Guide
Mar 01, 2017
Xactly User Conference May 20-22, San Francisco
Explore 7 sales compensation plan examples and how to choose the right one for your business.
Do your employees feel motivated? Are you rewarding the right sales behaviors? Are you able to attract and keep top sales talent in your industry?
The answers to these questions depend largely on the quality of your sales compensation plan.
Choosing the right sales compensation plan not only plays a role in driving employee satisfaction, it helps to determine whether your sales team will hit their targets and help you achieve your larger revenue goals.
Read on for 7 different sales compensation plan examples to consider, plus how to choose the one that’s right for your company.
Quick Takeaways
- Sales compensation plans are critical for attracting and maintaining top talent.
- Straight salary plans offer straightforward compensation with no commission or incentives added.
- Commission-based compensation plans usually pay a base salary plus some form of commission for each sale made.
- The right sales compensation plan for your company depends on factors like company size, culture, and maturity.
- It’s important to know your larger sales objectives before creating your sales compensation plan so that you can align the two.
What are sales compensation plans and why are they important?
Sales compensation plans are structured programs that outline how much your salespeople earn. Typically, they include a combination of base salary, commission, and other incentives to encourage salespeople to hit their targets and perform at a higher level.
If you’ve ever been in sales, you know that it can be a truly demanding job. That’s why a good sales compensation plan is so important for your company. It keeps sales teams motivated, creates expectation standards, drives friendly competition within your organization, and shows salespeople that you value them and their hard work.
That last point — showing salespeople they’re truly valued — is perhaps the most important reason to dedicate time and intention to a quality sales compensation plan. Research shows that while 91% of salespeople feel pride in their work, 61% also feel that they are underappreciated in the business world.
Compensation is a significant factor behind this sentiment. If you want to attract and retain top sales talent in your industry, you need competitive sales compensation plans that make people want to be part of your organization.
Let’s dive into 7 real-world sales compensation plan examples and what to consider when choosing the one that’s right for your organization.
7 Sales Compensation Plan Examples You Can Use Right Now
1. Straight salary
The most straightforward sales compensation plan is a straight salary, where sales employees earn a base pay with no commission or other incentives. This plan is simple to execute but not commonly used by sales-driven companies because it doesn’t motivate sales reps to sell. Under this model, a sales rep that closes 10 deals in a given month could earn the same as a rep who only closes two.
One scenario where a straight salary can work well, however, is when employees only spend a portion of their time on sales. For example, they might spend 25% of their time selling, and the rest on customer service or other administrative tasks.
2. Salary + commission
The salary + commission model (also called revenue commission) is one of the most common sales compensation plans. In this plan, sales employees earn a base salary (typically lower than a straight salary) and commission based on sales performance.
Salespeople like the salary + commission model because it offers security in the base salary and an opportunity to control your own earnings through commission opportunities.
Some companies cap commission at a certain amount, but this can have a negative impact on sales potential. Even your best reps may not be motivated to sell once they reach their cap. For this reason, it’s best to keep commission uncapped if possible.
3. Tiered commission
Tiered commission is extremely effective at keeping your high performers motivated. In this plan, reps who reach a certain number of closed deals or revenue earn a higher commission rate for any deal closed after that.
So, for example, reps may earn 5% commission for sales made up to $100,000. Beyond $100K, their commission rate would bump up to 6%. Once they hit $300K, it would bump up to 10% — and so on. Sales reps are incentivized to hit their quotas and do it quickly, because they’ll be earning more once they do.
4. Gross profit margin
Gross profit margin plans are dependent on the overall success of the company. Employees earn a percentage of the profit on any given sale rather than the total price of the product. This plan works well for startups and other small or growing companies that want to motivate employees but need to protect their bottom line while scaling up.
5. Draw against commission
Draw against compensation plans guarantee sales employees a certain amount for each pay, and allow them to “draw against” future compensation when they don’t meet commission to cover it.
So, for example, a new rep may earn $500 their first month even though they make no sales. The next month, that $500 would be deducted from their commission earned.
The benefit of draw against plans is that they provide security for sales reps even when they aren’t closing deals or have a slow period for any given reason. On the other hand, they can be risky if salespeople constantly need to draw against future pay and end up owing a significant amount back to your company.
Mainly, draw against plans are good to use when you’re ramping up new sales employees or need added security during a time of transition.
6. Straight commission
Straight commission is when sales employees earn no base salary. Their entire pay comes from commission. While this plan definitely keeps sales reps motivated to close deals, it can also lead to a stressful work environment and ultimately cause sales burnout.
This plan is most effective when used for contract/temporary employees and in cases when there is an opportunity to earn really large commissions.
7. Set rate
Set rate sales compensation plans are just like other commission plans, except they pay a dollar amount per sale rather than a percentage. So, for example, a rep may earn $100 for every sale of a product vs. 5% of the product’s cost.
The set rate model can be useful when you want to encourage sales of one product over another, even when their costs are similar. So, for example, if you want to sell more of product A than product B, you might offer a higher set rate for sales of product A to incentivize sales employees.
How to choose the right compensation plan for your company?
The right compensation plan depends on many factors unique to your company, including its size, culture, product and service offerings, and maturity. When choosing a sales compensation plan, remember that the ultimate goal is to do what works best for your organization and motivates your employees to perform.
Things to consider as you choose a plan:
- What are our short- and long-term objectives?
- What sales behaviors do we want to encourage?
- Is this plan realistic and affordable for our company?
- Will this plan motivate employees?
When you know the larger goals surrounding your sales strategy, you’re better able to create a plan that helps you achieve them.
The Xactly Intelligent Revenue Platform brings Revenue Operation teams together to support salespeople with precise plans, better incentives, and data-informed insights to give them more confidence in their pipeline. Learn more about how we can help you transform your revenue strategy.
