Sales compensation is a balancing act. First and foremost, you need to incent your sales team to make sales and pay them fairly but do so at an affordable cost to your company. Because of this, creating a strong sales incentive plan can be a difficult task. Regardless of your incentive strategy, all compensation plans run on the belief that money drives behavior. Your sales team must see the value in making a sale. In almost all cases, this value comes in the form of sales compensation, usually as a commission or bonus.
Understanding Bonus vs. Commission Plans
Compensation plans should contain key elements, tailored to your company’s needs, to help reach your business goals. Both bonuses and commissions are popular forms of sales compensation, but they are not the same. According to WorldatWork, a commission is “communicated as a piece of action (e.g., 2% of revenue, $5 per unit sold, 6% of margin dollars).” A bonus, on the other hand, is “a fixed incentive amount offered for achieving a specific objective.” However, the two compensation methods differ on more than just their definitions. The Payment Structure The biggest differences between commission and bonus plans are the payment structure and how much sales reps earn. Commissions: In commission plans, the total compensation amount will vary based on individual sales rep performance. Sales teams are presented with a percentage (e.g., 6% of sales revenue), which they will earn for every sale they make. Once they’ve reached their sales quota, this rate often increases to encourage overperformance. Bonuses: Bonuses are stated compensation amounts. They may vary for individual sales reps and can be represented by a percentage or fixed amount (e.g., 4% of base salary or $10,000). It’s important to note that bonuses do not have to be structured as “all-or-nothing” payments. If quota is not met, sales reps can earn a percentage of their bonus, which can help to keep morale up. What Determines Compensation Compensation can depend on several factors in your incentive plan. In most incentive structures, quota is the sales goal reps should aim for in order to receive compensation, but it might not determine how much a rep will earn. Commissions: Quota guides sales reps towards their potential earnings, but ultimately, the amount they are compensated depends on each individual rep’s performance. Once reps hit quota, they are often further encouraged to overperform with a higher commission rate. Bonuses: For a bonus structure, quota and sales rep performance will be major factors in earning compensation. However, unlike commissions, bonuses are often tied to both corporate and individual goals, which can help to incent employees in all departments.
Choosing the Best Compensation Structure
The fact of the matter is different businesses need different compensation plans. Before putting together your incentive strategy, you should first ask yourself the following questions:
- What can we afford to pay sales teams?
- What do we expect from sales teams in terms of performance (i.e., quota, revenue, etc.)?
- Will we be paying sales reps a base salary in addition to compensation?
- Will we be offering sales reps additional non-financial compensation?
When to use a Commission Commissions are the most common type of compensation plan and can be offered with or without a base salary. They are more typical in businesses that are:
- in earlier stages of business
- introducing new business roles
- launching new products
Use a commission when you know the fixed amount of the money your business can reasonably afford to pay sales reps to sell your offering. Design your plan to maximize compensation for well-performing reps and stay within your company’s budget. When to use a Bonus Bonuses are almost always paired with a base salary. They are usually more appropriate for:
- more mature businesses
- complex selling organizations
- account management roles
Implement a bonus compensation plan when you have a more established business and want to focus on the idea of compensating sales reps at market value. Then build your plan to reflect the needs for each individual sales rep’s market value.
Both commission and bonus plans will allow you to compensate sales reps fairly and incent them to perform well in the future. Regardless of your compensation method, ensure that your plan boosts sales team productivity and moves you closer to achieving your business goals. Creating a compensation strategy with those goals in mind is the first step towards a successful business plan! Learn how Xactly can help you create a simple, organized compensation plan for your business!