Sales Team Compensation Done Right
Hopefully, your sales representatives sell for you because they love your company, and believe in your product. And it's important to make their job as enjoyable as you can, and your product as easy to sell as possible. However, when it comes right down to it, your employees work for you because you pay them. The foundation of your relationship is the exchange of their work for your money, and only once that foundation is properly in place can you move on to motivating them in other ways.
In other words, a well-designed sales compensation plan is the single most important thing you can do to increase the success of your sales teams. Is your company's sales compensation plan up to snuff? In this post, find out the different types of compensation plans, and how your company's compares.
Compensation Plan Structure
There are three basic ways to structure a sales compensation plan: 1) Large salary + Smaller Commissions, 2) Small salary + larger commissions, or 3) Full commission. Companies with in-house sales teams typically use #1. Most outsourcing companies use #3. At Netpique, we operate under the #2 model.
To understand why Netpique chooses that sweet spot right in the middle, it's important to take a look at what a properly designed compensation plan can do for your company.
Align Your Interests
The reason that all three of the possible compensation plans include a commission component is that the purpose of commissions is to align your company's interests with your sales representatives' interests. You want your sales representatives to make money when your company does, so that they will want to do the hard work to make that happen.
Sales positions typically require a higher degree of individual initiative and willingness to put yourself out there and deal with rejection than other jobs. So rather than just a normal salary, companies normally offer sales teams a commission, so that they will be invested in making sales.
Motivate Your Sales Team
One of the primary purposes of a good sales compensation plan is to motivate your sales representatives to make sales. Unfortunately, many companies don't go far enough when it comes to using financial incentives to motivate their sales representatives. Instead, they treat sales more like an ordinary job, and pay out the majority of their compensation as salary, reserving only a small percentage for commissions. Typical numbers are 75% salary and 25% commission.
The result of a very conservative compensation plan like this is that it can cause sales representatives to place less importance on sales, since they get paid 75% of their salary just for being employed by your company, regardless of how many sales they make. When the salary is the main event, and commissions are just the cherry on top, it can be easy for your sales representatives to just coast along, bringing in disappointing results for your company.
Another important feature of Netpique's compensation plans (not represented in the chart) is that the commissions are uncapped. It makes no sense to tell your sales team that the sky is the limit, and then cap their commissions at a certain amount. Capping commissions sends the message that you only care about results up to a certain point. It puts a ceiling on the effort that your sales team is willing to expend, since they aren't rewarded after a certain number of sales anyway.
One of the big draws for new hires at Netpique is that our commission system is uncapped. The 40/60 split is a sort of estimate, based on typical performance of a well-functioning sales representative. All of our sales representatives receive a similar salary. However, there are many who go well beyond the average commission, receiving an even higher percentage of their compensation as commissions. Our sales representatives have complete control over their own earning power, and they are free and encouraged to put in as much work as they want to in order to achieve their own financial goals.
Increase Headcount Retention
With all this talk about the importance of commissions, it's easy to see how some companies would take the idea to an extreme and decide to dispense with the base salary completely and simply pay out commissions on sales achieved. If you have shopped around for sales channel partners, you will find that many of them take this approach.
Unfortunately, lack of a base salary tends to lead to an unstable workforce, since without the security of a regular salary, most sales representatives will be looking for a better job even as they're working yours. Having a base salary gives them the peace of mind that their rent will get paid every month as they are striving to achieve their loftier financial goals.
If you believe your company's current sales compensation plan is losing you sales, it's not to late to change it for the better. You should also take into account your industry, competition, and sales process when designing a compensation plan for your company. Netpique specializes in helping companies solve these and other sales problems and achieving better organic growth for your company.