Sales representatives want to get paid fairly for the work they do and the revenue they generate, rightfully so. To pull in the best sales reps, you need to offer the most attractive sales compensation plans.
I’ll help you do just that with this guide, which outlines the best sales comp plans that hungry sales reps want to see.
1. Base + Commission
Sales reps want direct compensation that they can take straight to the bank (literally). Indirect compensation, like wellness plans and retirement benefits, are bonuses, of course. But sales representatives work to sell, and they want direct compensation for the work they do and the amount they sell.
That’s why a base salary plus commission is one of the most coveted sales compensation plans. It not only gives a sales rep a regular salary they can rely on, but it also rewards them for closing deals.
There are numerous ways companies structure commissions. Although some companies provide sales reps with 100% of their commissions, others split commissions, giving both the rep and the company a portion of earned commissions.
For example, an 80/20 split gives the rep 80% and the company 20% of sales commissions. If the commission on a $10,000 sale were $1,000, the rep would take home 80% of that, or $800, while the company keeps $200. Note that the rep would make that $800 in addition to their base salary with a base plus commission structure.
A 60/40 split is also somewhat common, while a 50/50 split is more common for smaller businesses. Large organizations seeking the best sales reps generally use an 80/20 split to attract and retain top talent.
Although base plus commission is popular among sales reps, it doesn’t always equate to job satisfaction. Companies sometimes offer lower salaries to offset commissions or cap commissions, either of which likely won’t motivate reps to sell more.
Additionally, this structure can complicate payroll and your payroll budget, as it can be difficult to budget for variable compensation like commission. Having a strong HR team and commission-based payroll software to manage everything is a must.
2. Tiered Commission
Tiered commission is a motivating pay structure that rewards salespeople with higher commissions the more they sell. Typically, the amount they receive in commission is based on the percentage of their quota they’ve reached.
As an example, a sales rep who reaches 50% of their quota for the sales period might earn 5% commission, whereas a sales rep reaching 120% of their quota might earn 20%.
However, companies can structure tiered commissions in whatever way it makes the most sense. Revenue, units sold, and dollar amount sold are some benchmarks used. A company might also set up tiers that increase commissions as a sales rep’s individual sales increase.
The latter would look something like this:
- $100,000 in sales: 3%
- $200,000 in sales: 6%
- $500,000 in sales: 15%
- $1 million+ in sales: 30%
From a representative’s standpoint, a tiered commission structure that continuously encourages sales motivation is best. Resetting the commission structures for a specific period, like quarterly, can place every rep on a level playing field, encouraging each rep to keep pushing sales to reach the next tier.
In contrast, a tiered commission structure that caps after a rep reaches a specific sales amount might make them less inclined to learn new strategies to increase their selling skills, as there are no additional tiers to strive for.
Organizations with large sales teams tend to benefit the most from tiered commissions, as this form of sales compensation benefits all representatives. Top sellers stay motivated to maintain their higher commissions, while lower-level sellers work toward reaching higher tiers.
Problems that arise with tiered commissions usually stem from complex commission structures. Keep tiers simple and straightforward to make payroll easier on HR and calculations easier for employees.
3. Straight Commission
Straight commission pays only commission and no other form of regular compensation, like a salary. You can imagine that straight commission isn’t everyone’s cup of tea, but it works for highly motivated sales reps who have the opportunity to make multiple high-figure sales daily or weekly. Performance bonuses and other benefits can still be available to workers on straight commission plans.
Companies typically pay either net or gross straight commission, with gross commission generally being the more favored among sales reps.
Net commission pays a percentage of the rep’s net sale. For example, a $5,000 sale with $500 in expenses nets $4,500, so a 10% commission equals $450. In contrast, gross commission pays a percentage of the gross sale. Using the same example, a rep on gross commission earning 10% would make $500 on that sale.
Because no consistent pay comes with straight commission, this sales compensation plan is best for organizations with regular, high-grossing sales. Companies with only a few sales reps might also turn to this method, as each rep has the potential to earn higher profits.
4. Draw-Against Commission
Draw-against commission gives representatives an advance on their future projected commissions, similar to a cash advance for someone earning a salary. With this compensation plan, sales reps can get more consistent earnings, especially if they work for commission only.
Companies sometimes use this compensation plan for new sales reps who need to build up their sales portfolio before the company can get a good sense of their sales capabilities. It can also work well during slower sales periods to ensure that reps maintain a steady income despite weaker sales.
The drawback with this type of commission structure is that if a representative doesn’t meet their projected quota—in other words, their advance was more than they actually earned in commission—they may need to pay the uncovered portion of their advance back at the end of the sales period.
However, this actually can motivate sales reps to up their game. As they reach and exceed their quota, a rep may get more than they were advanced at the end of their sales period, making a strong case for increasing their sales.
5. Salary + Bonuses
A salary plus bonuses structure gives bonuses rather than commissions for a sales rep’s performance. This structure typically provides a flat-rate bonus based on how much a rep sells or the ability to meet quota, in contrast to a commission’s percentage of sales.
Let’s illustrate what this might look like. Say Terry’s quarterly quota is $100,000 in sales. He can earn a bonus of $2,000 for meeting that quota but is eligible for a $4,000 bonus if he exceeds his quota by 25% ($125,000 in sales). Of course, this is in addition to Terry’s regular salary.
Similar to a tiered commission structure, a salary plus bonus compensation plan motivates reps to reach and exceed their quota. However, this structure includes the perk of having a reliable salary and knowing exactly what extra compensation a rep can expect by reaching or exceeding quota.
Companies that want to simplify their compensation plans for sales representatives might choose salary plus bonuses, as it’s generally easier to structure bonus amounts this way compared to commission-based structures and payouts.
6. Equity Compensation Plan
Sales representatives help companies grow by reaching new revenue heights. Some companies offer their reps a piece of the pie with an equity compensation plan.
Equity compensation gives workers a portion of the company’s ownership, usually in the form of stocks. Equity compensation is a form of indirect compensation, or non-monetary pay, so it’s given in addition to a salary or wages.
An equity compensation plan usually offers an equity percentage based on the company’s generated revenue, often outlined in a tiered structure. For example, a company generating $25 million in revenue might reserve a pool of 10% equity for its workers, while a company with over $50 million in sales may bump this up to 20%.
To stimulate sales among sales reps, companies may use an individual structure instead based on the rep’s generated sales, such as 0.25% equity for sales of $500,000 or 0.75% equity for sales of $1 million or more. This is generally the more impressive option for sales reps.
This compensation plan is often used for employee retention, as it encourages longevity within a company. Therefore, businesses seeking to reduce turnover might find it beneficial.
7. Straight Salary
Straight salary pays just a salary to sales reps. Although sales representatives typically get paid commissions or bonuses in addition to salary, organizations shouldn’t overlook the potential benefits of paying salary only.
From a business standpoint, this compensation plan is ridiculously easier than others. There isn’t anything extra to calculate, so payroll is a breeze.
However, it also has some perks for sales reps. Most notably, workers whose selling duties are secondary to their primary responsibilities can continue to earn a regular salary regardless of the sales they generate. Straight salary can also be useful for companies with volatile sales periods, like organizations making most of their sales near the holidays but limited sales for the rest of the year.
New companies or companies with several new sales reps might also choose a straight salary to start with, keeping every rep on an even playing field. Once sales begin to pick up and reps earn experience, it can be easier for companies to gauge sales expectations and pivot to a new compensation structure, if needed.
Get Quality Reps on Board with Attractive Sales Compensation Plans
There are dozens of compensation plans to choose from because no two companies and their workforces benefit from the exact same pay structures. The duties and processes required of sales reps at different companies also vary, making it crucial to choose the compensation plan that really motivates them to work hard toward more sales.
Some sales compensation plans are more straightforward than others for HR to manage, which is something your company should consider. Still, try to place the spotlight on what works best to feed hungry sales reps. When you see the sales roll in, you’ll be glad you did.