Sales Compensation: Creating a Structure that Works

Creating an effective sales compensation plan is one of the most important steps you can take to ensure your sales team is motivated, productive, and aligned with your company’s goals. A well-designed compensation structure not only attracts and retains top sales talent but also drives the right behaviors, leading to increased revenue and business growth. 

However, crafting a sales compensation plan that works requires careful consideration of what motivates your team. In this article, we’ll explore the key elements of a successful sales compensation plan, the importance of incentives, and how to create a structure that works for  both your team and your business.

What is Sales Compensation?

Sales compensation refers to the rewards employees are given for achieving set KPIs for a company based on their performance. It typically includes a combination of base salary, commissions, bonuses, and incentives. The structure of a good sales compensation plan is designed to motivate sales teams to achieve specific targets, such as meeting sales quotas, acquiring new clients, or increasing product penetration in existing markets.

The Importance of a Sales Compensation Plan

A well-designed sales compensation plan is essential for attracting, retaining and motivating top talent, particularly in today’s competitive market. A clear and effective compensation plan ensures that sales teams understand what is expected of them and how their performance will be rewarded, driving productivity and accountability. A thoughtfully structured plan can help reduce turnover by providing financial stability for sales professionals, ensuring they won’t look for better opportunities elsewhere or become demotivated.

Experienced SDRs and sales professionals often prioritize a lucrative commission plan when looking for a new role. As they close more deals, their earnings increase, motivating them to surpass basic targets and achieve even greater results.

What to Consider When Building a Sales Compensation Plan

When creating or reviewing a commission plan, keep the following in mind:

• What are the main KPIs, and how will it be tracked? Clearly define what actions will earn a commission, such as booking meetings, closing deals, making calls, or creating opportunities.
• How will the commission plan evolve over time? Consider how the sales compensation structure might need to change as the company grows or as market conditions shift. 
• What is your budget? Make sure your budget is clear to avoid overcommitting or making promises that can’t be kept, which would severely demotivate a team. This will also help you decide if and where to cap commissions, set commission rates, and choose the right structure.
• What are competitors paying their SDR teams? Research the market to ensure you’re offering a competitive rate. To keep your top salespeople, you need an attractive commission plan. If you pay less than the industry standard, you risk losing your best performers to one of your competitors.
• How will you ensure fairness and transparency? Ensure the commission plan is easy to understand and transparent to avoid discrepancies. Communicate how commissions are calculated and make sure that all team members feel the plan is fair.
• How will you measure the effectiveness of the plan? Set up a process to regularly review the commission plan’s impact on sales performance and employee satisfaction. Be open to making adjustments based on feedback and performance metrics.

Base Salary

The very foundation of compensating an SDR or other sales professional is their base salary. Although the average base salary for SDRs is rising due to increased demand, it is estimated to be around £35,000 in London and $58,000 in San Francisco as of March 2022. However, an average base salary is likely to attract average talent. If you want to bring in top-performing sales representatives with a proven track record, be prepared to offer a higher base salary.

Once you have determined the base salary, the next step is to develop an incentive and commission structure. These components often work together to create a compelling SDR compensation plan that not only attracts but also retains high-caliber sales talent.

The Types of Sales Commission Plans

There are several types of sales commission structures, each with its own benefits. Below are some of the most common ones:

Base Salary and Commission

This structure combines a guaranteed base salary with additional earnings through commission, making it the most common approach in sales. Salespeople benefit from the security of a steady income while also being incentivized to work harder and achieve more, knowing that their efforts will be rewarded with extra pay. The balance of base salary to commission typically averages around a 70:30 ratio, though this can vary depending on the industry and company goals. This model strikes a balance between providing financial stability and driving performance, making it a popular choice for many organizations.

Tiered Commission Plan

A tiered commission plan builds on the base salary and commission model but introduces varying levels of commission rates based on performance. Rather than earning a flat rate, sales reps earn higher commission percentages as they meet or exceed specific targets or benchmarks. This structure not only motivates reps to push beyond their basic goals but also adds a competitive edge as they strive to climb the tiers. By rewarding increased performance with progressively higher payouts, this plan effectively boosts both motivation and productivity, encouraging salespeople to consistently aim higher.

Straight Commission Plan

In a straight commission plan, also known as a full commission plan, sales reps forgo a base salary and rely entirely on commissions for their income. This structure tends to attract highly experienced and confident sales professionals who thrive in fast-paced, high-reward environments. While this plan can be incredibly motivating, it also comes with inherent risks, as the lack of guaranteed income may lead to financial instability for those who don’t consistently perform. This model is often favored by businesses with short sales cycles or start-ups that may not have the resources to pay a base salary, but it requires a sales force that is comfortable with higher stakes and potential variability in their earnings.

Sales Compensation Incentives

You may have noticed the growing emphasis on gamification and incentives on platforms like LinkedIn. These concepts aren’t just trendy buzzwords—they’re powerful tools for boosting motivation, engagement, and overall job satisfaction, which are crucial for employee retention.

Incentives play a bigger role than you might expect. According to a Glassdoor study, 57% of job seekers consider incentives a top factor when deciding whether to accept an offer. Another study revealed that 85% of employees are more motivated to perform their best when an incentive program is offered.

Simply put, incentives reward employees for outstanding performance and achieving specific goals. Gamification, on the other hand, involves introducing elements of game-playing or competition into the workplace. Both strategies are proven to enhance productivity, elevate team performance, and boost morale, making them essential for getting the best results from your team.

Implementing an Incentive Scheme

When rolling out a new incentive scheme, it’s essential to consider the following:

• What are the goals and objectives of the incentive scheme? Ensure that your goals are clear, measurable, and realistic. They should motivate your team while being achievable. Consider where your team needs the most support or encouragement and focus your objectives there.
• What incentives will resonate most with your team? Different employees are motivated by different rewards. Some may prefer financial bonuses, while others might value experiences like a paid day out. If the incentives don’t appeal to your team, they won’t drive the desired results. Conduct a survey to understand what truly motivates your employees to ensure the incentive scheme’s success.
• How will you measure performance and results? Identify the key performance indicators (KPIs) that will allow both you and your team to track progress. Having clear KPIs helps boost productivity and gives your team a push when needed. Consider setting up an automated tracking system, like an Excel spreadsheet, or investing in specialized incentive software to streamline this process.
• What is the budget? Be realistic about what you can afford. Promising extravagant rewards without the budget to support them can lead to disappointment and loss of trust.
• How long should the incentive run? Decide whether your scheme will focus on short-term or long-term goals, or a mix of both. Short-term incentives can create urgency and spike motivation, while long-term goals foster consistent performance and a positive company culture.

A successful incentive program is carefully planned, measurable, and uses rewards that genuinely motivate employees. Sending out a survey to let your team rank their preferred incentives is a great way to ensure your scheme hits the mark.

Popular Types of Incentives:

• One-time cash bonuses
• Extra paid time off (PTO)
• Recognition and awards
• Apparel and branded merchandise
• Entertainment, such as concert tickets and experience days
• Team vacations and sales incentives trips
• Gift cards and subscriptions
• Technology and electronics
• Wellness incentives, such as a free gym membership or spa treatments

In addition to surveying your team, keep an eye on which incentives are most effective in driving KPIs and improving overall team performance.

Crafting an effective incentive scheme is a critical component of driving performance, boosting morale, and retaining top talent within your sales team. By thoughtfully considering the goals, preferences, and needs of your employees, you can design a program that not only motivates but also aligns with your company’s objectives. Whether through financial bonuses, personalized rewards, or opportunities for professional growth, the right incentives can inspire your team to consistently perform at their best.

Remember, the most effective compensation plans are those that evolve with your team’s needs and market conditions. Regularly reviewing and adjusting your strategy will ensure that it remains relevant and impactful, keeping your sales force motivated and engaged. With the right plan in place, you can not only retain top talent but also empower them to reach new heights, propelling your company forward in today’s competitive marketplace.