7 months ago
February 21, 2017

Pros and Cons of Different Types of Sales Compensation Plans

There are many ways to compensate your sales team. But which is best? Check out the pros and cons of the varied sales compensation plans.

Rhys Metler

There’s no doubt that you want a top-performing, motivated, and effective sales team selling your products or services. What you may not realize, though, is that the type of sales compensation you offer might play a big factor in the performance and motivation level of your reps.

All sales compensation plans should push sales reps to find and pursue opportunities, whether individually or as part of a team, in order to increase revenue. But sales compensation plans vary widely in structure, and you need to ensure that you implement the right plan for your business goals and your team. Otherwise, your plan could end up hurting your efforts.

To get you on the right path, here are the pros and cons of different sales compensation plans.

Straight Salary

Straight salary is just what you’d expect: you offer your reps a yearly salary, and that’s it. No commission or any other type of compensation on top.

Pros:

  • This structure is ideal for industries whose regulatory structure prohibits direct sales.
  • Straight salary can make all sales people equal members, which is best when they’re working as part of a team or a small group and when everyone contributes equally to the sales goals.
  • It can help you attract new talent with the promise of consistent pay, no matter how they perform.
  • No surprise payroll expenses will occur.

Cons:

  • Straight salary might not be tempting to top-performing sales reps who want to make as much money as they can through hard work and dedication. It tends to only attract less experienced staff who want a “safe” pay structure.
  • It could reduce retention and increase turnover. If your sales people have no opportunities to make more income, they might find a new organization where commission is offered.
  • There is no monetary incentive for your sales people to improve performance and get more sales so they might become lazy.
  • No competitive environment between sales people, which can limit the growth of your organization.
  • This structure pays not only for sales made, but also for non-selling activities and wasted time, which could lessen the value of the money paid.

Salary plus Commission

Salary plus commission is one of the most common sales compensation plans used in sales organizations. It combines a lower base salary with commission, typically on a percentage of sales, to arrive at total compensation.

Pros:

  • Salary plus commission offers a better balance of income security with the possibility of making more.
  • Your sales people are incentivized to work harder to attain sales targets for more cash.

Cons:

  • This type of compensation plan can be more complex to administer.

Commission Only

Commission only compensation plans offer remuneration only on sales made. There is no guarantee of income if revenue isn’t generated.

Pros:

  • Commission only sales compensation plans are easy to administer.
  • These plans remunerate sales reps based solely on sales achieves, equating to a better value for your money paid.
  • Commission only tends to attract fewer candidates in the hiring process, but does tend to attract the most eager and top-performing sales people who know they can make a good income off of their selling skills and experience.
  • Sales people tend to be able to make their own schedules with commission only sales compensation plans, which can improve morale and satisfaction.

Cons:

  • These plans can create aggression and high competition within your sales team.
  • It can create low income security for your reps with no guaranteed income, which can lead to high turnover.
  • Sales people who worry about the risk of no income guarantee might burnout quickly from the stress.

Profit Margin/Revenue

Rewarding your sales people based largely on how your company is performing is known as profit margin or revenue-based sales compensation plans.

Pros:

  • It’s ideal for startups that do not have liquidity in early stages.
  • It encourages company loyalty.

Cons:

  • You’d typically have to incorporate long-term incentives to attract and retain sales people, such as stock shares.

As you can see, all sales compensation plans have their pros and cons. Not every plan will be right for your type of organization. The size of your workforce, the products or services you sell, the age and stability of your company, the goals you have, and the type of sales people you want to attract will all need to be factored into your decision when designing a compensation plan.

Rhys Metler

Rhys is a tenacious, top performing Senior Sales Recruiter with 11+ 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 two daughters, BBQing on a hot summer day, tropical vacations and cottaging.