How to Create a Sales Compensation Plan to Attract Top Sales Talent
"Money isn't everything."
That's a true statement, but compensations are almost always a BIG motivator. It could be in the form of cash bonuses, stock options, or business trips.
Whatever it is, the right sales compensation plan (or comp plan) can help you attract and retain top-notch sales talent who'll drive your company’s growth.
When you reward and recognize your sales team, you're:
- Creating an atmosphere of success
- Challenging them to reach their goals
- Giving them a reason to stay with your company
And on top of all that, once the news gets out that your company offers competitive compensation plans, you’ll start attracting the best sales talent to your organization.
In this article, we'll further explore the importance of sales compensation plans, key terms to understand when creating a plan, and how to design a fair and effective plan for your team.
What is a Sales Compensation Plan?
A sales compensation plan is a document or strategy that outlines how you intend to pay your sales reps, typically including a base salary and incentives or commissions based on performance. And there are several other types of compensation, but this is arguably the most popular compensation structure you’ll find in many companies.
Sales managers use these plans to motivate and reward their reps for meeting and exceeding sales targets. The plan may also include bonuses and other incentives to encourage reps to close deals and bring in new customers.
We'll get into some examples in a bit, but let's explore why these compensation plans are important a bit further.
Why Are Sales Compensation Plans Important?
We've covered the basic reason sales compensation plans are important, but let's look deeper; here are some other benefits of having a sales compensation plan:
Benefit #1: Attract and Retain Top Sales Talent
Granted, not every salesperson is motivated by how much compensation you offer them. But aside from company culture or friends in the biz, sellers generally want monetary compensation for their work. Otherwise, they won't be motivated to give their best performance.
For instance, a study revealed that only 33% of workers prefer being publicly recognized at their company over receiving a private $500 bonus. This means the other 67% prefer cash awards over any sort of recognition.
So if you're looking to attract and retain talent at your sales organization, a competitive sales compensation plan is almost a must.
Benefit #2: A Formalized Way to Reward Reps
While there are several ways to reward reps, sales compensation plans offer a more formalized method to recognize reps and reward them to do better.
"Is it that important to formalize their reward process?"
Well, yes. A well-structured plan gives reps something tangible to look forward to. In other words, it gives them hope. And hope is one powerful motivator for most employees, whether they're salespeople or not.
Case in point: In a survey by Gallup, they found that employees who strongly agree that their leader makes them feel enthusiastic about the future (Gallup's measure of hope in the workplace) are 69 times more likely to be engaged in their work compared with employees who disagree with that statement.
Offer commissions and bonuses in a formalized way, and you’ll motivate your sales force to close deals more effectively.
Benefit #3: Create Structure Within Your Team
Sales compensation plans can also help you create a structure within a sales team by clearly outlining expectations and goals for reps. This can help to ensure that everyone is on the same page and working towards the same targets.
It can also make it easier for managers to track relevant metrics and progress and hold reps accountable for their performance and sales behaviors. A company that has a clear, structured sales compensation plan in place would usually have an easier time managing its sales team and meeting its sales goals than a company with a less structured approach.
Benefit #4: Make it Easier to Budget
Sales compensation plans also make it easier for you to budget for your sales efforts.
By outlining the base salary and/or commission structure for reps, you can more accurately predict and allocate how much it'll cost your business to hit its sales goals.
And in many cases, this can mean the difference between having enough funds to hire the extra sales reps you need and not having enough.
For instance, if you know ahead of time how much it'll cost to hire and retain top-performing sales talent in your enterprise team, you'll know where to adjust spending in other areas of your business to come up with the funds you need to motivate sales reps.
Benefit #5: Fairness and Transparency
Finally, sales compensation plans promote fairness and transparency within sales teams.
By clearly outlining how reps will be compensated, you can help to build trust and encourage collaboration among reps—giving them a sense of security and making them feel like their work is valued. This, in turn, helps reduce employee churn.
Of course, this doesn't mean everyone on the team gets the exact same compensation plan. With a variable pay setup, reps become eligible for bonuses and rewards based on performance. But having a uniform compensation structure in place can help to make sure that everyone is playing by the same rules and that no one is being treated unfairly.
In summary, sales compensation plans are a great way to motivate and reward reps, create structure within your team, make it easier to budget for sales efforts and promote fairness and transparency.
Terms to Know Before You Create Your Sales Compensation Plan
There are several key terms you should be familiar with as you begin creating your sales compensation plan. These terms will help you understand the different elements of your plan and how they can impact your sales strategy and bottom line.
A clawback is a provision in a sales compensation plan that allows your company to reclaim part or all of a commission that has already been paid to a sales rep.
Usually, it's useful in situations where the sale that the commission was based on is later canceled or if the rep's performance does not meet certain standards.
And in general, you'll need to include clawbacks in sales compensation plans to protect your company's interests and ensure that reps are fairly compensated for their work.
For instance, if a sale is canceled after a rep has already received the commission, it's usually not fair to keep that money—since the buyer did not complete the sale. Or, if a rep's performance does not meet the already-set criteria, clawbacks could be used to reduce or eliminate the commission that the rep receives.
Commission Per Sale
As the term implies, commission per sale refers to the amount of money a sales rep will receive for each sale they close.
This is typically a percentage of the sale price. A simple example of this would be a 10% commission for each sale that is closed. So if a sales rep closes a sale of $100, they would receive a commission of $10.
The commission rate is the percentage of a sale that a sales rep will receive as a commission.
This rate is typically based on the rep's performance and may be adjusted over time based on their success in meeting or exceeding sales targets. In our previous example above, for instance, the commission rate was 10%.
A commission cap is the maximum amount you'll pay out to a rep in commissions. It's often useful when you want to limit the amount of money that reps can earn from sales but still incentivize them to work hard and close deals.
For instance, you could set a commission cap at $10,000—meaning that even if reps close sales for more than this amount, they won't receive any additional commissions beyond the $10,000 cap.
On-Target Earnings (OTE)
On-Target Earnings (OTE) is a term used to describe the expected earnings of an employee, based on the employee meeting certain performance targets, essential for effective sales performance management. OTE is often used in sales roles or positions, where an employee's pay is partially or fully based on their sales performance.
For example, imagine you're a sales representative at a company and your boss tells you that your On-Target Earnings (OTE) for the year are $50,000. This means your boss expects you to earn a total of $50,000 in salary and commissions based on your sales performance.
Your base or straight salary is $30,000, and you have the opportunity to earn an additional $20,000 in commissions if you meet certain sales targets. If you exceed your sales targets, you may earn more than your OTE. If you don't meet your targets, your earnings will be lower. OTE is often used in sales positions to incentivize employees to perform well and meet their targets.
A sales accelerator is a type of incentive compensation that rewards reps based on their performance. Typically, it's used to motivate reps to exceed sales targets and push themselves harder to close deals.
For example, you could set up a sales accelerator where reps receive an additional commission for each sale above a certain threshold. So if the commission rate for sales below $1,000 is 10%, you could set up an accelerator where reps receive a 15% commission for sales above this amount. This way, they're getting an additional 5% for their efforts—which tells them that they're appreciated and incentivizes them to work harder to close more new sales.
Sales Base Salary/Pay
This is the amount you pay your reps regardless of sales performance.
For instance, if a rep has a base salary of $50,000 and they close $1 million in sales, they'll still receive the same base salary. The base pay is typically used to ensure that reps are paid a fair amount for the work they put in—regardless of how successful they are at closing new sales.
Sales commissions are the additional payments a sales rep receives for their work, typically based on their performance and the value of the sales they close.
These commissions can come in the form of bonuses, accelerators, and other incentives. And they are usually based on a fixed rate set by the company, the rep's performance, or both.
A sales decelerator is an incentive plan that reduces or eliminates a rep's commission if they fail to meet certain sales targets.
For instance, you could reduce their commission rate from 10% to 5% if they don't close any sales in a given month or quarter. This provides an incentive for reps to work hard to meet your business goals and ensures that they are fairly compensated for the work they do.
A sales quota is a target or goal for the number of sales that a sales rep or team is expected to close within a given period of time. This is usually set on a monthly or quarterly basis, and it's used to motivate reps to hit their sales goals.
If they meet or exceed the benchmarks or quotas you set, they may receive additional commissions or bonuses. And if they fall short, their commission rate may be reduced or eliminated altogether. It's also a popular method good sales leaders use to measure performance and hold reps accountable for their success.
How to Create a Fair Sales Compensation Plan For Your Sales Team
Creating a fair and effective sales compensation plan for your team requires careful consideration and research. Here are some key steps to follow when developing a plan:
1. Research Your Industry
Should you pay higher, lower, or the same commission rates as your competitors? Should you offer paid leave or other benefits?
These are questions that might go through your mind as you consider how to craft a compensation plan for your team. But there's hardly any other way to find out than to do the research. Look at what other companies in your industry are doing and use that information to inform your decisions.
And while you're at it, consider the specific needs and goals of your business when deciding on your sales compensation strategy.
For instance, if you find that other businesses in your industry are offering higher commission rates, but you're unable to do so for whatever reason, you can consider looking into other options such as bonuses or accelerators. Or you can offer a combination of attractive and cost-effective benefits to ensure consistent attraction and retention of the best sales reps.
2. Choose a Sales Compensation Plan Structure
There are two main types of sales compensation packages/plans:
- Commission + base pay
These two are the most popular types of compensation plans out there, but there are other commission structures you can consider, like:
- Tiered sales commission: Reps lock in higher commission rates after a certain benchmark
- Residual commission: Reps are paid continuously as long as the account they closed continues to generate revenue
- Territory volume commission: Working as a team, the sales reps assigned to cover a certain territory collectively earn commission and split it evenly
- Gifts, training, PTO, and other non-monetary incentives: Money talks, but you may find that your reps are more interested in other types of incentives. Talk to them and find out!
Depending on the type of business you're in, your company's gross margin, and the goals you want to achieve, you can decide which structure is best for your team.
For instance, if you're a SaaS startup using an outsourced sales team, then a commission-only plan might be the better option; since they're not in-house, you have the opportunity of shedding the overhead costs associated with a base pay + commission plan.
3. Decide on Commission Rates for New vs Experienced Sales Reps
When you have a team that's comprised of both new and experienced sales reps, offer different commission rates for each skill/experience level. This helps to motivate the newer reps and also ensures that the more experienced reps are appropriately compensated.
Why should experienced sales reps get more sales incentives than newcomers, you ask? Good question.
First, experienced sales reps often have a better chance of closing deals faster and more efficiently because they understand the sales process better and have developed more skills over the years. So they know what works and what doesn't to get quick and efficient results.
Second, experienced reps often come with a larger network who are willing to buy from them—especially if they've been working in your industry for a long time. So they may be able to make more sales with less effort—hence, they deserve a higher commission rate.
However, there are other factors to consider, regardless of the experience level of the people on your sales team. Things like:
- How difficult it is to nurture a lead and close a sale
- Whether they're also providing leads
- The average length of the sales cycle
- Number of leads worked at a specific time
- Gross profit margin
These are some of the elements you can use to determine the commission rates for your sales reps—no matter how experienced they are.
So at the end of the day, you're not just paying for their experience, but results. You're rewarding the sales reps for their hard work, dedication, and results that help your business succeed.
For example, if your sales cycle is long, you may want to consider a plan that rewards reps for their efforts throughout the entire process, rather than just at the point of sale. This can help to motivate reps to continue working hard and stay engaged throughout the sales process.
So things like the length of your sales cycle, and other factors I've shared above, will impact the design of your sales compensation plan.
4. Decide on Bonuses & Other Incentives
Besides the commission rate, you can also offer bonuses or other incentives to your sales reps.
These can be performance-based bonuses, such as hitting certain targets or goals, or they can be more generic incentives such as gift cards, travel opportunities, sales accelerators, and so on.
You could also do sales contests to reward reps to best each other and stay competitive. Not to mention this is also great for team bonding!
For instance, you could offer a bonus to the rep who closes the most deals in a month or give extra points for certain activities such as attending training sessions or generating leads through referrals.
On the surface, these may seem like small incentives, but they can help drive performance and also create a fun workplace atmosphere.
5. Set Quotas and Commission Caps
You can use a combination of sales quotas to encourage a certain level of performance.
These could be monthly, quarterly, or yearly quotas that reps need to hit before they start receiving their commissions.
In addition, consider setting a commission cap. As we've shared earlier, this will limit how much each sales team member can make in a given period, helping you keep the sales commission costs within budget—while also providing reps with an incentive to increase their performance as they reach their caps and look for ways to exceed them.
At the end of the day, you want your sales compensation plan to be transparent. It should motivate your sales reps to continue producing great results, and reward them for their hard work and dedication.
6. Choose When Payouts Occur
Lastly, decide when to pay out the commissions. You can choose to pay out the commissions immediately after they make a sale, or you can stagger them out over a period of time. You can also pay when specific quotas are met, or when a certain percentage of the product is sold.
This will depend on your specific business model, so you'll need to decide what works best for you.
But keep in mind that 64% of sales professionals prefer payment on at least a weekly cadence, with more than one-third of that group (24%) preferring to be paid every day. Of course, this doesn't mean they should dictate when you pay, but it's something to consider when making your decision.
You might also consider a tiered system, where reps earn a small commission up front, and then the rest is paid out over time as the sale continues to bring in revenue. This system can provide reps with a steady income—while keeping your business’s finances in check.
At the end of the day, the goal is to use a payout schedule that is both fair to your sales reps and beneficial to your business. So find the balance that works for you and your team.
Sales Compensation Plan Examples
|Company||Sales Compensation Plan||Calculation|
|Acme Inc.||Commission-based||10% of total sales|
|Beta Corp.||Base salary plus commission||$50,000 base salary + 15% of total sales over $100,000|
|Gamma Enterprises||Tiered commission||10% of total sales up to $100,000, 15% of total sales between $100,000 and $200,000, and 20% of total sales over $200,000|
Note that these are just examples, and the specific details of a sales compensation plan will vary depending on your company’s growth stage, sales rep experience and work done, and other relevant factors.
But overall, clearly communicate and explain the terms of your sales compensation plan to your sales employees so they clearly understand how you’ll be calculating their pay.
Creating a sales compensation plan is an important task for any business, as it can help to attract and retain top sales talent, motivate high-performing reps to keep delivering their best efforts, create structure within your team, and promote fairness and transparency.
There’s no one-size-fits-all compensation plan, but, following the steps we've outlined in this guide while considering the needs, available resources, and goals of your business, you can develop a fair and effective sales compensation plan for your team that'll keep them motivated and helps your business reach its goals.