Businesses use the gross margin commission plan if their reps are offering discounts to customers to hit their quota. Secondary objectives are related to the primary ones, but they are a lower priority. It should also ensure data reliability, keep disputes to a minimum, incorporate sales forecast and pipeline data to allow salespeople to estimate earnings in advance of closing deals, distribute quota agreement letters electronically, allow for digital resolution of disputes, and accrue commission, all while ensuring that incentives are paid on time. Rapid calculation. It cost the business $1500 to cover Matts selling expenses, and only $500 for Beth. One thing to keep in mind when using the commission-only pay structure is a persons involvement in the sale. Account managers are incentivized to upsell to current customers. Right now, businesses are operating within thelongest sustained economic expansion in history. Cut through the noise and dive deep on a specific topic with one of our curated content hubs. Still, the ability to spot forecast risks, model and compare different paths forward, and make justified changes to compensation plans may help sales and sales operations managers maintain stability. Incentives can be structured in multiple ways, including straight commissions, bonuses, prizes, spiffs, awards, and recognition. Aspects of a sales compensation plan include details like base salaries, commissions, and incentives. Relative commission is more focused on money, while absolute commission can shift a reps focus to other overarching sales goals, like acquiring new customers. This means that compensation plans can continuously evolve without worry about technological limitations. After you have the on-target earnings decided and approved, you can further divide it into base and variable pay. One would assume that Matt would make more commission here because his sale was bigger. When sales leaders and frontline sales reps have access to real-time performance data, plans can quickly be adjusted to meet the business goals. For example, an account manager who maintains and renews 100 percent of his clients may earn commission, bonuses and other perks. They assess potential changes and apply modifications to the incentive plans at the appropriate times. This will help you plan how much money to set aside for bonuses. Here are the steps in creating a sales compensation plan. Because Beths gross margin is higher than Matts, she will make a bigger commission. Either way, theyll make the same amount. Problems can arise when certain reps are contributing more than others and see their hard earned money be split with people that arent bringing anything to the table. There is no base pay involved. Theres a lot of pressure on sales managers to set the right quota for each rep. Reps can tend to rely on this when they struggle to hit quota, but it isnt good for your business. Solutions must be able to handle the following data-intensive processes: Committing to regular reporting is a great technique for keeping an organizations sales compensation plans functioning properly. Its the most common pay structure for sales teams. The purpose of having a sales compensation plan is to set the standard of performance for sales reps that will result in them being well compensated. There are two different rounds of breaking down your sales team for the compensation plan. When expectations are set, it encourages reps to work accordingly so they maximize their personal reward in a way that also benefits the business. With the goals and strategy in mind, hone in on your team. The on-target earnings for the positions on your team should be decided after doing market research. To effectively manage incentive plans to drive sales behavior, solutions should include these key features: What-if scenario modeling. Interested in engaging with the team at G2? This means that, more often than not, if a sales rep hits the exact quota, theyll earn the exact commission amount associated with it (plus their base salary). It promotes a company culture driven by performance and accountability for your own results. Many organizations develop incentives on a one-off basis to address individual problems. A Sales Compensation Plan That Will Inspire and Reward Reps, Tips for creating a sales compensation plan, What It Takes to Become a Great Sales Manager (+Salary), 5 Ways to Tailor Compensation to Increase Employee Retention, IT Executive Compensation Expectations During COVID-19 [Infographic]. Make sure each team member knows what is expected of them once you implement the plan. They are listed in the section above, but as a refresher, lets list the options and what goals that plan speaks to specifically. If a business compensation plan has high variable pay and low base pay, its considered highly leveraged. Often, a simple table with the breakdown will do. Discussing salaries with reps can be a stressful conversation to have, and you dont want miscommunication to make it even worse. Managers will sometimes use bonuses as an incentive for sales reps. Also, they can be mentioned during interviews to convince promising candidates to join the team. However, the gross margin commission plan would analyze cost before doling out rewards. Heres an example of how this would work step by step: When assigning duties, you can break it down by number of deals (in the example above) or by revenue. Theres a universal love and anticipation for getting paid, but payday for sales reps can look different depending on their business sales compensation plan. The best compensation managers anticipate and plan for these problems from the outset. Why have variable pay when you can just lump it all together, you ask? Also, it takes a lot of stress off sales reps because no matter what, they see consistent pay. The amount of commission a person earns depends on the business, but its usually a percentage of the revenue from a particular sale. A sales compensation plan is the strategy that businesses use to pay sales reps and drive their performance in a way that will help the business become more profitable. Plans that pay salespeople and managers purely for hitting their numbers miss out on the opportunity to pay them for improving. For example, these five types of reports may be necessary: Compensation registers. Every department can feel the positive effects of more revenue. When setting goals, its always best to have primary objectives, with secondary ones attached. In addition to managing a customers day-to-day business, account managers often have defined sales goals to meet. With your goals and structure in place, you need to gather the right tools that will help you compensate employees in a consistent, accurate, and timely manner. If they dont, you might have to rethink your own goals. Others will base commission on the following parameters: If you have a simple sales process that doesnt include the rep having a big impact on the buying decision, their commission will be smaller. The best way to explain gross margin commission is with an example. By ensuring all stakeholders have access to the same real-time data, a connected compensation platform allows incentive compensation plans to remain responsive to changes as they occur. Another type of variable pay, a bonus is additional compensation given to sales reps for good performance. Based on experience, responsibilities, and current level of customer interaction, each role will most likely be compensated differently. This allows plan creators and managers to optimize those plans and try out new, innovative ideas. Make sure you, the sales team, and anyone else involved in this process has a firm grasp on the following ideas to avoid confusion around money conversations. At the end of the day, Beths sale ($4,000 in profit) is valued higher than Matts ($3,500 in profit). Simplifies expenses and offers sales reps consistent pay. If you start to cap commissions, it can come off as greedy and as a signal for sales reps to kick their feet up and relax. It removes a lot of the individual pressures of selling and focuses on team building. Revenue is an important sales metric to pay attention to, but gross margin reveals true profitability. First, you take a look at the different positions your sales team is comprised of. Admin reports. Shifts focus from revenue to profit, which is better for the business in the end. A salary-only compensation plan is just like any other salary-based job the money a sales rep earns is decided ahead of time. The following are some standard groupings of metrics that can be included in any report: If an organizations incentive compensation plans are not driving ideal behaviors, three strategies can often help: Review incentive plans to ensure that they are tied to corporate goals. With those values in mind, its time to set goals for the sales compensation plan. Clearly define the sales roles within your organization. A common concern and problem of using the territory volume commission plan is when some people arent carrying their own weight. (See the next section for more insights on reports.) Also, the goals that sales reps are working towards arent directly related to those of the company overall, making it possible for them to lose sight of your overarching mission. The value you have chosen for on-target earnings will most likely reflect the amount you have in your budget for sales reps salaries. Similarly, advanced scenario planning allows plan creators and plan managers to view all the effects of potential changes to the incentive plans before those changes are rolled out to the sales team. Ongoing communication: Clear and consistent communication is essential to ensure that reps understand what is expected of them. These include summary-level metrics around overall performance, pay performance, and cost-to-sales data. Examples might include $500 for every new customer or a percentage of the annual contract value for new accounts. They are often part of the sales department, responsible for maintaining current clients and keeping them satisfied. Also, dont forget it needs to fit in your budget. In an ideal world, sales compensation plans motivate teams to work together towards common goals while simultaneously creating a friendly, competitive, and collaborative atmosphere. There are typical industry standards for commission, so depending on what your company specializes in, do some research to see what is normal and expected. We can all agree that payday is the best day. It is also crucial that stakeholders throughout the company work with the same data, which helps maintain alignment. Because sales compensation plans often involve some variable pay thatll be under the control of the rep, incentives will only motivate them further. Businesses that use a salary-only sales compensation plan for reps typically use it because it simplifies expense calculations and gives an idea of how much team growth is reasonable in terms of budget. These targets can be measured in a couple of ways, including by volume, revenue, or sales activities. Last, they alert the sales team they need to close 20 deals by the end of the month. Great reporting offers different stakeholders varying levels of granularity and includes drill-down and -up capabilities. Check it out and get in touch! Whichever approach you use for paying employees, make sure you do it on time. A salary-only sales compensation plan is not very common for sales teams. Best-in-class companies convene steering committees throughout the year. There are certain words and phrases that are used in the mini world of creating sales compensation plans. So when they make a sale, reps get paid and the companys revenue increases. However, if the rep is incredibly involved and has experienced complications to get the customer to say yes, they deserve a heftier commission. Depending on the type of sales compensation plan you found was best for your business, these expectations might include quotas or other benchmarks. For reps to be satisfied with a sales compensation plan, they need to understand it first. Your reps work hard for their money, and they rightfully expect to be compensated accordingly. Lets walk through it. For example, if a sales rep hits 75% of their quota, they will get 75% of their commission. Sales reps still have a limit on how much they can make, which doesnt give them any reason to keep selling once they get their bonus. There are two ways businesses typically set quotas for their sales compensation plans, either with the bottom up or top down approach. This compensation plan incentivizes reps to surpass their quota, meaning it can get expensive for businesses. Employers may offer bonuses tied to successful upselling to existing customers. As great as it sounds, payday cant be every day. They may work as the primary salespeople or with teams of sales professionals to solicit, present and land new customers. Sales incentive technology should offer scenario planning capabilities to keep the incentive plans flexible and help the business shift quickly due to market changes and business needs. Its finally time to take action. Each of these reports may have a different cadence and encompass a different set of metrics. If you were a sales rep and you made as much as you possibly could, would you still be motivated to sell? If you do end up offering a sales incentive plan in addition to a standard compensation plan, make sure it applies to the entire team. With this pay structure, the salary and percentage of commission received will not be as high as the compensation plans that focus on one of those two things alone. It means to be related, or to be in proportion to something else. They adapt to evolving company strategies, acquisitions, product launches, and shifts in the market or their customer base. The sales from that territory are added up, and all the commissions are split equally among all of the sales professionals working within it. 2022 Anaplan, Inc. All rights reserved. Your time is valuable. The amount they earn is the same, but businesses typically have a lower leveraged sales compensation plan, meaning the base pay exceeds variable pay within the on-target earnings. With different monetary values attached to different tasks, this plan is easy for reps to grasp and be motivated by. The base salary plus commission compensation plan gives sales reps a fixed salary as well as commission from their sales. We have all the tools and downloadable guides you need to do your job faster and better - and its all free. Businesses usually take one of three routes when deciding on a payday: Whichever method you choose, make sure you are consistent when paying your sales reps. Once they get used to this structure, they will start to expect payments at a certain time, and might plan personal payments around their payday. The next step in creating a sales compensation plan is deciding when to provide the compensation to your sales reps. However, its not enough incentive for sales reps to go above and beyond. A commission-only compensation plan pays reps solely based on their performance and the amount they sell. Ongoing plan changes: Companies continuously refine their incentive plans, most commonly on an annual basis. For example, a sales rep might make a $40,000 base salary and then receive a $12,000 bonus if they sell a predetermined amount. Say Matt makes a sale where the revenue total was $5,000 and Beth makes a sale where revenue was $4,500. Employers may offer a sales incentive structure with additional pay, commission, bonuses, travel and product rewards based on the dollar amount of finalized opportunities. Good communication comes in many formats, including live presentations, FAQ documents, and online resources like training or how-to videos. Find parameters for the incentive plan that will make your entire sales team more productive. The gross margin commission plan shifts the focus from revenue to actual profit. With those roles broken down and different levels designated, choose a type of compensation plan. Never assume anyone is well-off enough to be late in paying them. You can also determine a positions on-target earnings based on the quota designated to it. Pay for improvement. But if one waits until after these events occur to start figuring out how to adapt plans, reps will be left confused, and the organization will suffer sales cycle delays. This happy medium might look different for each business and role. According to the Alexander Group, in 40% of organizations, sales operations or sales management are also responsible for redesigning the incentive plan on an annual or semiannual basis. Incentives are essential to sales, as they motivate employees to increase their books of business. Find out what other companies in your area compensate their employees with similar positions. To break it down even further, team members require different compensation based on experience, deals they are involved in, and whether or not their sales metrics indicate success. What Does a Customer Service Representative Do? With the absolute-commission plan, managers dont need to set quota for sales reps. And although this plan might seem like it evens out the playing field, this equal pay structure might benefit some reps more than others. If your plan includes setting a quota, you need to do so in an informed and realistic manner. Incentive compensation is a form of variable compensation in which a salespersons (or other employees) earnings are directly tied to the amount of product they sell, the success of their team, or the organizations success. What they give is what they get. A connected compensation solution is invaluable for both of these activities. Because reps can only make commission when they make a sale, that means whenever they get commission, the business also brings in revenue (which is good). A form of variable pay, commission is the amount of money a salesperson earns based on the amount theyve sold. Sometimes, avoiding selling expenses is difficult. Leadership dashboards. Like any other plan within a business, the goals and objectives need to align with those of the organization as a whole. We suggest a structured approach that contains four phases: (1) a planning session that begins two to three months before implementation; (2) a diagnostic review of plan performance that includes relevant stakeholders; (3) an implementation phase that communicates all new plans, targets, and accounts to gain buy-in from salespeople; and (4) an ongoing adjustment phase in which plans are re-evaluated and modified based on market or business changes. If someone on a commission-only plan is solely qualifying leads, they shouldnt make as much as someone who is taking a customer all the way down the sales pipeline and closing the deal. Establishing a sales compensation plan for your business will not only keep reps happy, well compensated, and motivated, but itll also reflect on the profitability of your business. Here are some tips for making that happen. Upselling is a sales process where sales staff present and sell additional and enhanced products and services to the customer. Personally, I would take it easy. Its difficult to be fair, and depending on the milestones set, reps might lose sight of the companys overall mission. Upgrade your software to expand the capabilities of your compensation plan. The territory volume commission plan estimates commission based on the sales volume within a certain territory. Program updates: Use the information gathered from the postmortem to reassess the elements that drive your ongoing plan design and management processes. Sales reps dont have an incentive to sell once they reach their quota. Incentive compensation management is the strategic use of incentives to drive better business outcomes and more closely align sales rep behavior with the organizations goals. This motivates reps and gives them compensation freedom they have control over how much they make, depending on how much they can sell. These help reps understand their performance relative to quotas. Mid-year adjustments to incentive plans can be extremely frustrating for sales reps.