Sales Compensation – How to Choose the Right Sales Compensation Plan for Your Business
The most effective way to attract talent into your sales department is by compensating them well. However, that’s not as simple as it sounds. You can take a handful of approaches to sales compensation, each with its upsides and pitfalls. Here’s everything you need to know to choose the right sales compensation plan.
Terms to Know
This is the amount a salesperson must sell during a particular period (month, quarter, or year) for their performance to be satisfactory. Their quota is the minimum amount of sales they must make to earn a commission for commission-based workers. This can be calculated using absolute numbers, percentages, or the number of goods or services sold. A quota can also be referred to as a goal, objective, target, or performance target.
Accelerators are a higher commission rate earned on a rep’s sales after a certain point. This usually kicks in after the rep has reached their quota. It’s also sometimes called a “ramped rate” or a “kicker.”
This is the opposite of an accelerator; it’s a reduced commission rate compared to the sales rep’s standard commission. This can be a tool to penalize an employee for poor performance (by applying it to sales before a rep meets their quota or if a sales representative failed to reach their quota in a previous period). If a sales rep vastly outstrips their quota, a decelerator can be used to avoid having to pay an extremely high commission.
When misused, decelerators can reduce morale. Use them carefully and judiciously.
Clawbacks refer to a business’s practice of reversing or revoking an incentive that’s already been paid to an employee. This can happen if there were errors in the employee’s original calculated incentive pay. More commonly, clawbacks can kick in if a customer returns a product or cancels a contract that a sales rep has already been paid commission on.
On-Target Earnings (OTE)
This is the amount paid to a sales rep when all their targets have been met. OTE includes base salary and any additional forms of compensation, including bonuses or commission. OTEs can also simply be called “target earnings.”
Types of Sales Compensation Plans
In a salary model, sales staff are paid a flat rate. This plan allows for additional compensation like discretionary bonuses, sales context prizes, or other short-term incentives. However, don’t confuse it with “salary plus commission” models, where incentive pay is built into the sales rep’s employment agreement and is ongoing.
A salary model works well when the sales rep’s main objective is getting the word out about a product rather than necessarily making a sale right away. It can also be suitable for companies whose sales staff spend a lot of face time with clients or servicing accounts.
It can also be ideal when it’s difficult to tell who deserves credit for any given sale. If sales staff work in a highly collaborative environment, a salaried approach might be best.
In a commission model, every sales rep is paid directly in proportion to their sales. While this was once the standard way to pay sales staff, it’s fallen out of favor and is not currently industry-standard. However, there are times when it can be effective.
Commission pay can work well with new businesses when market possibilities are vast and fragmented. It can pay to let sales reps follow whatever leads they can find if there’s a low chance they’ll step on anyone else’s toes in other branches or more well-established staff in the process. This can also be helpful in new companies where it’s hard to determine appropriate quotas.
The commission model works best when management wants to maximize incentive and isn’t concerned about how sales staff compensation compares with other employees or prefers to keep sales compensation directly proportional to sales revenue.
Companies who want to use a commission-only compensation plan should offset the instability of the plan somehow. One way to do this is to start new salespeople on a “salary plus commission” plan until their commissions are more consistent and their client base is more established.
Combination (Salary Plus Commission)
This is a broad category. It includes any compensation model that provides for salary and ongoing incentive pay, including:
- Base salary plus commission on all sales
- Base salary plus a bonus for sales over the quota
- Base salary plus commission and bonus
This model gives companies better control of incentive pay and variable incomes than simple commission can. It’s also the most flexible – management can tailor incentives and compensation for each salesperson.
However, this model also tends to be more complicated than other methods. It generally involves more paperwork, oversight, revisions, and administrative work. And since tailoring each employee’s compensation individually is highly subjective, it can be challenging to keep compensation fair and equitable. But many companies find that the benefits of flexibility outweigh the risks.
Choosing a Payroll Software
When choosing payroll software, consider the following factors:
- The size of your business.
- Who manages payroll, and how much time do they have to devote to it.
- The compensation style you’re opting for. If you choose a salary plus commission model, you’ll need payroll software flexible enough to keep up with you.
- Whether you need support or functionality in the following areas:
- Payroll tax preparation and filing
- Timecard integration
- Direct deposit
- Self-service portals to allow staff to check their pay stubs and update contact information
- The cost of the software.
Ask about support costs up-front. If your company has a payroll issue, will you have to pay an extra fee for help fixing it?
How We Can Help
Choosing the right compensation model for your sales staff can be a tricky decision. Sometimes it pays to call in an expert to weigh in. When you need a listening ear and seasoned expertise, contact Sales Synergy Consulting. Whether you’re just starting, expanding your sales team, or are revamping your compensation model, we have the experience you need to take your business to the next level.