5 Types of Sales Compensation Plans
It can be difficult determining how to compensate your sales team. Paying straight salary means more stability, but less motivation for high performance. Conversely, straight commission provides plenty of motivation for high performance, but it will also likely mean higher turnover. Indecisive about which plan to choose? Luckily, CPSA provided 5 different types of sales compensation plans that you can use for your small business.
1. Straight Salary
Straight salary sales compensation plans aren’t very common, but they do have a place in some organizations. With this type of structure, you’d pay your sales people a straight—albeit competitive—salary like all of your other employees, and nothing else. No bonuses, no commissions, and few, if any, sales incentives.
This type of compensation plan is most often used when the industry you operate within prohibits direct sales, when sales people work as part of small groups or teams and all contributions are equal, when your sales team is relatively small, or when your sales people are expected to spend much of their time on other responsibilities other than selling.
However, these plans don’t tend to offer motivation to sales people, as there are no incentives for them to work harder.
2. Salary plus Commission
Salary plus commission sales compensation plans are possibly the most common plans used today. They’re structured in a way that sales people receive a lower base salary along with commission pay that makes up the majority of the total compensation.
Organizations use salary plus commission sales compensation plans when there are opportunities to support all sales people on this structure and when there are proper metrics in place for tracking sales to ensure that the splits are fair and accurate.
This type of plan is often the better choice as opposed to straight salary because it offers motivation to increase productivity and to achieve goals. It also offers more stability—sales people will still get some type of pay even if they’re in training, when sales are low during certain months, or if market conditions get volatile. However, it can be more complex to administer.
3. Commission Only
Commission only sales compensation plans are exactly what they sound like—you pay your sales people for the sales they bring in and nothing else. There is no guarantee of income.
These types of plans are easier to administer than salary plus commission and provide better value for your money paid as they are based solely on sales achieved. They also tend to attract fewer candidates, but do attract the most top-performing and hardest working sales professionals who know they can make a good income because they know how to sell. On the other hand, though, they can create aggression within your sales team and low-income security, which can lead to a high turnover rate, and sales rep burnout from stress.
4. Territory Volume
Territory volume sales compensation plans are most often used in team-based corporate cultures. They work through the calculation of territory volume at the end a compensation period. The total sales for the territory are then split equally among all of the sales reps who worked that territory. This plan works best when your sales territories are clearly outlined, when your sales team supports each other to reach common goals, and when your territories are rich enough to support competitive wages.
5. Profit Margin
Last but not least, we have profit margin sales compensation plans. These plans compensate sales people based on how well the company is performing. Startups use profit margin plans the most often because of a lack of liquidity. It’s best to use the profit margin plan if you know that your sales people are able to support themselves through your lean periods, when you can also incorporate long-term incentives such as stock shares, and when you have other incentives and job benefits to attract sales people, such as flex time.
Sales Compensation Needs Vary
There’s no right or wrong answer when it comes to deciding which type of sales compensation plan you use. It depends on the type of business and how you want the plan implemented. Each of the five plans addresses a different issue. Have large territories? Consider the territory plan so that salespersons work together, rather than undercutting each other. Startup with minimal capital? Utilize a profit sharing method. Want to provide the stability of salary but motivation for high performance? Use salary and commission. It’s not one-size-fits-all when it comes to compensation. Accordingly, identify your small business’s capabilities and goals when deciding which plan is right for you.