What Is Sales Compensation? Here Are The Basics.
Unlike employees in other roles, salespeople need the strongest possible incentives to do their jobs to the best of their abilities at all times. This means their sales compensation models work a bit differently from your typical 9-to-5 worker.
Salespeople need a good reason to dive in headfirst to the potential rejection of a sales call, and they need to have something to show for their work even when they’ve had an off week. That’s where “sales commissions” come in. This pay-for-performance element can make the hiring process a bit challenging if you’re unfamiliar with it, but once you understand the basics, it will all become clear.
There are three basic elements of sales compensation: guaranteed, variable, and bonuses and incentives. Let’s run through them so you’re fully prepared to make an offer on your next sales team hire.
Guaranteed Sales Compensation
Pay that’s earned no matter how many sales are made is often called Guaranteed Compensation.
Also known as a “base” or a “draw,” this is exactly the same thing as a standard salary or hourly wage in the non-sales world. The only difference: This amount tends to be lower than a comparable non-sales position. Remember, this is only a piece of the total compensation this person will receive — this is just the piece that’s not tied to sales performance. Guaranteed compensation serves as a reliable minimum that the salesperson can count on making, even if they have a rough week or month.
Variable Sales Compensation
Pay that’s earned on every sale is known as Variable Compensation.
This is usually referred to as “commission.” Commission can either be a percentage of each completed sale or a specific dollar amount per sale that you, as the employer, sets up beforehand. This kind of compensation is tied directly to sales performance, with higher sales obviously meaning more money. The exact commission percentage will vary greatly depending on the product’s price point, the length of sales cycle, and the volume of sales.
Pay that’s earned when larger goals are met is typically called Bonus Compensation.
Any additional payment beyond the standard base and commission is what will fit into this category. Things such as cash bonuses for exceeding sales targets, prizes for sales-related contests, and availability of profit-sharing plans are all types of bonus compensation. Usually, bonuses and incentives are tied in some way to sales performance. One exception to this would be something like stock options, which are often used as an incentive in early-stage companies as an alternative to higher-base salaries.
Override Sales Compensation
Finally, pay that’s earned on another team member’s sales is known as Override Compensation.
This generally only applies to sales managers and sales support team members, but it’s still important to note. For example: You have a salesperson with a 5% commission rate. This salesperson has a sales manager who receives 1% of the total sales from all their reports as their compensation. That 1% commission to the manager is what’s called an override.
Most sales compensation plans are a mix of guaranteed and variable compensation, with incentives and bonuses being somewhat less common. Keep in mind that skill level and experience play a big role in the scale of compensation. For example: A phone-based sales representative will generally make less than a field-based outside sales representative.
It’s critical that you figure out how to use these payment methods above to create a compensation or pay plan that works for both you and your salespeople.
Have a question related to this topic or anything else?