eBusiness Weekly
Robert Gonye
So, we recap from where we left off from last week in the drivers for sales teams, understanding commission models and applying one which works for you.
Base salary plus commission
This is the most common pay structure. Sales teams receive a fixed yearly base salary, as well as commission. They get the security of a steady income with the economic incentive to sell.
You’ll benefit from greater clarity into your expenses (since there’s less variability in a perfect economy that is) and the opportunity to hire highly motivated salespeople. Furthermore, since you’re giving teams a base salary, they’re obligated to fulfil some non-selling tasks, like training a new team member or attending training.
The commission percentage is lower because of the base.
To determine the base-variable comp split, determine:
How difficult the sale is.
How much autonomy is needed (are you providing your sales team leads or asking them to generate their own, giving them technical support or requiring they sell a technical product by themselves).
How much experience is necessary
As the difficulty, self-sufficiency, and expertise grow, so should the base salary.
Variable compensation therefore is determined by:
How complex the sales cycle is.
How much influence an area sales rep.
How many leads they work.
Selling function (closing the sale or initiating the sale).
Base salary plus bonus
A modified version of the base/commission combo, this awards a base salary plus a bonus if the employee hits their pre-set target. For example, you might pay $3 000 base and $1 500 for selling X amount per year.
This approach offers high predictability. If for example you know eight in 10 employees hit their target on average, and total earnings are $55 000, you can set aside $440 000 in your annual budget.
But there’s no motivation to over perform which then means it is exposed.
Absolute commission plan
An absolute commission is paid out on specific activities or milestones. To illustrate, you might pay your salespeople $100 for every new customer or 5 percent of upsell and cross-sell revenue.
These plans are easy for reps to grasp, which always drives good results. In addition, you don’t have to set a quota: You can set benchmarks or recommendations, but ultimately, you’re only compensating salespeople on what they sell. Another benefit: Because output is directly tied to salary, reps are typically highly motivated to perform.
On the other hand, this structure doesn’t take into account market penetration or quantity of opportunities. One salesperson may be getting twice as many leads as her peer, but she’ll be treated equally.
Furthermore, you’ll need to carefully link what’s best for the company with your chosen commission. If you’re trying to drive sales of a certain product line, you’ll need to compensate reps accordingly, they’re always going to do what’s most lucrative (to them) regardless of business objectives.
Relative commission plan
Unlike an absolute commission plan, a relative commission plan uses a measure, or predetermined target. This target can be based on revenue (X dollars) or volume (X units).
When a rep hits 100 percent of quota, they make their on-target earnings (OTE). That either consists of base plus commission or pure commission.
For an example, a salesperson’s yearly target might be $10 000 in new business. At-plan commission is $500, and base is $800 Their OTE is $1 300.
Territory volume commission plan
With a territory volume commission plan, sales teams work with prospects and clients in clearly defined regions and reps are paid on a territory-wide versus individual sale basis. Once the compensation period is complete, the total sales are split among the salespeople who worked that territory.
It’s a good fit for team-based sales organisations where each salesperson on the team works toward a common goal. And each team focuses on a specific territory or region.
To attract reps to this plan and grow your sales teams, you’ll want to offer an attractive commission and a well-developed territory. And while prospects will be protected from poaching by other sales teams, reps within a specific territory can’t follow customers who move outside of their territory.
Straight-line commission plan
A straight-line commission plan rewards salespeople based on how much or little they sell. If they reach 86 percent of their quota, they receive 86 percent of their commission. If they reach 140 percent of quota, they’re paid 140 percent of commission.
Although this approach is relatively easy to calculate, it’s not perfect.
My issues with it? You want to encourage over performance as much as possible. If you’re already paying base, getting someone to hit 140 percent of target from 120 percent has a greater financial impact than getting an underperformer to hit 100 percent from 80 percent.
Furthermore, someone might be able to get along just fine making 80 percent of target as a life style at the detriment of the company’s growth. You don’t want to disincentive sales to sell because they’re happy with a lower salary.
When to pay commission
There are three standard options for paying out commissions.
You can pay:
- When the customer signs the contract.
- When you receive the customer’s first payment
- Every time the customer pays
The first option — paying when the customer signs — is good motivation for the salesperson because they immediately see the monetary impact of winning the deal.
However, it can lead to cash flow problems for you if there’s a significant delay between the signed agreement and the first payment (especially if you’re an early-stage business and/or it’s a big deal).
The second option — paying when you’re paid — can be confusing for salespeople to keep track of. It can also disrupt your cash flow; after all, if you give a rep commission on the entire contract when you get the first check, you’re paying in advance of the customer’s subsequent payments.
But it’s the most common choice because there’s less of a lag between commission and revenue. You can also use claw backs to incentivise salespeople to focus on good fits (rather than anyone who will buy). That usually boosts retention.
The third option — paying each time you get an invoice — is the best for your cash flow. Nonetheless, it can be complex to figure out — especially if you have a large sales team.
I trust this spells out what you need to be cognizant when it come s to managing teams where you pay them out commissions and tie it to performance.
The views given herein are solely for information purposes; they are guidelines and suggestions and are not guaranteed to work in any particular way.
Robert Gonye is a Business Growth Expert and Influencer. He writes in his personal capacity. Comments and views: [email protected]. twitter@robert_gonye.
