Last week, I wrote a post discussing whether sales commissions, the most popular compensation option for salespeople, remain the best solution for rewarding employees. I thought I’d follow up on that post by exploring some different compensation plans in a bit more depth. Compensation is a huge issue--it’s a difficult process to strike a balance between compensating your sales team enough to avoid turnover, but not too much that there’s no motivation to reach targets. I’ve picked the most common forms of sales force compensation and highlighted a few of their benefits and pitfalls, so you can decide which plan best aligns with your business needs.
- A salary-only plan compensates employees on a straight salary that doesn’t depend on sales figures or performance.
- Positives: a salary provides stable income for salespeople, since it is not subject to change regardless of how an employee performs. This method also encourages collaboration and teamwork, putting less pressure on individual employees as it removes any competition over leads. Finally, companies who use salaries often report lower turnover rates, which is important when trying to hire high-quality and dedicated employees.
- Negatives: this method can be detrimental to business development, as there is no individual incentive for employees to bring in new customers. It can also lead to fewer overall sales made by the sales force as there’s no pressure to meet specific targets.
- Most commonly used for independent salespeople, this compensation plan is based strictly on commissions, so income depends entirely on sales.
- Positives: commissions are often awarded based on reaching concrete goals, which is helpful for salespeople, as they can align their efforts towards reaching their targets. Employees are also encouraged to look for new customers which is great for business development.
- Negatives: commission-only plans are not ideal for companies in which new business is hard to come by or acquired slowly. In this article, the author states that in his industry, which sources art to businesses, gaining a new client can be a month-long process, which wouldn’t support a commission-only compensation program. There is also more pressure on employees, which makes it harder to hire quality salespeople.
Salary + Commission
- This plan is the most widely used, as it combines a base salary with commissions that are earned based on employee performance.
- Positives: this plan combines the perks of both salaries and commission, giving employees both a reliable income and the opportunity to earn more based on their performance. This puts less pressure on the sales force, and makes it easier to find great hires as this is often the most attractive compensation plan to potential employees.
- Negatives: for employers, this plan can get complicated. There is strategy involved when choosing a formula for how commissions are calculated and which sales figures to base them on.
Territory Volume Compensation
- This type of compensation is used most often in team-based environments, as it divides the revenue made in a certain area between the salespeople who work in that territory.
- Positives: this plan puts less pressure on individuals and fosters a team-centered attitude, since each salesperson’s compensation depends on the performance of the group.
- Negatives: there are a lot of details involved in this type of compensation plan, including a strict definition of territories. It can lead to hostility between co-workers if group members feel that effort isn’t equally divided.
- Used mostly for small or start-up companies, this plan compensates its employees entirely on the profits of the business.
- Positives: total profits are split among team members, which rewards loyalty to the company. This ensures employees are committed to the company and its mission.
- Negatives: this plan can be risky--if revenues are low, this means less income for employees. Long-term incentives are often needed to balance out an unsteady salary.
Overall, there are many factors to consider when choosing which compensation plan is right for you. The nature of your business, whether you sell products or services, how often you compensate your employees and the size of your sales team all play a role in deciding which plan is the best fit. I hope the options outlined above shed a bit more light on the types of plans available, and can help you decide which compensation strategy makes the most sense for your business.