Whether a company is trying to grow or has reached the Enterprise level, the right sales commission structure can be the difference between hitting your goals or falling flat. Since sales is tasked with increasing revenues, incentives are an important part of achieving those goals. Plus, commissions work well for SMBs who don't have the resources to pay up-front base salaries. Of course, the payment plan—a mix of a base salary and commission—gets determined by the goals and size of the business. For Enterprise companies, other benefits are often added to the mix such as healthcare, wellness benefits, an expense account, a 401k plan, stock options, and more. It's important to structure your compensation plan with your end objective in mind. For example, rewards should be given based on specified activity. So, if an employee beats their quota, they might also get a higher rate of commission. Not to mention, a commission plan means every sales employee is motivated to help the company reach its revenue targets. And, for smaller companies, they have peace of mind around payroll since it will rise and fall in alignment with revenue creation. If times are bad, companies don't have to cut salaries since it is a commission structure. For Enterprise companies, the right commission structure will allow them to hire more sales staff to meet larger targets.
How to Compensate Your Sales Staff as a Small Business
One thing smaller companies must prioritize is budget. Not meeting payroll can lower employee morale, a harsh reality when sales are down. So, a commission based plan is the best option for sales staff. Yet, you want a structure that rewards results. It never makes sense to offer a high base salary and low commission percentage. If you want your sales team to hustle, then you need to offer more commission and a lower base. Another option to look into is a medium commission with a medium base. Consequently, this isn't the most profitable option because as a small company, you will need more sales to grow. So, to keep your salespeople motivated, offer either a low base and high commission or pure commission. Now, if you want to attract qualified salespeople then you want to offer a base salary that they can survive on, such as $3,000 per month. Then, give them a high commission percentage that they can strive for. The important part of this making sales feel as if they have control over how much they can earn. The more sales they bring in, the more revenue for the company. And, a smaller company can afford to hire more sales staff with this type of compensation plan. There are other items to consider such as what types of activities warrant the most financial rewards. You should never align a commission plan with the number of sales made. The reason is salespeople will be more focused on how many sales they make and not worry about the amount of each sale. Instead, commissions should be tied to a percentage of revenue. You might also consider what is called a "ramped" commission where sales reps get higher percentages as they meet their sales goals. For instance, a rep might earn 15% for the first $200,000 in profits. For the next $400,000 in profits, they earn 20%. There is also the choice of a draw against commission. Employees can get an advance relative to future commissions. This can be a tricky scenario though. If an employee draws $2,000 and only makes $1,500 in commissions, then they would owe the company $500. Some employees may feel resentful having to pay the company back, especially if they could not control outside factors such as a down economy or lack of sales support.
Commission Structures for Enterprise Businesses
When it comes to larger, and more established, companies, the ability to pay various sales plans gives them more flexibility in this regard. An Enterprise company might very well offer a medium base salary and a medium commission because they already have an established pipeline of incoming sales and managed territories. They want to hire the best employees too, and sometimes, that means offering a higher base with benefits such as healthcare, travel, stock options, and 401ks. Another option is to offer a base salary for a few months to new employees who need to ramp up their client lists. This option can work well for software companies where employees need time to achieve expertise. It also works well for longer sales cycles. So, the salesperson gets a base salary for the first three or six months. After that, it might be pure commission. Good salespeople don't usually mind pure commission because they know they can make a killing if incentives are uncapped. But, they also need the time to get comfortable with the company's products or services and the sales cycle first. It's important to note that even as an Enterprise company, you can't afford to allow your salespeople to become complacent. There are many nimble startups out there just waiting to take your place in the market. As a result, your commission structure should attract effective salespeople, but also keep them motivated.
Elements of a Sales Compensation Plan
For starters, all sales compensation plans and commission structures must be documented and distributed to your sales staff. Frontline managers should also thoroughly understand the plans so that they know where and how to motivate their employees. Here are some of the building blocks to include:
- The company's sales strategy and objectives
- Appropriate benchmarks for the sales staff
- Payout formula such as a low base and high commission
- How to resolve issues over commission structures
With a commission structure, compensation questions will always come up. A new salesperson who just made a million dollar sale for an Enterprise company might wonder why they only received a $10,000 commission check. The employee might not understand that it takes the collaboration of multiple departments to close million-dollar deals. Things need to be laid out as clearly as possible. It's critical to have specific details about how issues will be resolved. It might be through a committee or human resources. Furthermore, you want to have meaningful sales objectives. It can be about meeting sales quotas, and it can also be about the size of the sale. Picture this: one sales employee meets their sales quota by offering deep discounts on a consistent basis. Another sales employee has a fewer number of sales, but they are for larger amounts and they meet their sales quota as well. Which sales rep has provided the most value to the company? Answering questions like these helps to take the guesswork out of the meaning of sales success for your company. It also provides a clear path for your sales reps to follow.
Whether you run a small business or an Enterprise company, deciding on the right commission structure will involve some difficult decisions. It's always tempting to offer higher base salaries when finances are stable. But, it's better to resist that temptation since you know that the economy goes up and down. The best approach is to offer a commission structure that attracts the types of sales employees you need while keeping them motivated and keeping your company in an optimal financial position.