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Finance & Legal
Jun 6, 2017 | Canadian Professional Sales Association lock

A sales compensation plan is the combination of base salary, commission, and incentives that constitute a sales representative’s earnings. They are designed in such a way as to drive performance and increase revenue. There are many different ways to structure a sales compensation plan to suit different organizational and employee needs. They should be designed and tailored based on a rep’s role within the sales team, the length of the sales cycle, the types of sales engagements and the rep’s level of seniority.

Sales compensation plans are important.  They are key to encouraging the positive behaviours in your staff that are necessary to achieve your overall organizational goals and results.

Structuring Sales Compensation Plans

As mentioned above, there is no one-size-fits-all structure when it comes to sales compensation. As well as considering the factors specific to individual reps, business owners will also need to consider aspects such as industry, company size, territories, and more.

Think carefully about your the structure of your sales compensation plan since the best quality sales reps will be attracted by plans which reward high performance admirably, thus keeping turnover low. If your plan rewards top and underperforming reps at the same rate, not only will your plan be unsuccessful in motivating your team, it may also lead to high turnover and the increased associated costs.

Since straight salary plans aren’t very common, they won’t be discussed here, but they do have a place in some industries where direct sales may be prohibited.

Different Ways to Structure Sales Compensation Plans

  1. Revenue/Quota Based Plan: A popular structure for many organizations, in a revenue/quota based sales compensation plan, a lower base salary is used alongside a commission rate based on the sales volume/percentage of quota achieved over the previous sales period. Setting quotas is a strong motivator as reps will track their sales throughout the period against their targets. This plan requires striking a balance between setting aggressive targets based on the number of accounts/number of businesses/average sales/demographics in a set territory tempered by what is achievable. Targets set unattainably high will demotivate employees.
  2. Profit-Based Plan: The difference between a revenue and a profit-based sales compensation plan is that in the latter, commission rates will change as profit margin levels increase. Therefore the greater the profit, the greater the amount of commission. What’s good about this type of plan is that the sales rep’s compensation is tied to their contribution to the bottom line meaning they will be chasing profitable business. But on the other hand, in situations where the profit margin is slim, the rep’s commission will be similarly small, and this may be demotivating.This type of plan works well in the services sector where there are no fixed costs.
  3. Balanced Plans: In balanced plans, sales compensation is calculated through a combination of revenue, profit, and other variables, such as target number of new clients or upsells.
  4. Territory/Team-Based Plan: In the territory or team-based plan, sales reps only receive a bonus if goals for the period have been achieved for their whole territory. This helps foster teamwork, collaboration and creates accountability for each team member. The downside to this type of plan is that it may disincentivize high achievers if not run in tandem with the ability to earn individual commission and may also breed resentment if team members are not felt to be pulling their weight.

As you can see, it is easy to tweak each plan and create different combinations. The important thing to remember is that since the purpose of a sales compensation plan is to motivate sales reps to perform to the best of their ability, a balance must be struck between aggressive targets and an allowance for great performance to translate to great earning potential.

About the Canadian Professional Sales Association

Since 1874, we’ve been developing and serving sales professionals by providing programs, benefits, and resources that help you sell more, and sell smarter.

Contact us today at MemberServices@cpsa.com or 1-888-267-2772 to see how we can help you and your team reach new heights in sales success.

Copyright ©2017 by The Canadian Professional Sales Association

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