Knowledge Base
How to compensate your sales force
Choosing the right plans can make or break your company's performance
Sales compensation plans are essential to motivate and incentivize sales teams. They provide a clear path to financial rewards based on the achievement of specific goals and targets. Sales compensation plans consist of several components that vary by company, industry, and sales role. In this article, we will explore the top 15 most common components of sales compensation plans.
The majority of a sales rep's compensation is usually tied to one or more of the following major compensation components.
Base salary is a fixed amount paid to a sales representative regardless of their performance. A base salary is usually determined by a sales representative's experience, education, and skills. The base salary provides a safety net for sales representatives and ensures that they have a stable income.
Commission is a percentage of the sale that a sales representative earns based on their performance. The commission rate varies by company and industry but is typically between 5% and 10%. Commission provides a strong incentive for sales representatives to close deals and generate revenue for the company.
A bonus is an additional financial reward paid to a sales representative for achieving specific goals or targets. Bonuses can be tied to individual or team performance and can be paid monthly, quarterly, or annually. Bonuses provide an extra incentive for sales representatives to work hard and achieve their goals.
Quotas are specific sales targets that sales representatives are expected to achieve. Quotas can be based on revenue, profit, or other metrics. Quotas provide a clear target for sales representatives to work towards and are often tied to compensation.
Customer retention is the percentage of customers who continue to use a product or service over a specific period. Sales representatives may be incentivized to retain customers by earning a percentage of the revenue generated by retained customers. This is most commonly used in place of Quota Attainment in compensation plans for Account Managers and other roles tasked with maintaining and growing existing customer relationships.
Sharing in the overall profits or equity value of a company provides an extra incentive for sales representatives to work towards the company's overall goals. It is most effective when used with small, collaborative sales teams who are likely to see the impact of their activity directly on company value.
The easiest way to calculate a sales rep's commissions, bonuses, quota attainment, or customer retention is on a revenue basis. Unfortunately, this is not always compatible with a company's goals. Linear, revenue-driven plans often push sales teams to lower prices and don't adequately reward exceptional talent. Here are a few alternatives that can be used to better align sales activity and company objectives.
Gross margin is the difference between the revenue generated by a product or service and the cost of producing that product or service. Contribution margin is the difference between revenue generated and the variable cost of producing that product or service. Which of these metrics to use varies from company to company and depends on accounting methodologies, but either option can help incentivize reps to sell more profitable products and services.
Accelerators can be used to change the amount a rep is paid for sales relative to a target or quota. For example, a sales representative might earn no commission on the first $50,000 in sales; 5% commission on sales from $50,000 to $100,000; and 7% commission on sales over $100,000. Accelerators ensure high-performing reps receive the bulk of available variable compensation and provide an extra incentive for sales teams to go the extra mile.
Not all territories are created equal. While we recommend balancing the opportunity within territories whenever possible, it isn't always realistic. An alternative is to calibrate territories based on their potential to generate revenue or profit, and set goals or quotas based on that opportunity rather than assigning the same number to all reps.
Market share is the percentage of a specific market that a company controls. Sales representatives may be incentivized to increase market share by earning a percentage of the additional revenue generated by increased market share. This can be used in circumstances where the market is growing in a way that is difficult to predict
Candela advises clients to avoid making compensation plans overly complex, but in some cases it can be helpful to add compensation components that reward behaviors specific to a given role or to a company's strategy.
A product performance bonus is an additional bonus paid to sales representatives based on the performance of a specific product or product line. The product performance bonus provides an extra incentive for sales representatives to sell specific products or product lines.
A team performance bonus is an additional bonus paid to sales representatives based on the overall performance of their team. The team performance bonus provides an extra incentive for sales representatives to work together to achieve shared goals.
SPIFs are short-term incentives that are designed to motivate sales representatives to focus on specific products or services for a limited period. SPIFs are often used to drive sales during slow periods or to help launch new products. SPIFs can be in the form of cash bonuses, gifts, or other incentives.
Contests are competitions that are designed to motivate sales representatives to achieve specific goals. Contests can be team-based or individual, and they often provide a range of rewards for top performers. Contests are typically short-term, with prizes awarded at the end of the contest period.
A new business bonus is an additional bonus paid to sales representatives for bringing in new customers or accounts. The new business bonus provides an extra incentive for sales representatives to focus on new business
An upsell/cross-sell bonus is an additional bonus paid to sales representatives for upselling or cross-selling products or services to existing customers. The upsell/cross-sell bonus provides an extra incentive for sales representatives to focus on expanding revenue from existing accounts.
Sales compensation plans are critical to motivating and incentivizing sales teams, and getting compensation right can mean the difference between success and failure of not only the sales organization but of the business overall. Choosing the right components for each role and ensuring the resulting compensation is sustainable and attracts and retains the right sales reps is a complex task. Candela helps design, model, roll out, and evaluate compensation plans for sales teams ranging from 10 reps to 10,000.
Ignite growth.
