Sales Compensation Plans 101
June 26, 2018
Grow Your Sales Team with the Right Sales Compensation Plan
One of the biggest challenges for a growing business is attracting (and retaining) qualified salespeople. This often comes down to having a formal compensation plan that spells out exactly how much reps can expect (and hope) to make selling your solution. It’s no surprise, then, that 90 percent of organizations have a plan that details the governing terms and conditions for sales compensation.
But what kind of sales compensation model is right for your business? That depends on many factors, including the size of your organization, the sales cycle in your industry, your solution, and the average annual value of the contract your sales force brings in. The Society for Human Resource Management (SHRM) provides an in-depth compensation toolkit that highlights some of the considerations relating to designing and administering compensation plans for sales professionals, as well as issues related to compliance with federal and state laws.
Basic Guidelines for Creating a Sales Compensation Plan
Deciding on a compensation model for your reps will require a close examination of your sales processes as well as a deep-dive into your organization’s financial structure, but there are some basic guidelines that can help you get started. Of course, these guidelines won’t tell you which compensation plan is the best fit, but they will make sure that your plan is fair, understandable, and relatively attractive.
- Make it Easy. Your compensation plan should be easy to measure, easy to administer, and, most importantly, easy to understand. Your reps will appreciate this, and so will whoever is responsible for administering compensation.
- Keep it Simple. There should be total transparency into how your sales reps are paid, and part of that is making sure your compensation plan is easily digestible. A good rule of thumb: aim to fit your compensation plan on a single page.
- Show Causality. Compensation should directly relate to the desired performance you wish your reps to achieve. In other words, your compensation plan should incentivize desired behaviors, like renewing contracts, upselling and/or signing new clients with longer terms.
Base vs Variable Compensation
“Variable” is the portion of a compensation plan determined by employee performance. In contrast to base salary (fixed and paid out regardless of performance), variable pay is provided when employees hit certain goals. The industry standard is 60:40 (60% fixed, 40% variable) but your compensation plan can be more or less depending on factors such as the degree of influence your reps have over the customer’s buying decision.
To determine the base-variable comp split, consider how much autonomy is needed (are you providing your sales reps with B2B leads or asking them to generate their own?), how much experience is necessary and the length/complexity of the sales cycle. If you operate in a volatile market or offer a complicated product or service with a long sales cycle, the base pay should be substantial enough to provide continuity of income so salespeople don’t become discouraged and begin to look for financial opportunities elsewhere.
Variable Compensation Plan Models
Profit-Based Comp Plan
Commission rates in a profit-based plan change as profit margin levels increase: the greater the profit, the more a rep makes in bonus pay. This plan is usually found in organizations where profitability is controllable by salespeople. For example, reps who sell a single product at a set price have little to no impact on the gross margin, thus there is nothing to be gained by paying on profitability. On the other hand, if salespeople can influence price and/or they sell products with varied margins, incentivizing with a profit-based compensation plan may help accelerate margin growth overall.
Quota-Based Comp Plan
Sales volume and quotas are the driving factors for many sales reps, and this compensation plan is structured to reward salespeople who meet or exceed monthly/quarterly/annual sales goals. Quota-based sales compensation plans are usually easier to track and pay than profit-based plans. These plans are also effective at retaining high-performing salespeople since they reward reps who consistently meet or exceed their goals.
Team-Based Comp Plan
Variable compensation in a team-based plan in which bonuses are paid out when monthly/quarterly/annual sales team goals are reached. Team-based compensation plans can create a very competitive and productive sales team, and if reps are not pulling their own weight there will be more accountability and motivation to improve. The drawback to this type of plan is that it can have the opposite effect on sales people who are not used to having their compensation influenced by others over whom they do not have control. They may also become less productive if they perceive their team as being unable to meet the established goals.
Give Your Reps More Leads to Work With
The more deals your reps close, the more they make, the happier they are, and the healthier your bottom line. Intelemark can fill your sales pipeline with quality B2B leads, cutting down on the amount of time your reps spend hunting for the right prospect so they can focus on closing more deals. Our custom B2B appointment setting and lead generation campaigns will generate a list of prospects who are ready and willing to talk to one of your representatives.
On average, our clients see a 30-70% increase in top of sales pipeline activity and a 40% increase in qualified lead generation. Learn more about the outstanding results we drive for our clients. Contact us today and schedule a test campaign if you want to learn what kind of results you can expect from a B2B telemarketing campaign.