The Pros and Cons of Different Sales Compensation Plans
With any job, a primary consideration is compensation. We all want to be paid fairly. One common perk of a career in sales is the ability to earn more based on your own hard work and selling success. With salary, commission, bonuses, and other incentives, sales professionals often have options and feel in control of the compensation they receive, which can be great for motivation and fulfillment. However, in sales, the types of compensation can be more complex than for other professions. Not all plans fit all salespeople. Here are a few pros and cons of the most popular compensation plans for sales professionals:
Without question, this is the easiest type of compensation for both sales reps and their organizations to manage. On the positive side, consider the following benefits:
- A salary-only compensation plan offers security for the employee and dramatically simplifies things for the employer.
- With no variable costs, payroll expenses are easy to forecast and budget for.
- In some instances, salary-only sales can be positioned as a more “transparent” marketing differentiator. This might give customers the impression of a low- or no-pressure sale.
However, this type of plan does have drawbacks:
- For one thing, there is less earning potential. Working regular hours, sales reps earn the same regardless of their work. As a result, there can be reduced incentive to work harder or produce more.
- Also, it can be more challenging to tie performance to goals, and sales managers will have to think of nonmonetary alternatives as motivators.
In theory, this type of compensation can be the most attractive for highly motivated reps because it offers several benefits that should directly appeal to them:
- First and foremost is high earning potential. When a sales rep’s pay is directly tied to the deals they close, many will be extra motivated to identify the best targets, make the extra calls, and work longer hours to get things done.
- Another benefit for sales reps is control. With commission-based compensation, reps earn based on what they sell. If they sell more, they earn more. In addition to the motivation, this appeals to extra-confident risk takers who will think outside the box to find innovative solutions.
However, this too can present challenges for both reps and the organization:
- For example, a commission-only plan offers less security, making it risky for employees. Even the best reps can sometimes suffer from slumps or market changes beyond their control. These things can adversely affect their earning potential.
- In addition, commission-only compensation can result in higher turnover. Those sales reps who do not excel will leave when they can’t produce the income they need. As a result, employers should consider the increased onboarding costs associated with this type of plan.
- A further consequence of a commission-only plan is that it might trigger unwanted behavior to satisfy short-term goals that can cause irreparable damage to the brand.
- In addition, a make-or-break, commission-only comp plan increases the likelihood of a hostile work environment, with little to no teamwork. If a sales rep’s entire compensation is directly tied to their individual effort, they could compete against each other for prospects or territories. As a result, the organization may lose the benefits of a united and collaborative sales team.
Base Salary Plus Commission
In many ways, this is the happy medium between salaried and commission plans:
- A common salary-to-commission ratio is 60:40 (60 percent fixed / 40 percent variable). This offers the security of a salary with the greater earning potential of commission.
While there are no real downsides to this type of plan, organizations should be mindful of several things:
- This requires a solution that benefits both employee and employer. As a result, it should be frequently revisited as market conditions change, making it work-intensive for employers.
- Base Salary Plus Commission plans need to be kept simple. If a plan grows too complex and elaborate, it can lead to a discouraged sales force and costly accounting errors.
- Also, this plan must be tied to company objectives and not prompt behavior that benefits the sales rep, not the company.
This plan pays reps when they reach specific goals, targets, or milestones in which output and activities are directly tied to their pay. It offers the following benefits:
- This is the ideal plan in situations when you’re trying to drive client growth, increase upsells, or boost cross-selling opportunities.
- Pay increases as deals are closed or benchmarks achieved. For example, a salesperson is paid $200 for every new customer and $300 for renewing an existing contract. This eliminates the intimidation of a hard quota.
- The emphasis is less on revenue and more on activity.
However, a plan like this can have negative consequences:
- Sales reps with different titles and priorities may feel shortchanged compared to peers who chase fewer or easier short-term targets.
- You may run the risk that sales reps who are paid an absolute commission lose sight of your organization’s overall mission.
With these plans, teams work together within territories of prospects and clients. On the plus side:
- Once the pay period is complete, the commission is split between reps.
- This can be great to develop a team atmosphere.
However, on the downside:
- This can only work for organizations that value and encourage teamwork.
- While this creates collaboration, it can also create animosity if some sales reps think they work harder than their peers.
Gross-Margin or Profit-Based Commission
A slightly more complicated plan that considers the true profitability of an organization, it takes into account the expenses it took to close a deal. For example, Sales Rep Jane closes a deal for $10,000, but it took around $2,000 in expenses. In this case, Jane only gets a commission for the difference ($8,000). First. the pluses:
- The advantage for the organization is obvious—it shifts focus from revenue to profit, which is a more straightforward indicator for a business.
- This strategy is often employed to reduce discounting that may hurt the company’s bottom line.
And the lone minus:
- Sometimes, avoiding expenses (even discounting) can make selling a lot more challenging and possibly put your organization at a competitive disadvantage.
As all sellers know, there is no one-size-fits-all sales approach that works for all sales teams. Instead, there are best practices successful organizations employ to drive results. What works for one organization may not be right for another. In this way, it is incumbent on sales leaders to understand the environment and culture they wish to foster and develop a compensation plan that works for the long-term goals and objectives of their reps and organization.
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