How do you properly compensate a sales team? Your sales employees can make or break your business. But knowing how to manage, and properly incentivize them to do a great job day in and day out can be tricky. Here is a breakdown of what you need to know.
Some companies pay their sales team on a salary basis, such as in some retail chains; others are commission-only, such as in recruiting or real estate; while the majority offer a combination of salary and bonuses based on performance. Today, the typical base salary-to-commission ratio is 50/50 or 60/40.
“There is no such thing as the perfect sales compensation plan,” says Jake Dunlap, CEO and founder of Skaled, a company that helps fast-growth ventures develop their sales processes and systems. So instead of striving for a perfect system that doesn’t exist, try to incentivize the behavior and results you want.
For example, companies selling low-cost products or services — under $300 to 400 — are very transaction oriented. To keep salespeople motivated to make those non-stop sales, employers should use regular sales contests to drive higher volumes. The salesman or woman who has the highest numbers for the month will win a prize, be it a desirable item (like an iPad) or extra compensation.
Setting Floors and Bonuses
Many companies set a sales floor, as well as a bonus plan for their sales team.
A “floor” is the minimum amount that needs to be sold to earn anything above the salesperson’s base salary. What’s the right way to set a floor? Dunlap suggests a standard would be 75% of the total monthly sales quota. Meaning that, unless 75% of the total quota is met, the salesperson receives no additional compensation that month.
At the other end of the spectrum, sales pros who meet and then exceed their sales quotas qualify for bonuses tied to those additional sales. These bonuses can consist of a higher commission per sale over the quota — a.k.a., you’d earn 15% of every sale instead of the standard 10% after 10 units are sold.
The other bonus structure is flat bonuses based on tiers of performance, such as an extra $1,000 for every additional $25,000 sold.
According to Dunlap, some salespeople will find creative ways of managing their quotas, such as timing sales to ensure they fall in the next calendar month, when the count starts back at zero. This can be a problem for some companies, especially for products or businesses where sales need to be done quickly. As such, smart companies can create compensation plans that discourage this practice, called sandbagging.
Dunlap’s favorite compensation approach is a monthly plan with a quarterly bonus. Using this system, salespeople have both a floor and a monthly bonus tied to their sales quota.
To discourage sandbagging, he also recommends a quarterly bonus that is paid on top of monthly bonuses. Here’s one example: As soon as you hit your quarterly quota, you earn 20% (instead of 15%) on all deals above that, so you’re incentivized to close deals as quickly as possible.
The timing of payments to your salespeople can be tricky when your team is selling higher value products and services that take many months to close. In enterprise sales, where the value of the sale exceeds $40,000, salespeople are usually compensated on a quarterly basis.
Paying Based on Team Performance
A less common, but still used, approach is team-based compensation. In larger sales organizations, where sales professionals are divided into teams, these compensation programs can take into account your own performance, your team’s performance, and your division’s sales performance.
In these situations, 50% of the compensation is often based on the individual, 30% on the team, and 20% on the division. While this may be appealing to companies, it’s usually less appealing to your sales team, unless they’re placed on an established, high-performing team. Otherwise, the potential downside is bigger than the upside.
“I’m not a big fan of team-based compensation when you’re rapidly growing,” says Dunlap, because fast growth requires a steady stream of new hires who will bring the team’s sales total down.
The monthly plan with quarterly bonus, on the other hand, incentivizes individual salespeople to close quickly and frequently.
The Ideal Scenario
The most effective sales compensation programs encourage salespeople to close as many deals as possible as quickly as possible, and then they pay out commissions as close to when deals are done as possible, says Dunlap. This keeps both the employer and the salesperson happy.