Sales Compensation Plan: What you need to know

14/11/2022 7:14 AM

What is Sales Compensation Plan?


The Sales Compensation Plan guides employers when determining how to compensate their sales staff fairly. The sales compensation plan  takes into account a variety of factors, including but not limited to job responsibilities, geographical location, company size, and industry.By understanding these key components, employers can create a sales compensation plan that is both effective and motivating for their sales team.


Establishing an effective sales compensation plan is essential to recruiting, retaining, and motivating a sales force. A well-designed sales compensation plan will allow the sales force to earn a reasonable income while ensuring that the company meets its financial objectives.


A sales compensation plan is used by businesses to incentivize their sales force. The sales compensation plan aims to motivate the sales force to drive revenue and reach specific sales goals. The most critical factor in designing a sales compensation plan is ensuring it is aligned with the company's overall business strategy. The sales compensation plan should be designed to incentivize the sales force to sell the most profitable products or services for the company.


 


Typical compensation includes a basic salary, commission, and additional financial incentives to motivate salespeople to reach or exceed their targets. A sales compensation plan should inspire outstanding performance in a sales team. 


A sales compensation plan can be built in various ways to meet the demands of various organizations and employees. They should be created and tailored based the position within the sales team, the sales cycle length, the kinds of sales engagements, and the sales representative's level of seniority.


 


 

Sales Compensation: Terms to know


 


Sales Quota


A sales quota is a revenue target with a deadline established by sales managers, either collectively or individually. Monthly, quarterly, and yearly quotas are the most typical timeframes. The sales staff will be judged by earnings, deals closed, or overall activity as the sales managers and company leadership deem fit.


 


Sales Accelerators


A sales accelerator starts to work when a sales rep exceeds the quota by a specified amount. This type of payoff is exponential in that a sales rep receives an increase in commission if they reach a certain target.


 


Sales Decelerators


Sales decelerators penalize underperforming salespeople, which is the exact reverse of what happens with sales accelerators. For instance, a decelerator may be applied between 40% and 60% of their quota.


 


Clawbacks


Some incentive provisions in compensation plans call for a new customer to remain with your business for a specified time.


 


You can incorporate a clawback if a consumer leaves before the period expires. The sales representative will then be required to repay the commission they received for the sale related to a customer who leaves early. Clawbacks are useful for encouraging salespeople to prioritize client retention. They serve as an additional inducement for employees to remain with your business to benefit from their sales commission.


 


They are typical among subscription businesses. A clawback takes effect when a customer stops using your product or service before reaching a particular benchmark.


 


On-Target-Earnings


OTEs are a reasonable expectation of what a salesperson will make if they perform and meet their goals. The total of a sales person, basic pay and commission on closed agreements, is known as their OTE. For instance, a sales representative may receive a basic salary of $60,000 and anticipate earning $40,000 in commission over a year. Their OTE would be $100,000 as a result.


 


Companies should not publicize inflated OTE figures if they do not intend to pay their representatives at that level. This won't work in the long run, and you'll discover that top salesmen won't join or stay on your team if you plan on doing it.


 


Contests/Incentives


Other effective ways to recognize high performers include incentives and competition. Although they can be offered as different rewards like dinners and excursions, incentives are frequently given out as cash payments.


 


Team leaders might, for instance, organize a competition where the first salesperson to close 50 deals in a month receives a $1,000 prize. Alternatively, the first team to sell 100 more subscriptions will receive a group weekend getaway at a spa.


 


Sales Compensation Plans Examples


 


Straight Salary


Although they are uncommon, straight salary sales compensation programs do exist in some companies. With this arrangement, you would only pay your salespeople a flat salary, competitive though it may be, just like the rest of your staff. There are no commissions, bonuses, or other kinds of incentives for sales.


 


This kind of compensation plan is most frequently used when your industry restricts direct sales when your sales team is small, or your salespeople work in teams or small groups where everyone contributes equally, or when you expect your salespeople to spend a large portion of their time on duties other than selling.


 


However, because there are no incentives for salespeople to work more, these strategies tend not to motivate them.


 


Salary plus Commission


Sales compensation plans that include salaries and commissions are the most popular ones currently. They are set up so that commission payment, which makes up the majority of overall remuneration for salespeople, offsets a lower base income.


 


Organizations implement salary plus commission sales pay plans when they can support all salespeople on this structure and manage sales to ensure fair and accurate splits. This kind of sales compensation plan is generally the superior option because it provides incentives for workers to work more and accomplish more. It provides additional stability because salespeople will continue to get paid even if they are in training when sales are low during particular months, or if the market becomes unstable.


 


Commission Only


Commission-only sales compensation plans are exactly what they sound like; your salespeople are only paid based on the sales they generate. No assurance of income is provided.


 


These kinds of programs, which are based only on sales achieved, are more straightforward to manage. They also tend to draw fewer candidates, but they draw the best-performing and hardest-working sales professionals.


 


Tiered commission


The tiered commission is a fantastic tool for maintaining the drive of your top achievers. This model rewards sales representatives with a set income level or concluded agreements with a greater commission rate on any subsequent deals.


 


Set rate


Similar to other commission plans, set-rate sales compensation plans are based on a flat cash amount for each sale rather than a percentage. As a result, a sales representative might make $100 rather than 5% of the sales revenue.


 


Even though their costs are comparable, the set rate approach might be helpful when you wish to promote sales of one product over another. To motivate sales staff, you may, for instance, give a higher set rate for sales of product A if you wish to sell more of it than product B.


 


Territory volume


Territory volume sales compensation plans are most frequently implemented in company cultures that value collaboration. After a compensation period, they work through the territorial volume calculation. The total revenue generated by the region is then divided evenly among all the sales representatives working there. This strategy functions best when your sales territories are well-defined, your sales team helps one another to achieve shared objectives, and your territories are prosperous enough to provide competitive compensation.


 


Profit Margin


We also have sales compensation plans based on profit margin sales. These programs base salespeople's compensation on how well the business is doing. Startups with a shortage of liquidity frequently adopt profit margin plans. The profit margin plan should be used when you are confident that your salespeople can support themselves through tough times, when you can also include long-term incentives like stock shares, and when you have other incentives and advantages to entice salespeople, including flex time.


 


How to choose the right compensation plan for your organization


The following factors are essential when choosing the right compensation plan.



  • Company size

  • Organizational Culture

  • Product and Service offering

  • Maturity of the organization

  • What are the ' 'company's short- and long-term objectives?

  • What sales behaviors does the company want to encourage?

  • Is this plan realistic and affordable for your company?

  • Will this plan motivate employees?


 


Importance of Sales Compensation Plan.


 


Securing enough talented sales personnel


A highly skilled, motivated, and talented sales team is essential for an organization's success. Only when a company has a solid compensation plan can it attract a high-performing sales team.


 


A good compensation strategy typically leaves the sales force content or satisfied. It just makes sense that a happy sales crew would be motivated to work hard.


A favorable compensation structure inspires salespeople to feel loyal to the company. Any sales organization's goal is to develop a team of skilled salespeople.


A good compensation plan helps an organization grow its sales volume and, as a result, its profit.


 


The foundation of a healthy employer-employee relationship is a fair compensation scheme. Thus, a sound compensation policy prevents misunderstanding that typically results from financial and non-financial issues. It is only reasonable for sales teams to compare their compensation structure to other firms in the same industry.


 


In conclusion, there are many types of sales commission plans that you can choose for your business. You may need to trial run a few plans before picking the best fit for your company. There is no one-size-fits-all. The best plan will depend on your objectives.

Logical Zivurawa
Consultant
This article was written by Logical a Consultant at Industrial Psychology Consultants (Pvt) Ltd

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