A sales compensation and commission structure is the ‘carrot’ for sales reps. These payments define how, why, when, and how much money they will make for specific behaviors. That way sales reps can pay their bills, build their careers, and make long-term investments. Your reps will be happier if they can put a down payment on a house, or eliminate all college loan debt.
A valuable sales rep will add a high amount of profitable revenue to the top line. You want to motivate sales reps to stay, grow, and contribute to the team. Having a fair base salary or earned commissions will provide that incentive, and convince employees to remain highly motivated.
Also, consider the effect on talent acquisition. Candidates interested in sales will pass on information about the best-paying positions. Such actions increase the word-of-mouth as well as company reputations.
Compensation, commission, and incentives are too often used interchangeably when they are not interchangeable. Each plays an important role when used strategically by leadership to drive certain behaviors by the reps. You want this behavior to be motivational, ethical, and sustainable.
Compensation is the full amount of money to which an employee is entitled to their income. This can include a base salary if the position offers a base salary, and also includes incentives and commissions. The term “compensation” refers to the whole and now the individual parts.
Commissions are a percentage of sales that reps receive when they close a deal.
Incentives are bonuses that they can receive if they perform more than the required work or make the desired quota. Some are financial, like holiday and end-of-year bonuses added to base pay. Others are physical rewards like gift cards and vacations.
As you can see, the three terms are quite different. Not all incentive programs provide taxable income; some involve offering free trips or products in bulk. Commissions always have to have money involved.
Develop these equity programs with thorough detail, so that you can fairly pay your reps. In addition, your programs should drive short, mid, and long-term value for the company. What determines value? Accordingly, the value they have created is the primary factor.
There are many ways to build out your sales commission structure. The method should be determined by your phase of growth and team skills. Your coaches and managers should also engage in a careful examination of your short, medium, and long term goals.
The standard sales commission structures typically include revenue, gross margin, and tiered commission structures, along with multiplier and commission-only plans. The sales commission strategy is effective for individual performers because it provides employees with the opportunity to obtain additional compensation. The system rewards their efforts, and especially, their achievements.
Tiered commission plans are based on rewarding sales reps if they surpass certain revenue thresholds. You can use it to reward high-performing reps. Multiplier plans often include custom metrics to determine the sales rep’s earnings. Commission-only bases the compensation solely on performance.
Employers must design an effective and comprehensive, but not overly complicated, sales compensation plan. Each facet should reward the behaviors that the organization needs to promote.
Ensure that your compensation plan accounts for “Clawbacks” where a rep has sold something on which they received a commission but for one reason or another, the customer didn’t fulfill their term and/or didn’t pay in full. You need to have the flexibility to pro-rate the amount back from your salesperson, otherwise, you will incentivize the wrong behavior.
Are you ready to refine your merit-based payment systems? Rose Garden Consulting can help you refine which commission structures will inspire your sales reps to work their hardest.
Learn more from our complimentary initial consultation. As Jerry Maguire once said in his titular film, “Show me the money.” We will show you where the money should go.