As a sales manager, you want to make sure that your company’s sales compensation structure provides enough motivation for your team members to perform well and earn commission. You also want to ensure that it makes financial sense for the business as a whole. Here are five popular sales compensation structures, so you can choose the one that best fits your needs.
1. Tiered Structure
Tiered commission structures are a type of sales commission structure that pays higher commissions on sales above a certain point.
The tiered structure has three levels: the base commission rate, the mid-level, and the high-level. The base commission rate is paid on all sales; if you sell 20 blue widgets in one month and your base rate is $500 per widget, you’ll make $10,000 at this level. The mid-level (or “mid-high”) kicks in when your sales reach a certain amount—maybe 30 widgets or 50 widgets per month—and pays out an additional percentage based on what you’ve sold above that number of units. Finally, if you manage to sell 60 or more blue widgets during a given period (let’s say six months), your earnings will be increased by yet another amount at the high level (or “high”).
2. Dimensions of Performance
The dimensions of performance can be different for different types of sales reps. For example, if you’re in a B2B software company, the number of leads generated may be an important dimension. If you sell consulting services to small businesses, the number of clients acquired might be most important.
If you don’t clearly define these dimensions and make them measurable, they won’t actually help with your compensation plan. They’ll just lead to confusion and resentment among sales reps if they’re not being rewarded fairly based on the metrics used to evaluate their performance. It’s also possible that some metrics may not even be fair—some people are naturally better at closing deals than others—so make sure it doesn’t disadvantage anyone in your company by making unreasonable demands on them just because their job title says “sales rep.”
3. Spiffs and Bonuses
Spiffs and bonuses are a way to motivate your sales reps. If you want to implement them, consider the following:
- How will they be implemented? Is there a certain number of units that must be sold before spiffs can be earned? Or is it based on time or a combination of both?
- Who decides when someone has earned a spiff, and how much will it be worth? This should all be clearly documented so there are no misunderstandings about how these things work.
- What kind of abuse do you want to prevent from happening with this system in place? Are there any limits on who should earn spiffs (e.g., only people on commission), or is it up to everyone working at the company?
4. Ladder Structure
In the ladder structure, a sales rep is paid a base salary plus a commission on sales. As their level increases, they earn more money from the base salary and more from commissions.
The simplest way to understand this structure is as follows:
- The higher your level in an organization, the more money you make overall.
- The lower your level in an organization, the less money you make overall.
5. Performance Waterfall
Performance waterfall is a commission structure in which a sales rep earns a percentage of the revenue generated by their team.
The waterfall works like this:
- You are paid a base salary, which is often based on experience or tenure. Your base salary covers your expenses (travel and other costs) and allows you to spend time on prospecting and building relationships with customers.
- If you generate revenue directly through your sales efforts, you will receive commissions on those sales activities. These commissions can be calculated using one of several different methods, including gross profit margin or net revenue after cost of goods sold (COGS).
Sales compensation structures are used to motivate sales representatives and reward them for their success. Sales reps are motivated by money, recognition, career advancement, team spirit and their manager, as well as the company’s vision of where it wants to be in five years.
Now that you’ve learned the key components of a sales compensation structure, it’s time for you to get out there and put this information into practice. Work with your team to establish a strategy for performance measurement, determine short- and long-term goals, and build an incentive system that will help you drive the right behaviors. Remember – even the best structure is only as good as its execution, so be sure to keep testing and refining your approach until you have it just right!
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