It’s often said that sales is the most important department in any organization. After all, your sales team is the linchpin between your company and its customers. When your salespeople succeed, your business succeeds.
Motivating your sales team through a competitive compensation package becomes essential when you want to attract the best talent and close the most sales each quarter.
If you’re beginning to structure a sales compensation plan for your sales representatives, you might not quite know where to begin. What are the common sales compensation packages, and which are the most appealing to sales reps and companies?
What Is a Sales Compensation Package?
Sales compensation is how much money per year a salesperson receives. It’s common for salespeople to be compensated with a base salary, commissions, and extra incentives to motivate them to reach their quota (or go beyond it.)
A sales compensation package is a structured plan that contains the base salary, commission, and additional incentives that make up the earnings of a sales representative.
The ideal package will encourage your sales team to meet a high performance standard. It will also outline salary increases for managers and higher-level salespeople. When a sales compensation plan is designed to set expectations and standards for sales compensation, encourage positive behavior, and produce results to meet the goals of teams and the entire organization, the company benefits.
Sales Compensation Glossary
Before we look at the common types of sales compensation packages, let’s go over the meaning of some essential terms.
A sales accelerator kicks in when one of your salespeople hits a certain amount over their predetermined sales quota. With this form of compensation, sales reps can earn substantially larger commissions than typical during months or quarters where they achieve great success.
For instance, let’s say that you have a sales rep that hits 115% of their quota by the end of the quarter. A compensation package might outline that they will receive 1.2x their performance over the met quota of 100%.
While sales accelerators reward high-performing salespeople, sales decelerators penalize reps that aren’t meeting performance standards.
For example, let’s say you have a decelerator scheduled to kick in if a sales rep doesn’t meet 50% of their quota. At this point, their compensation would be calculated by multiplying their performance by a decimal.
The sales manager will set sales quotas for individuals or the team as a whole. This is a time-bound revenue target. Different sales teams might find it suitable to measure sales in various ways, including deals closed, profit, or overall activity.
On-target earnings, or OTE for short, are a way for sales representatives to gain perspective on how much compensation they can expect if they meet the quotas. OTEs will commonly include both the base salary as well as commission that would realistically result from deals that have been closed. This can give people a realistic view of how much money in total they can expect to receive for a position.
A clawback is a condition that can be built into your sales compensation package. It’s common in companies that offer subscription services.
A clawback will kick in when a customer stops being a customer before hitting a previously specified benchmark.
For example, a company might set it up so that reps have to give back their commission if a customer cancels their subscription service one to six months after signing up.
The reason for including this in a compensation package is to encourage salespeople to focus their energy on customers who will benefit from the product or service and use it long-term, rather than those who will buy in for a short time and cancel.
Sales performance incentive funds (SPIFs) are contests that can create a high-performance culture on your sales team.
It’s common for these contests to include either monetary or non-monetary incentives. For example, the first rep that increases their retention rate by a certain percentage might receive a $1000 cash bonus, or the first team to close a certain amount of sales could receive gift certificates to a fancy restaurant in town.
Usually, SPIFs run for somewhere between one to four weeks. When they’re shorter than this, they don’t offer an opportunity for your reps to take it seriously. When they’re longer, it might not feel nearly as urgent, and you likely won’t see the results you desire.
If you’re beginning to build your sales team, you’ll need to fill these seven key roles for maximum efficacy.
Compensation Package Factors
Depending on the nature of the industry you’re in and factors specific to your organization, you might find it makes sense to weight these different elements in a way that favors a heavy base salary or a hefty commission rate.
The base salary you offer is the amount of money your sales reps receive regardless of their performance. It doesn’t matter if they hit 200% of their sales quota or 10% of it– this is the foundational salary you offer for the position.
Commission rates are expressed as a percentage of how much revenue a sales rep brought in. There are different standards in different industries for commission rates, and it’s a good idea to look at what your competition offers when you’re putting together a compensation package for your sales team.
For example, it’s common for car salespeople to make 25% of the gross profit on a car that they sell. On the other hand, real estate agents typically receive a 5 or 6% commission rate through the transfer of a property, which is split between the agents involved and then further with their respective brokers.
In general, sales commission rates often range from 5% to 50%. However, the most common range for commission rates in sales is between 20% and 30%.
The projected sales of a sales rep is how many deals they are expected to close during a specific period.
Commission Per Sale
The commission per sale is the monetary compensation a salesperson receives for each unit of the product they sell.
While a commission refers to the salesperson receiving a certain percentage from the sales they close, a bonus amount is a compensation that a rep receives above their base salary for deals they’ve closed during a specified period.
Are you wondering how to improve your quality of hire when filling your sales team? You can learn more about how data can benefit your hiring process using recruitment analytics here.
Examples of Sales Compensation Packages
There are four primary types of compensation in the world of sales. These are:
- Hourly wages
You will want to tailor your sales compensation package to your organization’s size, resources, and interests.
Let’s outline some of the most common compensation packages to help you get a sense of the possibilities when you’re designing your compensation plan.
Commission-Only Compensation Package
One relatively simple type of compensation package is a commission-only compensation plan.
In this scenario, sales reps don’t receive any base salary and instead receive all their compensation through commission.
Some companies might choose this model because it helps avoid the risks associated with other types of plans. When your salespeople make a lot of money, your revenue increases for the sales period. When they hardly close any sales, you’re not left in a position where you have to pay out more than the company made that month or quarter.
Sales reps sometimes enjoy the freedom and ability to earn as much money as possible. It also reduces your risk because you aren’t paying a salary to a low-performing sales rep.
On the other hand, this type of package can make it challenging to stick to a pre-structured budget and forecast your future expenses.
If you’re thinking about instituting a commission-only compensation package, you’ll want to think about how involved the sales are and how much customer support you expect your reps to offer. You might decide that anywhere between 5% and 45% is a reasonable commission percentage for your salespeople.
Base Salary Plus Bonus Compensation Plan
If your sales reps usually meet their targets, a base salary plus bonus compensation package could be the right fit. The benefits of this package include motivating your salespeople to close sales and a high level of predictability.
With this type of structure, you might offer a specific amount of money as a bonus for sales reps that sell a certain number of units per year or quarter. You can then use this information to guesstimate how many salespeople will meet this quota, so you can plan ahead for how much money you’ll pay out in bonuses.
Base Salary Plus Commission Plan
The base salary plus commission package is the most common pay structure for people in sales positions.
Salespeople can know for sure that they will at least receive a certain amount of money per year in the form of their base salary. On top of that, they can earn more by closing sales and meeting other performance goals.
Most businesses will benefit from this type of structure. You can hire competitive and motivated salespeople while having a clear sense of your expenses ahead of time.
Another benefit of this kind of package is that your reps will also be obligated to perform additional tasks that don’t directly involve selling because you’re paying them a base salary. If you’re offering a commission-only package, on the other hand, your reps likely won’t fulfill any duties other than trying to close sales.
This type of package involves offering a lower commission percentage because reps are already receiving a base salary. The more involved and complicated a sale is and the more impact a sales rep has on the customer’s behavior, the higher the commission rate should be.
Absolute Commission Package
Also known as a set rate commission plan, an absolute commission plan involves compensating your reps when they meet certain milestones or targets. This is an easy type of plan for salespeople to understand, and it often leads to having a highly motivated sales team.
Gross Margin Commission Plan
Another option for commission packages is paying your salespeople based on profit instead of sales. For example, a sales rep would receive more compensation for closing a sale on a product with a gross margin of $3,000 versus one with a gross margin of $500.
Straight-Line Commission Plan
In this structure, a salesperson receives a commission based on the percentage of the quota they meet. If they reach 92% of their quota during a given period, they will receive 92% of the total commission. If they hit 120% of their predetermined quota, they will receive 120% of the commission.
Which Compensation Package Is Most Appealing?
Depending on the specific details of your organization, the ideal compensation package for salespeople will vary. For example, you might find that offering a higher base salary works well for your team, while another business might focus on rewarding sales representatives through commission.
A person’s role, sales cycle length, experience, and type of deals will inform how compensation packages are structured.
When you’re designing a compensation package, you’ll also want to consider the following:
- What type of compensation package is your competitor offering?
- What’s your budget?
- What are the goals of the sales team and the organization?
- What is the cost of living in your area?
- What is the standard in your industry?
- How easy is our proposed package for a sales rep to understand?
- What type of package will attract top talent?
- Can the organization remain profitable if you enact a specific commission structure?
The best sales compensation package for your organization is the one that will drive your reps to perform their best. For many companies, this will likely mean offering their sales reps a base salary plus a commission package. However, just because this is the most common type of commission plan doesn’t necessarily mean it’s the ideal choice for your organization.
Do you have any questions about how to put together the best sales compensation package for your business? If so, please leave a comment below, and we’ll get a conversation started. We love discussing all things recruiting and compensation, and we’d be happy to assist you in any way we can!