Sales incentive structure

Offering sales incentives is one of the most effective ways of drumming up enthusiasm for your people to hit and even exceed their sales targets. Thus, having a robust sales incentive structure provides clear direction on what’s expected from your employees and how they're going to get rewarded for their performance.

Different organizations adopt varying approaches to designing a sales incentive plan. Compensation plans could cover a wide range of variables, including sales quota, retention rate, subscription plans, and product price.

Traditionally, B2B sales incentives are very straightforward – a salesperson receives a commission based on the contract price of the product he sells. For instance, if an employee manages to sell $50,000 worth of products in January, and the company offers a 10% commission on the gross sales, then he earns a $5,000 incentive on top of his base salary on his February paycheck.

These Trends in Marketing and Pricing Call for a Different Way of Designing an Incentive Plan

However, many software companies are now recognizing the advantages of providing low barriers to entry sales models. That’s why popular services like Dropbox and Canva offer prospective users free access to their products. This strategy creates a stream of users that could become paying customers later on. Product-led growth (PLG)approach counts on the product’s features and performance to do much of the selling.

Another trend that’s been making rounds in the SaaS industry is the usage-based pricing (UBP) model. Conventionally, software companies offer tiered subscription plans to their users. Regardless of how often they use the service, the customer pays a fixed amount every billing cycle depending on the subscription plan he signed up for. In contrast, with a UBP model, customers only pay for the services and products they use or consume. Some companies that have adopted this pricing model include Hubspot, Slack, and Adobe Creative Cloud.

So, how to make an incentive plan for sales with these marketing and pricing trends in mind?

The shift to modern marketing and pricing strategies calls for a more creative way of designing a commission incentive plan. The straightforward and traditional sales incentive plan no longer cuts it.

Introducing… the Vested Commission Model

Instead of focusing on giving incentives right after a transaction, this model is invested in the long game of the company–higher retention rate, better customer satisfaction, increased upsells, etc. Instead of immediate reward, incentives are vested over time so that salespeople are invested in cultivating a long-term relationship with their customers.

Commission Incentive Plan

If you want to attract, retain, and/or motivate your salespeople, an effective commission incentive plan is imperative. A better offer somewhere or an inequitable compensation plan, and the best people on your team could say adieu without a moment’s notice. That’s why the best incentive plan is always well thought out.

Here are the factors that go into creating a competitive commission incentive plan:

Goals

The company’s objectives lay the framework by which the commission plan is created. What does the organization hope to achieve with the sales incentive plan? Aggressively acquire new paying customers? Minimize churn rate? Or perhaps steer the company to a more sustainable growth path.

For instance, if the company is a well-established one and the objective is to minimize customer churn rate, a vested commission plan might be the best scheme in this case. Company goals also help determine what specific KPIs are to be rewarded.

Industry

It’s also prudent to check what other companies are paying their salespeople in commission within the same industry. Websites like Glassdoor and Indeed provide ballpark amount in terms of base salary and bonuses. These numbers can serve as a reference to make sure that the company offers enticing compensation to its top performer.

Budget

To ensure the sustainability of the incentive plan, management must know how much it can afford to pay its top salesperson. For this purpose, it is important to determine and establish the on-target earnings (OTE). OTE is calculated as:

OTE = base pay + maximum commission when the sales quota is met

For instance, if the company offers $50,000 base pay regardless of the performance and a maximum commission of $40,000 when hitting all sales targets, the OTE is $90,000.

Schedule

Another important factor to consider is the schedule of the commission payout. Will the sales team receive the commission right after the transaction? Or will they have to wait quarterly, or annually, and meet milestones to get the full amount? It’s vital that the company set expectations and have all the criteria laid out in a contract, including clawbacks, and disseminated through a sales incentive plan pdf copy.

Sales Incentive Plan Design

Creating and implementing a sales incentive plan design could take hours and hours of work. Fortunately, commission plan software now provides the system and tools to reduce countless hours of work into a few clicks of a button. Here is what the right software could offer to an organization:

Turn-Key Incentive Plans

Commission plan software could provide the company with a basic compensation plan design. Management could easily tweak and customize it to suit their objectives. Additionally, some tools allow split-testing of different commission plans and determine how they could impact the company’s bottom line. Have many fun sales incentive ideas? Integrate and test those, too, with your existing incentive plan.

Transparency and Accessibility

Want to cultivate trust in your company? Let a software automate the calculations and make them accessible for everyone to see. This reduces errors in the process and is a win for transparency in the workplace. In addition, commission plan software allows the sales team to see their numbers in real time so coaching sessions become way easier.

Complex Plans Made Easy

Complex commission plans don’t have to be a daunting task anymore. Your staff can say goodbye to working out performance incentives in excel format as you can set up complex commission criteria and commission splits within the software.

Sales Incentive Calculation

There are many types of incentives. And calculating the actual pay hugely depends on the type of commission scheme that your organization adopts and the criteria that directly influence the commission. Here are the common types of incentives and how they’re calculated:

Sales-Based Straight Commission

This is one of the most common and straightforward types of incentive. The salesperson earns a fixed percentage of the sales that he generates. For instance, the company offers a 5% incentive on his total sales. If he is able to generate $100,000 in sales, he can expect a $5,000 incentive on his next payday.

Graduated Commission

With this type of incentive, the sales incentive percentage increases in proportion to the sales volume. For instance, the company may offer a 5% commission for total sales of up to $200,000, a 6% commission for sales of $200,001 - $400,000, and a 7% commission for sales of $400,001 and above.

So if salesperson A generated $500,000 in sales in one month, the sales incentive formula would be:

$500,000 (sales) x 0.07 (commission rate) = $35,000

He would receive $35,000 in commission on top of his base pay because his sales volume qualified him for the 7% commission level.

Tiered Commission

This type of incentive applies a certain rate on the base sales amount and applies a different rate on the remaining sales.

For instance, a company offers a 5% commission on the first $100,000 worth of sales, a 6% commission on the next $100,000 in sales, and a 7% commission on the remaining sales amount.

So if a salesperson generated $275,000 in sales, the sales incentive calculation is as follows:

Split Commission

This type of incentive is used when many team members contribute to the sale.

For example, the company offers an 8% commission on sales. If a team of six generated $800,000 in sales, the incentive calculation formula would be:

Incentive per member = (Sales x Commission Rate ) / number of team members

Incentive per member = ($800,000 x 0.08) / 6

Incentive per member = $10,666.67

Sales Incentive Guidelines

Once a plan for sales incentives for employees is created, it’s important to set the guidelines and establish the policies that govern the commission schemes. It’s best to create an incentive policy pdf and make sure everyone has a copy of it. If there are changes to the criteria, operations should prioritize prompt dissemination of these changes to people who will be affected.

Here are the benefits of establishing clear guidelines and rules on incentives:

Ensure Alignment

If everyone has a copy and reads the company’s sales incentive guidelines, company objectives become clearer. And this provides concrete direction to the team. As a result, sales teams become more motivated to set their own goals that are in alignment with the company’s and devise a strategy to accomplish them.

Easy to Settle Disputes

When policies and guidelines regarding incentives are established from the get-go, it’s easier to handle disputes. Management and employee have an objective set of rules to refer to when settling complaints and possible discrepancies.

Sales Incentive Plan Examples

Here are real-world sales incentive plan examples that you can use as a template or tweak to make it suitable for your organization:

Straight Commission with Clawback Clause

This is one of those sales incentive examples that could cause disputes down the line when the clawback clause is not clearly explained in the incentive guidelines. For instance, a customer signs up for a subscription service that’s worth $10,000 annually. If the company offers a 5% straight commission on the gross amount, the salesperson will earn a $500 commission for this sale.

But what if after a month, the customer decides to terminate his subscription and ask for a refund?

If the company has a clawback clause on its incentive plan, it has the right to recoup the commission paid to the sales rep because the company will have to issue a refund to the customer.

Profit-Sharing Incentive Program

One of the common incentive pay examples is the profit-sharing program. Companies with this type of commission scheme will calculate their net profit within a financial year and give a percentage of that total profit to all or their best-performing employees. This incentive can be given quarterly or annually, or it can be given as a lump sum during retirement.

Different organizations have varying objectives and unique cultures. Its incentive plan must reflect the nuances of the organization for it to have maximum impact on the company’s revenues and other relevant targets.