on a previously agreed upon formula. This offers employees the flexibility of a steady pay schedule, but it also allows them to build on their salary based on total sales. Typically, employers find this variety of compensation plan to be a positive method of motivating their sales team to excel, since they are continually striving to surpass quotas. However, this type of payroll is much more difficult to calculate than other types of pay.
For organizations interested in implementing a commission and salary based compensation plan, it is important to determine the salary to commission ratio. Factors to consider include the type of sales, the sales cycle, and what is expected of the salesperson. In doing so, it is important to strategically match base salary and commission amount of each sales person, to the concrete goals that are expected on a quarterly or annual basis.
3. Territory Volume Compensation Plans
Territory volume compensation plans are most frequently used in a team-based setting, often proving to be the most complicated form of compensation. Territory volume requires the total sales of a specific territory be calculated at the end of the pay period. The commission is then is divided, usually evenly, among every salesperson that works in that area, regardless of their individual contributions to the sales achieved.
In order to implement this type of compensation plan, three things need to be present. First, territories must be clearly defined. Second, the territory must be able to support competitive wages relying on volume calculations. Finally, the team must be connected to each other and highly motivated to excel as a group. It’s an excellent plan if you want a collective effort that focuses on interdependence and teamwork. In opposition, territory volume plans can often create tension, as underachieving or unmotivated members of the team are pressured to perform to a certain standard by their colleagues, often resulting in high turnover.
4. Profit Margin and Revenue Based Compensation
Almost exclusively used by start-up companies, this type of sales compensation plan rewards employees almost entirely based on the company’s performance as a whole. This has the potential to be extremely beneficial, but requires that the salespeople be highly driven and able to work in a team setting. Companies will find that this is a great way to recruit employees that are truly loyal to the company, as individual pay-outs are not available. Companies that opt to use revenue based compensation plans should be able to incorporate long-term incentives, such as stock shares, into their compensation plan.
Choosing a sales compensation plan requires careful thought, as the right compensation plan gives you the opportunity to attract, motivate, and maintain the talent needed to see your company succeed. Carefully weigh your options before making a decision, and more importantly, always look for feedback. If your current compensation plan is ineffective, adjust as necessary to best suit your organizations unique needs.
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