How to Determine a Fair Sales Compensation Plan that Motivates

Managers understand at a deep level that healthy sales are integral to the success and future growth of the company. They also know that the company needs to limit expenditures as much as possible to post the highest profit. 

Although it can be a delicate balance between offering excellent compensation to attract and maintain the best sales reps and reducing payroll expenses as much as possible, following the tips below can lead to a compromise that appeals to all parties.

Start by Creating an Effective Sales Compensation Planning Team

While managers coach, evaluate, and direct their teams, the performance of company salespeople affects several other departments as well. To draft effective sales compensation plans, Salesforce recommends inviting leadership representatives from the following areas to become part of the planning team:

  • Human resources
  • Finance
  • Legal
  • Marketing
  • Outside compensation analysts
  • Outside consultants and strategic service experts
  • Sales

Although not every company has these departments or works with the same types of outside vendors, bringing together people with this type of expertise provides several unique perspectives.

Consider These Questions When Determining Compensation for Salespeople

Before any team can determine compensation for the next year, they must know the budget along with profit and goals. For many organizations, the first question to consider is whether to offer a set salary, a percentage-based commission, or a combination of both. This requires the team to determine how much the company needs to earn and  how much it can set aside for compensation.

Next, the compensation team should consider several job factors. Some questions to consider here include:

  • What are other companies in the local market offering for compensation?
  • What is the length of the average sales cycle?
  • How much experience must newly hired reps have?
  • What level of post-sales support must reps provide?
  • Will reps generate most of their own leads?
  • How many opportunities can reps work on at the same time?

Exploring these questions and answering them honestly is essential before moving on to consider different types of compensation plans.

Sales Compensation Plans Are Highly Industry-Dependent

The way a compensation team decides to structure base pay, commission, and bonuses for team members often depends on the industry more than any other factor. For example, do reps need to sell products just one time or convince their customers of the benefits of an ongoing contract? 

If the latter, the company might consider adding residual monthly payments to coincide with the ongoing revenue the contract provides. Here are some specific sales compensation structures for companies to consider:

  • Commission percentage with salary: This considers a blend of salary, commission, and bonus. The company splits profits with individual reps when they hit a certain target.
  • Commission only with a draw: This pays a set percentage for commission along with an advance on future sales called a draw to provide stable income while individuals get up to speed.
  • Salary plus commission: Each team member receives a guaranteed salary regardless of performance along with commission when reaching or exceeding goals.
  • Tiered commission percentage: With this compensation strategy, reps earn higher commissions once they reach a new tier of revenue.

After implementing a compensation plan, it’s important to seek and evaluate feedback from salespeople themselves to determine its effectiveness.