When it comes to recruiting, hiring, and retaining great sales talent -- few things are more persuasive and important than maintaining a competitive sales compensation plan. Pay too little and you’ll lose good salespeople to competing companies. Pay too much and your salespeople will get complacent and stop growing revenue.
Below, I’ve compiled nine tips for making good decisions about base salary, commission, bonuses, and more. Incorporate a few of these tactics into your next compensation plan overhaul, and see them benefit the quality of your sales team and your company’s bottom line.
Sales Compensation Plan Tips
Think twice before assigning full commission
Avoid the draw against commission
Reward behaviors you'd like to see repeated
Pick the right commission rate
Pay commissions quickly
Get creative with shared commission and bonuses
Consider a plan that changes with experience
1. Think twice before assigning full commission
For most sales positions, base salary is a must. If you pay commission only, you’ll attract someone who either can’t get another type of sales job (not who you’re looking for), or someone who doesn’t need regular income (also not who you’re looking for).
The base salary should be high enough to cover basic living expenses for the salesperson, but not so high there’s no need to earn commission. These days, typical base salaries range from $36,000 to $72,000, depending on the experience and expertise needed for the position.
2. Avoid the draw against commission
Many companies only offer a salary as a draw against future commission. This means the salary plan is based entirely on commission.
Employees are “advanced” a specific amount of money at the beginning of each pay period, known as a predetermined draw. That draw is deducted from your commission at the end of the pay period, but if a rep comes up short, they owe money to their employer.
This model is de-motivating and outdated. No one wants to work hard for a company only to end up owing money at the end of the month.
If a salesperson has several bad months (which even the best reps run into) they can run up debt with their employer. And there are too many companies offering better, more progressive plans to salespeople.
3. Reward behaviors you’d like to see repeated
Promote good sales habits by financially rewarding positive behaviors when you see them. For example, if you want more new business than repeat purchases, offer a higher commission on net new sales.
A commission structure here works in your company’s favor because you don’t pay people unless you make money -- and you can incentivize the type of business you want to gain.
4. Pick the right commission rate
This is the tricky part. Typically, commissions are a percentage of net profit or a percentage of total revenue. They vary greatly by industry and company and can range from 1% to 10% of revenue or 20% to 40% of gross profit.
A good rule of thumb for choosing the right commission rate is: The total commission for top-performing salespeople should equal the salesperson’s base salary.
Thus, if a salesperson who has a $60,000 base is performing well, they should be earning another $60,000 in commissions.
5. Pay commissions quickly
A reward delivered quickly and consistently increases the likelihood rewarded behaviors will be repeated. Drive instant gratification by reducing the turnaround time on commission checks and see an increase in sales motivation.
6. Get creative with shared commission and bonuses
Shared commission and bonuses can work well in team selling environments, and when salespeople might not have total control over the outcome of a deal.
For example, if a salesperson generates leads, and gives those leads to a closer or technical expert, a commission structure could be frustrating. Basing the bonus structure on how many qualified leads the salesperson delivers might alleviate that frustration.
Bonuses are also great for inside salespeople, customer service representatives, and recurring revenue producers. For these teams, consider lump-sum bonuses based on a percentage of revenue generated or bonuses when production peaks.
7. Consider a plan that changes with experience
This type of compensation plan includes a substantial base salary and low commissions during the onboarding and ramp-up time. However, the base salary will decrease over time as less-experienced reps’ sales and commission rate increase.
This is only a win for the salesperson if their income total increases. The ramp-up time should be at least as long as your onboarding process, plus your typical sales cycle. You don’t want new hires to be under too much pressure too early.
8. Be flexible
Consider how territory and product line issues should influence a salesperson’s compensation. A new territory or product, for instance, might need higher commissions during the early months.
9. Be transparent
Discuss all of this with your sales team. Make sure they know compensation packages are a work in progress, and tell them you want to find a plan that works for everyone.
Make sure they understand the goal of this plan isn’t to pay them as little as possible -- but to reward good behaviors and maximize their income.
If you discuss the pros and cons of each plan, and listen to what your salespeople have to say, you’ll stand a much better chance of winning buy-in on a comp plan that works for everyone.