Compensating most employees is fairly simple. You pay a salary and in most cases, additional benefits.
But compensating salespeople can get tricky because there are many different compensation plans to consider. The one you choose should align best to your growth strategy and objectives.
At first glance, it seems logical to consider compensating salespeople based on, well, sales, but you might want to refine that plan to reflect other goals.
For example, if you’re more interested in gaining new customers, your plan could provide extra compensation for opening new accounts. Or you might be more interested in increasing average order size, improving customer retention rates, or focusing on selling more profitable products. Whatever your specific business goals, you can refine your compensation plan accordingly.
Any compensation plan, however, should be fair and easy to understand. It should also be competitive with other companies in your industry. If it isn’t, you could lose salespeople. Your industry trade organization might be able to provide a survey of industry-specific compensation plans to give you a general idea of what it will take to remain competitive.
Plans are usually designed with a base salary and commission, but the main incentive is the commission structure. Plus, in some cases, you’ll need to pay a “draw” so salespeople receive at least some compensation, especially when they first begin working for you.
According to Ken Sundheim, owner of executive search firm KAS Placement, there are several different general sales compensation plans you can consider. These include:
- Straight Salary. There are no incentives under this plan, so salespeople needn’t worry about their paychecks. Although most good salespeople will eventually realize that a commission-based structure could be far more rewarding.
- Salary plus bonus. Salespeople receive a salary, but also a bonus if target quotas are met. There is more incentive with this approach, but once again, good salespeople may prefer being paid a commission for each sale.
- Base salary plus commission. Salespeople receive a fixed annual salary so they have a predictable cash flow, but also receive a commission on sales. However, given the base salary, commissions will likely need to be lower than with a straight commission plan.
- Straight commission. Under this plan, there is no base salary so salespeople are compensated only on sales. Pay isn’t tied to hours worked, so some salespeople may have to work more hours to generate enough income.
- Variable commission. This plan is similar to paying a straight commission, but the commission rate can change based on whether sales goals are met or if they’re exceeded.
- Draw against commission. Although this plan is based on commission, salespeople receive a draw each pay period to help with their personal cash flow. The draw is then deducted from commissions earned after the pay period.
- Residual commissions. This plan is useful for businesses that have steady client accounts. Under this plan, salespeople may receive an initial commission for a first sale and perhaps a smaller commission as long as the customer continues to order.
Whichever compensation plan you design, monitor it regularly. If it doesn’t seem to keep your sales team motivated – especially top performers – you may need to make some adjustments.
