8 years ago
April 13, 2016

Understanding Sales Compensation Plans

Strong sales compensation plans should benefit the sales person as well as the organization offering the plan.

Rhys Metler

Strong sales compensation plans should benefit the sales person as well as the organization offering the plan. To meet these two goals, sales compensation plans often contain compromises. Confusing matters, much of the language in a sales compensation plan is legal in nature, since sales compensation plans are a form of contract. These basics about sales compensation plans will help you understand the different components and their potential impacts on your total compensation.

The Base Salary of Sales Compensation Plans

Not all sales compensation plans have a base salary component, though many do. A base salary usually comprises no more than 40% of a sales person’s total expected compensation, and may be adjustable on a sliding scale according to how much commission a sales person earns. Except in industries where there is no commission paid, base salary is used primarily only as a base; it is only a portion of the total compensation and not meant to be competitive with salaries for other professions. Base salary may also:

  • Be higher for sales people who are just beginning in a position and who do not have a deal of experience, so that they can adjust and familiarize themselves with an organization
  • Be removed once a sales person reaches a certain rate of commissions
  • Be adjusted in other ways based on the total compensation mix, as outlined in the sales compensation plan

Since base salary can be adjusted according to circumstances, you should always read carefully any sales compensation plans presented to you so that you understand and can predict how certain changes will influence your total income.

The Commission Structure of Sales Compensation Plans

Most sales compensation plans have some type of commission built in to the compensation mix. Commission is typically on a sliding scale so that sales people earn a higher percentage for smaller sales and a lower percentage for larger sales, especially when a base salary is being paid. However, sales compensation plans that are straight commission without salary may have one percentage set for earnings on all sales. Commissions are most frequently figured either on the face value of a sale or on the gross profit to the company of a given sale. This should be clearly outlined in the compensation plan.

The Bonus Structure of Sales Compensation Plans

Potential bonuses in sales compensation plans can be what differentiate an excellent compensation plan from an ordinary one. A sales person who meets all of his or her quotas for the year can easily increase his or her salary by 20% or more under a sales compensation plan that awards average bonuses for activities. Bonus eligible activities and quotas that are typically written into sales compensation plans include:

  • Quarterly quotas
  • Yearly quotas
  • 4 quarters plus yearly quota
  • Targets for other sales activities including client retention, up-selling, and other tasks

The Incentive Structure of Sales Compensation Plans

Incentives differ from bonuses in that they are typically non-cash rewards, such as vacations and car expenses. Yet although incentives are not cash, they can add value to a sales person’s total compensation. Because incentives tend to encourage short term rather than long term sales, most sales compensation plans will discuss eligibility and restrictions on incentives but will not outline all possible incentives. Look to incentive-specific plans for additional details on what an organization is currently offering and an idea of what the future may bring.

Sales compensation plans are different at every organization. If you have questions about a sales compensation plan when accepting a new position or if a new sales compensation plan is being rolled out at your organization, be sure to ask the sales manager for clarification. Your compensation should always be predictable based on the sales that you deliver, and if you do not understand a sales compensation plan you will not be able to plan your goals accurately.

Rhys Metler

Rhys is a tenacious, top performing Senior Sales Recruiter with 15+ years of focused experience in the Digital Media, Mobile, Software, Technology and B2B verticals. He has a successful track record of headhunting top performing sales candidates for some of the most exciting brands in North America. He is a Certified Recruitment Specialist (CRS) and has expert experience in prospecting new business, client retention/renewals and managing top performing sales and recruitment teams. Rhys enjoys spending quality time with his wife, son, and daughters, BBQing on a hot summer day and tropical vacations.