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Sales Compensation

Sales compensation is the combination of salary, bonuses, commissions, and other types of payments that drive salespeople to work to increase sales and achieve company goals by giving them an incentive for their performance. 

Sales compensation can be an important part of a company's strategy because it helps determine the effectiveness of salespeople in reaching their goals and increasing sales.

What is sales compensation?

Sales compensation is a type of financial reward a salesperson earns for their work. It can include base salary, commission, and other monetary incentives to motivate the sales representative to perform well. 

Sales compensation helps to guide sales representatives towards specific goals that will help increase the company's profits. In short, sales compensation is often a form of reward that encourages motivation and improves employee satisfaction.

Why is sales compensation important?

Sales compensation is an important part of sales management. When properly designed and executed, sales compensation plans give the sales team in your organization a clear vision of the goals you want your sales reps to achieve and rewards for achieving them. Compensation is not just about pay—it's about creating an effective program that motivates employees to perform well.

What is the difference between sales compensation and sales incentive?

Sales compensation

  • It is the money paid to employees for performing their jobs.
  • It is a type of compensation based on a salesperson's performance. This can be in the form of commissions, bonuses, and payouts.
  • It is based on a formula that considers a salesperson's annual salary and how many hours they work each week.

Sales incentive

  • It is a common form of sales compensation that involves paying salespeople based on how much they sell. 
  • It is a type of compensation that is given to motivate employees to work harder. 
  • It is usually based on revenue or profit goals set by management. 

What is a sales compensation plan and how does it work?

A sales compensation plan is a sales strategy that earns a company more revenue from its customers. It includes detailed information about the salesperson’s pay structure, such as their base salary, commission, incentives, and benefits. 

The purpose of a sales compensation plan is to encourage specific sales rep behaviors and communicate expectations and criteria for the compensation of sales team members.

A good sales compensation plan:

  • Motivates your salespeople to work harder and be more effective in their job.
  • Promotes high performance from every member of your sales team.
  • Drives your company’s top performers to higher productivity levels, profitability, and market share.
  • Encourages them to focus on high-value deals.
  • Helps in attracting and retaining the right kind of salespeople.

What are different types of sales compensation plans?

The most common types of sales compensation plans are:

  • Straight salary: Here, a sales rep's pay is predetermined. They earn the same amount no matter how well they do. They are used to protect an employer from fluctuations in business. 
  • Base salary + commission: This is a standard sales compensation plan in which a rep earns a base salary + commission based on the product volume. The higher the volume, the more they earn in commissions.
  • Commission only: A commission-only plan means that reps are compensated entirely with commissions based on their performance and don't receive any base salary. 
  • Highly variable pay: Highly variable pay plans give reps a fixed percentage of sales revenue generated by them or those in their team (or both). 
  • Flat commission plans: These plans offer a fixed percentage of the sale price to the sales rep for each item sold. This type of plan is most often used by retailers who sell one product line or service.
  • Percentage commission plans: With this type of plan, a percentage of each sale is paid out as a commission. The amount paid varies based on several factors, including volume, market conditions, and product/service category.

Pro tip

Forget the hassle of calculating comissions for your sales teams with Compass. Manage and automate sales comission programs easily, from launching to calculating and disbursing incentives. 

What does sales compensation management mean?

Sales compensation management (SCM) is the process of setting the right compensation packages for sales employees and ensuring the financial rewards are significant enough to achieve business goals. 

SCM policies need to be designed with the primary objectives, such as creating alignment between what you pay individuals and their performance, providing appropriate incentives to salespeople with great potential, and motivating teams by sharing rewards.

How to create a sales compensation plan?

Here is a step by step process to create a sales compensation plan:

Step 1. Determine the goal of your compensation plan: Determine what you're trying to accomplish with it. Make sure it serves a clear purpose for your organization.

Step 2. Research industry trends and best practices: You may find inspiration and ideas for improving your program by looking at others' plans and seeing how they work in practice.

Step 3. Determine your budget: The amount of money available for rewarding employees will be a significant factor in determining how much money can be spent on each employee and what kind of rewards they can receive.

Step 5. Define the roles of each position in the sales process: Determine which job roles will receive compensation based on their performance and how much.

Step 6. Decide what type of compensation plan would work best: With those roles broken down and different levels designated, choose a compensation plan. Here are a few to choose from:

  • Base salary only
  • Commission only
  • Base salary plus commission 
  • Base salary plus bonus
  • Absolute commission
  • Relative commission 
  • Straight line commission
  • Territory volume commission
  • Gross margin commission


Step 7. Define performance metrics:
For a sales compensation plan to work effectively, it needs to clearly measure performance against some standard or goal. This could be net new business won each quarter or average dollars per sale over the last six months (or last year).

Step 8. Set expectations for each position: Set realistic goals for each role and measure them over time to see if they're working as expected or if adjustments need to be made to improve the plan.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

What are the tips to create a sales compensation plan?

Tips for creating an effective sales compensation plan:

  • Create a plan that is simple to understand and easy to follow.
  • Make sure your plan includes pay increases based on performance and sales numbers, as well as raises for new employees or promotions.
  • Consider setting up the following components: base pay, commissions, bonuses, and other incentives such as prizes or merchandise discounts.
  • Consider giving bonuses for exceptional performance or sales growth, but be sure that the bonus isn't so large that it becomes a distraction from the primary goal of your company's sales team: selling more products or services.