How do you build sales compensation that drives both behavior and results? Here are the 4 approaches, and when they work best.
When it comes to formulating a sales compensation plan, there are many options. Each has its own strengths and weaknesses, and can incentivize your team in varying amounts.
Depending on the products and/or services that your company provides, selling can look very different. So how do you know which plan is right for your business and staff?
In this article, we'll take a look at four forms of compensation plans, outlining the pros and cons of each, so you can determine the best plan for your business in order to reach its targeted sales goals.
Plan number one is the “straight salary” plan. It’s defined as a fixed annual income determined by the firm’s owner or manager and is distributed equally among pay periods. The strengths are that it is simple to manage, provides a stable, secure income, and helps facilitate teamwork.
Accounts and territory changes are easier, which promotes quality customer service. It’s also clearly understood by all and managers can direct priorities. There’s also very little, if any, impact when major cash comes in or goes out.
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Straight salary plans, however, also limit sales staff incentives, and the top performers often subsidize the rest of the team, meaning the sales stars may not stay onboard. This plan won’t have aggressive sales. It’s safe. And a more direct management of salespersons activity is required. In short, when a salesperson is guaranteed an amount, regardless of performance, compensation can’t be used as a tool to shape his or her behavior.
You may want to look into sales coaching to help you figure out another method to drive behavior if this is the route you choose to take.
Salary Plus Bonus
Plan number two is the “salary plus bonus” plan. It’s defined by the firm’s owner or a manager as a fixed annual salary, typically around 70 to 80 percent of the earner’s W-2. A bonus is then paid usually once per year, sometimes twice or quarterly.
Some of the advantages of the salary plus bonus plan are that it’s a flexible plan for management, as the bonus amounts vary. It’s easier to adjust for fast growth or loss for both parties, the sales rep and the company. The secure income is most of the earner’s W-2. Also, account changes are easier and managers can direct priorities to balance long term.
Salary plus bonus plans, however, are a bit more complex to administer. They can create unclear goals, and often, sales representatives become successful without necessarily growing. Direct management is required more, and the plan somewhat limits salesperson incentive (with most of the income a guarantee).
Most sales superstars shy away from a salary plus bonus plan because this compensation model limits income upside and is more appropriate for a farmer/account manager type salesperson. They want a small salary with huge upside.
Salary Plus Commission
Plan number three is the “salary plus commission” plan. It’s typically defined by a firm owner or manager-set salary that makes up about 40 to 60 percent of the earner’s W-2. Then, earners recent a percent commission from sold accounts, which is paid periodically, monthly, quarterly or twice per year.
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The perks of this plan are that it provides earners with a “livable” base income, and then they are paid for performance. This provides an incentive for assertive sales stars. Less direct management is involved, and it automatically adjusts. Bigger checks are tied to success, and the focus is on acquiring new accounts. This plan also helps owners with cash flow.
The drawbacks are that this plan is more complex to administer. It’s a bit scarier for earners in that no sales equals no commission. With every man competing for himself, it can seem less like a team sales environment. It can be hard to change accounts and there is a limited ability to direct non-sales activities by the top salespeople.
Plan number four is a “straight commission” plan. It’s defined as a percentage of either sold/ accounts/products and the commission goes directly to the salesperson. A recoverable draw commission plan is typically for a period of 90-180 days with a guaranteed salary and any accounts/products sold during this timeframe, the commissions are paid back to the company to recover monies paid. After the three-to-six month period, the sales person goes on straight commission with no monthly compensation other than commissions paid.
If the earner’s pay is between $3,000 and $6,000 per month, it’s considered a draw. Commissions are paid twice annually every six months, where if six-month commissions are:
The plusses of a straight commission plan are that they totally pay for performance, so they are a great incentive for superstar sellers. They can also create superstars. Non-performers are weeded out. They automatically adjust, require less direct management and maximize the focus on income. Earners can see big checks if they are successful, and the focus is on new accounts.
On the flip side, no sales means no commission, which can be quite scary to the earner. It’s really tough to change accounts, there’s almost no team selling, and there is very little ability to direct non-sales activities by the salespeople. It’s a “when it’s great, it’s great” mentality, so you can develop longevity and loyalty among superstars. But it can also go equally sour in a moment’s time.
Once you’ve determined the best plan for your sales team, introduce an effective compensation calculator. We will focus on target cash compensation (TCC) to determine the economic value of a job. It’s composed of TCC, the targeted annual cash compensation level composed of the base salary “midpoint” plus the target incentive compensation (TIC).
TIC is the amount for the achievement of on-target performance (i.e., 100 percent of goal). The base salary is the fixed portion of an earner’s total cash compensation. Learn more about sales compensation strategies and planning by consulting an expert such as those at The Sales Coaching Institute.