8 years ago
July 6, 2016

Which Type of Sales Compensation Plan Is Most Effective?

Your sales compensation plan could mean the difference between the success and failure of your sales team. Learn which plan is the most effective.

Rhys Metler

There are many ways to compensate your sales people. The sales compensation plan you choose to implement into your organization should be designed in a way that keeps your sales team motivated, helps you achieve your sales and revenue goals, and makes sense for your bottom line.

So what type of sales compensation plan is the most effective? Let’s figure it out.

Base Salary and Commission

All sales compensation plans will be based on a base salary, commission, or a mix of both. A base salary is used to help sales people cover their basic living expenses. Commission is used to make your sales people feel like they control their own income, and it helps make them feel like they’re sharing their employer’s success.

Many employers will use a base salary plus commission to compensate their sales people. With this type of sales compensation plan, your sales people receive a predetermined salary—usually at least 30% of total compensation—along with additional compensation known as commission, which is based on sales or revenue goals determined by the company.

Side note: When calculating your sales compensation plan, make sure to leave enough money out to cover bonuses, a sales incentive plan, and contests as well.

Variable and Residual Commission

The variable commission structure will offer sales people varying amounts of money, based on the revenue generated from a sale.

Variable Commission Based on Sales Goals

When your commission structure is based on sales goals, you can really motivate sales people to achieve their targets. You set sales targets, and as your sales people start to sell more, you increase commission.

Straight Commission

Straight commission isn’t always liked by sales people—and it can be difficult to recruit and hire commission-only employees because sales people are only paid after a sales transaction and do not receive a base salary. No sales means no pay. And this can be scary to commit to. They earn a percentage from their sales, which can make them more motivated to work hard and can lead to a very high income, but on the other hand, it can mean that they don’t make enough money to pay their living expenses if you have long sales cycles or difficult-to-sell products or services. But this type of compensation structure does often attract top talent who know how to sell and want the big pay out.

Which Is Best?

Determining which ones of these sales compensation structures would be best really depends on your organization, your sales department, the sales role, and your goals. Generally, a mix of both base salary and commission is usually best.

The ration of your base salary and commission should be based on the experience level required for the sales role, the level of difficult in selling, the level of autonomy needed, the complexity and length of your sales cycle, the amount of influence your reps have on buying decisions, and the focus of your role.

For example, if you have a long sales cycle, reps don’t really have much say on buying decisions, and the focus of the role is largely prospecting and growing existing business, then a high commission structure won’t work—you’ll need to offer a higher base pay.

But if your products are easy to sell, your sales people spend most of their time hunting new business, and your sales cycle is short, then it might make sense to lower the base salary and increase the commission percentage.

Setting up an effective sales compensation plan is no doubt hard work, but done correctly, you’ll benefit from a huge pay off. Your sales people will be more motivated than ever before and they’ll work as hard as possible to sell your products or services, leading to increased profits for your company.

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.