Blending salary and commission to create a well-balanced compensation plan can be challenging. Though it may look marginal at first glance, your sales commission structure should lay at the core of your plan if you want to keep both your sales reps and your customers happy. Before diving into best practices that can help you design a better commission structure, let’s learn about the sales commission structures that most sales organizations have in place.
7 COMMON SALES COMMISSION STRUCTURES
There are a number of common, industry-accepted sales commission structures. A typology published in Business Insider does a great job of explaining the structures, as well as their pros and cons. We’ve summarized from their article below:
- Straight Salary – Though this is one of the “safest” sales commission structures, it’s also the least motivating. With salespeople lacking incentives to sell more, they will easily become complacent in their job.
- Salary + Bonus – Salespeople get a fixed component with every pay period and an additional bonus at specific intervals if they hit or exceed their quotas. Although stable, bonus is mostly capped by this structure. An over achiever will earn less here than with a commission-based structure.
- Base + Commission – One of the most used structures in a sales compensation plan, this is based on the number of completed sales and is reliable due to the fixed component. However, the commission rate can be marginally lower than commissions within a straight plan.
- Straight commission – With no base salary in the commission structure, this plan is risky for underperformers, new sales reps, and for those going through a bad sales phase. However, earnings can be spectacular for over-achievers.
- Variable Commission – This commission plan is similar to a straight commission but – as the name suggests – it’s not flat, but variable. The rate can go up or down depending on sales quotas. Though reps can be motivated to become overachievers, there’s sometimes an emphasis on quantity instead of quality, and customer services may fall on second place.
- Draw Against Commission – Based on commission only, this structure pays salespeople with an advanced sum of money at the start of each pay period. This “pre-determined draw” is then deducted from their commission at the end of the pay period. After they pay back the draw, salespeople keep the rest of the money. Depending on results, this can be either reliable or challenging – with reps ending up in debt because of a bad sales month.
- Residual commission – Salespeople continue to get a commission as long as their account is generating revenue for the company. Though this can be a reliable source of money, it can also make reps lose significantly when accounts slip through their fingers.
AN EFFICIENT SALES COMMISSION STRUCTURE
The type of sales commission structure you define depends on a variety of factors such as:
- The role of salespeople in your organization – If they play a critical role in selling your product in a very competitive market then their compensation plan should be very ‘aggressive’ and contain a higher commission percentage. If your salespeople are working as part of a team to sell a product (e.g. cold calling team, sales team, business development team, etc.) then you may want to lower their commission rates.
- Your sales strategy – If you plan to continuously sell new products in the market, then your compensation plan should lean towards providing more commissions than fixed base salary. If you’re looking at maintaining existing accounts, then your sales commission structure should be residual-based, compensating reps as long as the accounts maintained by them are generating revenue. Divide your sales team into hunters and farmers and compensate them accordingly.
Keep in mind you should also reward the overall team’s accomplishments when achieving a common goal. Recent Aberdeen Group research shows best-in-class companies are almost twice as likely as laggard organizations to compensate sales reps for both individual and team achievements.
Keep it simple – You shouldn’t require an advanced math degree to work out how much you will get in a particular month. Sales commission calculations shouldn’t be rocket science.
Provide real-time visibility – It can be extremely frustrating for a sales rep to not know where they stand in the middle of the month. Provide visibility to enable them to calculate how much money they can make. A clear and concise dashboard does wonders to boost motivation and alert managers about coaching needs.
Use the carrot and stick approach – Accelerators motivate salespeople to sell more and overachieve. At the same time, commissions should also have a threshold cut off. Commissions should not be given if the rep fails to achieve a specific minimum.
Don’t cap earnings – There is nothing more demotivating than knowing you can’t make money out of a deal you have worked very hard for because you have been a stellar performer and have maxed your earnings. This is a sure fire way of losing your top sales reps to competition. As a leader, you should be able to create a compensation plan that results in a win-win situation for both your salespeople and your organization.
Align the metrics with the business goals of the company – Tailor the plan to incentivize behaviors that fit the goals of the company. As an example, if the goal is to generate more cash flow then incentives should be given to more upfront payments.
How about you? How are you designing your sales commission structure? Feel free to let us know if you have any suggestions or questions. I will be answering them in the comment section below.
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