There are few motivators in life as strong as money. This is especially true when it comes to sales. How, and when, you pay your sales team can either motivate them to smash their quotas and help achieve company sales goals or cause them to leave you for your competitors.
According to TINYpulse, 43% of workers would be willing to leave their companies for a 10% salary increase. So, your sales commission structure and compensation plan are key factors in being able to attract top sales talent and more importantly retain your sales reps. It also directly affects your company’s profitability.
But, you may be wondering what the best sales commission structure is for your outside sales team. Some structures are better for certain companies and situations than others. The main thing to evaluate first is your unique company goals and where you would like your business to be. Would you like more revenue, return customers, a shorter sales cycle, or a higher profit margin? Just to name a few.
Don’t try to emphasize all of your goals. Choose one or two main objectives so you can structure a clear and focused plan.
Once you have a few objectives in mind, you can start to decide which structure is right for your team and your company. When deciding on a sales commission structure, you will end up with a variation of either a commission-only or a base salary plus another form of compensation.
Let’s break down some of these top sales commission structure examples, how they can be implemented, plus the pros and cons of each:
Sales Commission Structures To Choose From
Commission-Only
In a commission-only pay structure, you forgo a base salary and only pay your reps a commission based on what they sell and are bringing in to the company. Usually, this means that the sales rep would receive a percentage of each sale or a set amount per new customer acquired for example. The average norm is 20-40% of the gross (total sale minus expenses).
Pros:
- A commission-only structure can provide a strong motivation for your outside sales reps since they are only paid for making sales. The commission rate in this structure is often the highest compared to other structures offering a form of commission.
- You do not have to pay if your reps aren’t performing.
- This commission structure is the fastest route to market so it is often desirable for startups.
- You can save money on hiring, taxes, benefits, etc because commission-only reps are hired as independent contractors.
Cons:
- Most high-performing sales reps won’t take the risk of getting paid commission-only. So, you’ll likely be hiring someone who can’t get work somewhere more secure. This probably isn’t someone who will consistently make sales or represent your company well.
- You will more than likely experience a high turnover rate of sales reps because you will have low income security with no guaranteed income.
- Commission-only sales can often create a cut-throat environment that will not have a cohesive team.
- Your sales reps may experience a high level of burnout from the increased stress and risk of no income.
- Because your sales reps will only be paid for making sales, there is a chance they will ignore emails, skip company meetings, and fail to fill out paperwork because it distracts from what they’re paid to do.
- Sales reps are more likely to use deceptive sales techniques to close the sale and ensure they are making money.
Base Salary Plus Commission
This is the sales commission structure that most companies have in today’s sales environment. Your sales reps receive a base salary plus earn a commission for every deal that they close. The average ratio for U.S. sales forces is 60% salary and 40% commission. This can, of course, vary depending on industries, sales roles, etc.
Pros:
- You have the flexibility of several options in commission per sale. Including a percentage of the sale amount, a set dollar amount for each new customer, etc.
- This sales commission structure provides your sales reps with a level of comfort and security even if they happen to have a slow month.
- Your sales reps are motivated to sell as much as possible to earn more commission. (Many companies offer an uncapped commission opportunity)
- With a base salary, there will be a higher chance of your salespeople sufficiently performing non-selling tasks that will benefit your company, such as actively using a CRM, responding to customer emails, attending company meetings, etc.
- Your salespeople will be a higher caliber because of the extra time they can invest in training, continued learning about your product and new offerings, etc.
Cons:
- In this commission structure, your commission rate is likely lower than that of a commission-only opportunity. So, some sales reps who are used to a commission-only structure, and see that as an opportunity, may be put off by the lower rate in this structure.
- It may result in more upfront costs to the company compared to a commission-only structure.
- This commission structure can be more complex to administer compared to structures with one payment factor.
Base Salary Plus Bonus
This sales commission structure gives your sales reps a base salary plus a set bonus for hitting their expected sales targets or quotas. This differs from the salary plus commission structure mentioned above because the bonus in this structure is a set amount versus an uncapped commission on sales made.
Pros:
- With this commission structure, your sales reps will be motivated to hit their sales goals to ensure they get paid a bonus.
- The sales reps will still feel supported since they know they have a cushion in their base pay.
- This structure gives you a baseline sales budget to work from because you know what the base will be for everyone.
Cons:
- Your sales reps will probably not be motivated to sell beyond their quota since they don’t have the opportunity to be compensated more to do so. You might end up losing out on potential business because of this.
- It can be harder to differentiate your sales leaders since everyone will be looked at as either making their quotas or not. More than likely, with this commission structure you won’t be closely evaluating other stand-out factors.
Commission Draw
This form of sales commission structure has elements of both a commission-only structure and a base salary plus commission structure. The sales rep is advanced a set amount of money at the start of a pay period, known as a draw. At the end of the pay period or sales period (depending on your agreement), the draw is deducted from the employee’s commission that was earned per sale during the period. The rep receives the remaining commission amount.
Pros:
- Your sales reps will generally be happy starting with a specific amount of income and have the benefit of being able to rely on that cushion.
- Reps will be motivated to sell as much as they can and continue to sell. This structure often offers uncapped commissions.
- This structure can help retain sales reps because they can rely on a specified amount and still have the ability to make more money.
- This is a good commission structure for new hires who have recently finished their initial onboarding and need time to ramp up production.
Cons:
- If a rep does not sell enough to generate a commission total that covers the draw, they end up owing you money. If they have several bad cycles in a row, a rep can find themselves in significant debt to the company. Thus, quickly lowering morale.
- The commission draw structure can be complex to execute unless sales and commissions are sufficiently tracked on an on-going basis.
- This payment structure has much higher up-front costs compared to other sales commission plans.
- Depending on the performance of your sales reps, you can find your company’s profits falling behind in this commission structure over time.
Territory Volume Commission
In outside sales, since reps are often working in predetermined territories, a territory volume commission structure is another option. With this commission structure, the reps are paid on a territory-wide basis versus per sale individually. Once the sales period is over, the total sales are split among the reps who worked that territory and commission is paid equally among them.
Pros:
- This is a perfect sales commission structure for team-based sales organizations that have defined territories.
- Promotes a healthy, team environment where everyone works together towards common goals.
- This structure can often result in excellent customer service because reps and sales leaders are often working together to provide solutions to their prospects and close deals within their territory.
Cons:
- Animosity can grow between reps within a territory if someone is consistently underperforming compared to the rest of the team and still getting the same commission. To avoid this, a team environment has to be consistently and sufficiently nurtured and you have to stay on top of individual reps performance within each territory.
- Some sales reps may not want to split their commissions with other members of the team and want to be the only factor in determining how much commission they get.
Tools To Help Implement A Solid Commission Structure
A solid sales commission structure can help to provide a framework for reporting as well as tracking and calculating sales and commissions. To effectively implement the types of commission structures we have covered above, there are now digital tools available to help automate the reporting and tracking in real-time.
These tools help provide transparency to your sales reps and can also add another layer of motivation to continue to see their numbers rise. They also allow you as sales management to easily manage the commission structure/plan and make adjustments as needed.
Some examples of how to utilize tools and software available to implement a sales commission structure:
- When your structure involves paying individual commissions (not including the Base Salary Plus Bonus or Territory Volume structures), use an Incentive Compensation Management (ICM) program. An ICM will automate sales commission reporting in real-time, increase data accuracy, and provide the ability to spot and alleviate commission errors.
- Deal tracking software is a must for any sales commission structure. Through deal tracking, you and your team can visualize deals through each stage of the sales process and calculate both anticipated and earned commissions and bonuses.
- When you are implementing a territory volume commission structure, a territory management software is essential. You can easily visualize deals graphically on a map and see where new opportunities may lie as well.
Source: Blitz
A Good Sales Commission Structure Equals Motivation
How much you pay your employees depends on a wide variety of factors. Things like how in-depth your sales process is, your industry, varying sales roles, etc. But, a good sales commission structure will motivate your reps to help achieve company goals.
The main goal of commissioned-based compensation is to encourage positive behavior in your sales reps and penalize the practices that hurt your business. Your compensation structure, then, should align with your company goals and help drive your team to success.
The right commission for your company means a happier and productive sales team. When you make it clear to them that you are willing to share the wealth, literally, they’re more likely to go out of their way to make you and your business successful. A clear and motivating commission structure can also greatly help maintain accountability.
Find out what your goals are, pick the right commission for your company, give your sales rep competitive pay, and watch your company grow.
