For many organizations, determining compensation for sales reps is an incredible challenge. It starts out by pitting two competing interests against each other. The company wants to earn as much profit as possible while reps want to earn as much income as possible.
The owners of businesses that rely heavily on the efforts of salespeople must also consider that what motivates one representative may have no effect on another representative. Although it’s a tough balancing act, paying reps on commission is one way to bring the interests of both employer and employee closer together.
Consider Several Different Commission Strategies
Managers must consider several unique factors about the business before selecting the most appropriate commission strategy. These could include the market the company operates in, the typical customer demographics, the average length of sales cycles, and the types of products or services sold. One of these four commission strategies could work better than another based on the assessment of company factors:
- Commission Multipliers: The strategy allows for more nuanced and complex methods of paying individuals. It can be ideal for managers who want to add several performance measures to an incentive plan.
- Flat Commissions: With this common and simple-to-use commission strategy, the rep receives the same payment regardless of how much he or she sells. Managers can calculate flat commissions by the item sold or the dollar amount.
- Hybrid Commissions: This method uses a combination of tiered and flat commission structures.
- Tiered Commissions: Some salespeople feel highly motivated by tiered commissions because they earn more money once they surpass certain quotas. It can also act as a motivator for lower-performing representatives when they see their colleagues earn more than they do.
Commission-Based Compensation Can Be Most Effective for Expanding Companies
Tying compensation to concrete results can put the entire team in a better long-term position. It gets people selling more while the company is growing because they want to hit certain commission targets. An environment that rewards urgency often can’t help but grow. It can also keep salespeople around longer because they know they would have a difficult time reaching the same level of commission-based compensation with another company.
Employ the ABC Model of Sales Compensation
After creating a compensation team and briefly considering different compensation strategies, Salesforce recommends applying the ABC Model to arrive at the best decisions.
“A” stands for Align with Sales Roles, a strategy that emphasizes no single compensation strategy works for everyone. Managers must consider each person’s role and relative importance in the sales process.
“B” means to Base on Company Culture and Philosophy. An important thing for organizations to consider here is how they want to measure up against others in the market while keeping in mind that above-market compensation attracts the highest quality of candidates. Considering the best way to differentiate pay between high, average, and low-performing representatives are also important.
“C” stands for Construct to Drive the Right Sales Behaviors. Companies should align sales compensation plans with business goals. Goals should be easy for salespeople to understand and achieve.
Sales managers shouldn’t feel frustrated if the initial compensation plan fails to motivate as expected. It may take a few years and a few different strategies to find the one that produces the best overall results.