What is Variable Compensation in Sales?
Sales compensation strategy is your organization's overall game plan when it comes to driving your team's performance and increasing revenue. Your sales compensation plan encompasses all aspects and details of your reps’ earnings, such as base salary, commission, and any incentives or benefits they may be eligible for.
In sales, variable pay is the portion of sales compensation determined by employee performance. When employees hit their goals (aka quota), variable pay is provided as a type of bonus, incentive pay, or commission.
What Does Base Pay Mean?
To understand variable compensation, you have to understand what base salary, or base pay, is. Base pay is a fixed payment that is paid out regardless of employees meeting their goals. In sales compensation, base pay has to be combined with other compensation types in order to ensure competitive compensation is offered and limit sales rep turnover. Together, variable pay and base pay salary make up what is known as the pay mix.
But what do those types of payment structures look like and how do you know which one(s) are best for your organization? Find out below.
Types of Variable Pay
There are many ways to motivate reps. When it comes to variable pay, a commission plan is the most common. Regardless of the type of variable pay, your goal should be to motivate employee performance and encourage sales reps to meet their quota (Learn more about quota planning with Xactly Sales Planning Software).
Sales Commission Structures
Sales commission structures lay out the path for sales reps and employees to earn variable pay. Commissions are typically a percentage that reps earn as a result of closing a sale. These structures can be a flat rate, calculated on gross margin, or determined by the percentage of quota completion (multiplier structure).
The most common commission structure is a tiered commission plan. Under this variable pay structure, reps earn a percentage based on deals closed. However, there are commission tiers that reps achieve as they close more deals and work towards quota.
For example, reps may start out a new year with a seven percent commission rate on any deal they close. Once they've hit $100,000 in total sales, they now earn a nine percent commission rate until they meet quota. Then, after they achieve quota, any deals earn an 11 percent commission rate.
Bonus vs. Commission
Some companies decide against a commission structure altogether and opt for a bonus structure. When it comes to bonus vs. commission, there are several differences to note. For example, commissions are typically paid alongside base pay in each pay period. Depending on how bonuses are set up, they may be paid with each pay period, quarterly, or annually.
In addition, both bonuses and commissions often depend on performance. However, bonuses are typically a fixed payment amount, while commissions may differ from rep to rep based on individual performance.
Management by Objectives (MBOs)
Management by Objectives, or MBOs, helps employees set individual goals to work towards incentive pay. This is a popular tactic for non-sales or non-commission employees to earn variable compensation.
These goals are typically set by an individual employee and their manager on how they can contribute in their role and/or expand beyond their day-to-day responsibilities. Often, MBOs encourage collaboration and welcome innovative, creative ideas to help the company reach its goals.
How to Implement Your Compensation Plan
Money motivates, and therefore, your sales compensation plan and variable compensation should motivate sales reps to close deals. By rewarding or paying for rep performance, you are establishing a direct link between results and pay, which is one of the best methods companies can use to motivate sales teams to hit goals.
More importantly, your variable pay structure must drive the right sales behaviors to reach company goals. Variable compensation pay is an amazing motivational tool, but it can certainly miss its mark without proper implementation and the correct pay mix.
If your sales team is given an opportunity that relies too heavily on incentive payment, you run the risk of encouraging reps to work independently, and perhaps shy away from taking chances for the organization. Too little variable performance pay and sales reps may not be inspired enough to work at high levels.
To effectively manage your system, here are a few tips when sorting out your compensation strategy and developing sales compensation plans:
1. Incentives Based on a Salesperson’s Degree of Control
If reps enlist help from other staff or your brand’s positioning does most of your selling, incentive compensation can be lower than when reps influence a sale entirely on their own.
2. Variable Compensation Based on Individual Achievement
Sales reps should be held accountable for things they can control. Placing an individual’s pay at risk based on team results may not be seen as fair, and could lead to increased turnover.
3. Avoid a Skewed Variable Pay System
Sales team roles often determine the level of variable pay incentives. For instance, variable pay is greater when you have more control over results. So, an account executive (AE) will usually have the highest variable pay level on the team, and more than say a customer success rep because the AE has a more direct influence on the deal closing.
Your team is made up of a wide variety of resources. Not every sales role is the same so variable compensation should depend on different roles' responsibilities. While they share the same overarching goals, they do not all share the same responsibilities. Compensation based on role helps organizations to hone in on each position’s strengths. This allows you to motivate each person more effectively by basing their rewards around actions and metrics they can impact on a daily basis. This keeps your team motivated, engaged, and inspired to exceed your goals.
The Impact of Variable Compensation on Performance and Pay Mix
Winning companies are well aware of the positive benefit of incentive pay, and aim to offer competitive compensation in order to reduce turnover while retaining top talent.
It’s all about balance. You need your incentives to motivate reps and drive the right sales behaviors, but you also need to design them in a way that ultimately allows you to hit your revenue and growth targets and drive profitability.
Interested in learning more on how to improve the preparation, design, and implementation of your sales compensation plans? Download our “Ultimate Guide to Sales Compensation Planning".