Sales Compensation Plans

There’s no better way to motivate your salespeople than through fair, effective sales compensation plans. These structured programs determine what each salesperson earns. They detail an individual’s salary, commission, and other incentives.

Companies with better compensation plans attract and retain top sales teams. It's advisable to structure your remuneration using insights from various sales compensation plan examples available.

Everyone who joins your team must know the compensation plan to understand what they can expect from their commitment to your organization. Although earnings differ, the principle elements remain the same. A typical sales commission plan template should show the base salary and graduated incentives for achieving specific targets.

Sales commission plans best practices should communicate your expectations and encourage the team to do more. Despite the many types of sales compensation plans, you need to settle on a standard structure.

A good compensation plan sets targets and earning potential. Other remuneration structures include bonuses on top of surpassing targets. The standard practice is to release these plans at the beginning of the year.

Let’s now take a deep dive and examine some common commission types and compensation plans that drive the design of a sales commission plan template.

Fixed Vs. Variable Rate Commissions

Comparing fixed vs. variable rate commissions should help you separate their differences. You can infer the differences from their naming conventions. A fixed commission structure uses a flat rate as defined by an organization.

Conversely, earnings depend on a sales representative’s gross sales in a variable rate commission plan. Usually, the sales department categorizes sales amounts and assigns a rate for every category. For example, the company may offer 5% on the first $10,000 and 7% on sales above $10,000.

Straight line commissions are another straightforward compensation category. If you report Y% sales in a quota, the company pays Y% in commissions. To arrive at your remuneration under the straight line structure, you take the sum of all the monthly sales multiplied by the commission rate.

The two commission structures yield different results, but the variable plan is the most rewarding.

Absolute Commissions

Absolute commissions incentivize sales representatives by focusing on predefined goals and specific activities, such as selling a set number of products or acquiring new customers, rather than sales revenue. This compensation plan is used by objective-driven businesses to direct the focus of sales reps and achieve particular targets. It may be the best fit for a business aiming to improve numbers related to a specific activity.

They are also referred to as set rate commissions. The beauty of a set rate commission plan is that you tie a sales rep’s compensation to their output. Besides, you don’t set quotas, only benchmarks that motivate individuals to perform.

When drafting a commission plan with specific targets, you must consider the company’s objective carefully. Consider whether you need to attract more prospects or engage in a sales drive for specific products or services. Additionally, evaluate how the plan aligns with the broader business strategy, ensuring that it incentivizes the right behaviors and supports the company’s overall goals and market position.

Commission Plan with Accelerator

Any discussion on sales compensation would only be complete with accelerators. Sales accelerators are components that kick in upon the achievement of quotas. A commission plan with an accelerator encourages sales reps to sell more with guaranteed rewards for above-average performance. For example, you may have a structure that offers an additional 10% for sales beyond 110% of the assigned quota.

Sales decelerators are the exact opposite. A commission plan with a decelerator defines lower compensation for individuals that do not achieve a specific percentage of their quotas. Working with the above example, you may have a rule for anyone that does not reach 70% of the allocation. If the condition is met, the affected individuals drop their potential earnings from 10% to 6%.

Accelerators help boost revenue and individual achievement — everyone wins. On the other hand, sales decelerators are valuable tactics for encouraging sales team members to achieve their quota range.

Commission Plan with Milestone Bonus

Bonuses are earnings for doing specific tasks. A practical instance is where you earn an amount of, say, $100 for each successful deal. A commission plan with a milestone bonus rewards salespeople for meeting specific business stipulations.

Additionally, the milestone bonus remains static whether you surpass or fail to meet the requirements. You could also pair it up with a mission bonus to reward managers and their lead teams.

A task bonus benefits the organization because it presents a low-risk approach. Additionally, sales personnel are rewarded with milestone bonuses for outstanding performance. Nevertheless, achieving these milestones demands continuous monitoring and the presence of a dedicated management team.

Commission Plan with Cliff

It’s essential to understand what a sales cliff is. Ideally, a cliff is a performance threshold that a sales rep must fulfill to earn a commission. For example, a seller may stipulate that you won't receive a commission unless you achieve at least 70% of the month's target.

Also called a commission floor, a cliff is counterproductive. A commission plan with cliff forces salespeople to put effort into achieving the bare minimum instead of the full quota. Most sales reps tend to delay deals with clients, while some strategically incorporate add-ons. Consequently, this can lead to declining revenue and potentially losing the company's top sales talents.

Even though there is no right or wrong way of setting commission plans with a cliff, you must consider both the company and sales reps’ interests. The task also involves carefully forecasting the demand for your products and services. That way, you can be confident that your sales team is hitting their targets.

Commission Plan with Contract Multiplier

A commission plan with contract multiplier uses a percentage factor applied on tiered quotas. Developing a contract multiplier plan is tedious but provides room for customized compensation. You can conceptualize it by creating a basic commission structure that applies percentages to quotas.

For example, you could have quotas of 0-49%, 50-99%, etc. On top of these, you apply a multiplying factor or modifier of, say, 0.8 commission on achieving 49% or less in the first quota. In addition, you could set a 0.9 modifier 99% or less on the second quota. These figures may seem complicated because of the calculations involved. However, once formulated, applying them is easy.

A notable aspect of contract multiplier commissions is that you peg these on several performance indicators or KPIs. It is not the sales quota alone that determines your performance. You may need add-ons and upsells in the deals you close.

Capped Vs. Uncapped Commission Plan

Companies may implement cap commissions for numerous reasons, primarily driven by budgetary constraints. The difference between a capped vs. uncapped commission plan is in the limits. There are limits in a capped commission plan compared to the uncapped.

Pros of Capped

• Under the capped commission plan, a sales rep can only earn a specified maximum regardless of their sales.
• By adopting this structure, companies safeguard against paying astronomical sums to their salespeople.

Cons of Capped

• Capping commission promotes sales consistency among sales reps.
• This approach demoralizes the sales team and leads to sandbagging, especially in non-competitive sectors.

Remember that an uncapped commission plan offers unlimited earning potential, often called "unlimited commission."

Pros of Uncapped

• This structure incentivizes sales reps to excel and push boundaries.

Cons of Uncapped

• The commission plan risks under-compensating salespeople.

It's also worth noting that sales representatives are driven by more than just monetary incentives.

Commissions For SDRs

Sales development representatives (SDRs) are the people behind prospecting for business. They obtain leads, qualify them, and lead them to their sales counterparts, who finalize the deals. Commissions for SDRs must be competitive lest these talented people leave the organization. Benchmarking with competing firms is essential.

While structuring their compensation, consider commissions for demos held, as these attract prospects to your brand. Through product demos, SDRs ensure that only high-quality leads go to the sales team.

Commissions for closed/won deals are crucial when the company has been experiencing low win rates. The commission structure also helps motivate the team to meet a specific target audience's expectations.

Also, consider commissions for qualified opportunities when building an SDR remuneration plan. These act as incentive magnets when you’re dealing with a larger demographic. More qualified prospects are helpful when you seek to increase your sales volumes from the target audience.

Draws

Draws in sales refer to advance payments made to sales reps to provide them with minimum income. Typically, sales representatives earn a salary and commission with a guarantee on the former. The draw amount is similar to receiving a portion of their commission in advance.

However, draws are periodic and could last a month, quarter, or longer. Once the draw period ends, you reconcile the commissions earned and offset against the draw received. Organizations use draws to keep their sales rep financially afloat during low sales periods when commissions fluctuate.

Conversely, clawbacks are recoveries of commissions a company pays to its sales employees. Mainly, clawbacks occur when customers terminate their contracts before the expiry date. Moreover, a salesperson may have erred or acted fraudulently by overstating sales. Under these circumstances, the company adopts a contractual obligation by taking back the earlier awarded commissions, sometimes with penalties.