How to Build a Compensation Plan for Sales

In many business environments, compensation plans are usually quite straightforward. Companies offer their staff members a salary, usually based on the market average in their area, and sweeten the pot with various benefits, such as health insurance or paid time off. 

While sales compensation plans can also be this straightforward, they can also feature a number of unique nuances. Most enterprise sales compensation plans, as well as strategies for paying SaaS technology vendors, revolve heavily around quotas, and commissions. 

This means you may have more factors to consider when you’re creating compensation packages for the top talent in your sales team. Today, we’re going to take a closer look at how compensation plans work in the sales world, and how you can build your own.  

What is a Sales Compensation Plan?

On a basic level, a sales compensation plan is the total amount of money you pay your sales reps on a yearly basis. The total compensation package includes your staff member’s base salary, commissions, and other incentives, like bonuses, depending on your business. 

Like most employers, sales leaders often use a lot of data to build an effective employee compensation plan. For instance, in an enterprise sales compensation plan, companies might look at the average salary for most professionals in this space (around $174,000). 

They’ll also examine their competitors, to determine whether higher salaries or benefits might help them to attract new employees. However, in the sales space, there are also other factors to take into consideration, depending on your compensation philosophy. 

Many sales leaders offer professionals “sales commissions,” which incentivize them to to prioritize high-quality leads and customer success. Others offer access to bonuses and variable pay rises, to drive staff engagement in the high-turnover sales landscape. 

Types of Enterprise Sales Compensation Plans

Enterprise sales compensation plans, and other renumeration strategies for sales professionals (such as those in the SaaS industry) often include a number of components. Companies in this landscape know they often have to engage their team members with more than just a base salary. 

Because of this, teams pay employees using various different methods. Common types of sales compensation plan in the enterprise and SaaS worlds include:

• Base salary plus commission: A structure that provides reps with a fixed yearly base salary, as well as commissions. This gives employees the security of a steady income, as well as an economic incentive to sell. Usually, team members earn less from sales commissions, because they also have a base salary, but payments can be variable based on numerous factors.
• Base salary plus bonus compensation: With this strategy, companies provide sales reps with a consistent pay rate for their salary each year. However, they also encourage them to earn bonuses based on performance. This means employees who hit their sales quotas, or accomplish more for the business earn a higher income. 
• Commission only compensation: Though less popular today, some companies still pay their employees based only on sales commissions. This means if they don’t sell anything, their salary is essentially zero. However, a commission-only plan can also incentivize workers, with a potentially limitless income. 
• Gross margin commission plan: With a gross margin commission plan, the salary team members receive is based on whether the company has reached its business objectives for revenue. Reps are given variable pay, which allows them to earn more when they sell a product with a higher gross margin. 
• Absolute commission plans: With an absolute commission plan, employee compensation is based on reps achieving specific targets or milestones. For instance, salespeople might earn $1,000 for every new customer they convert or 15% of your upsell and cross-sell revenue.
• Straight-line commission plan: This plan essentially rewards reps based on their sales success. If a rep reaches 140% of their quota, for instance, they’ll earn 140% of their sales commissions. However, if they only reach 60% of their quota, they earn 60%. 
• Territory volume commission plan: Common with SaaS company sellers, a territory volume commission plan pays reps based on the performance of an entire territory, rather than individual performance. This is a good fit for team-based sales companies where business leaders want to encourage collaboration.

It’s also possible to offer sales professionals a salary-only compensation plan. This is similar to most renumeration strategies, where companies decide how much they’ll pay sales people in advance. It doesn’t matter how much or little the employees sell in this structure; the earnings remain consistent.

How to Build a Compensation plan for Sales Teams

There are plenty of different ways to approach compensation in the enterprise sales and SaaS business environment, as well as in most other sales landscapes. While there’s no one-size-fits-all strategy for success, the best compensation plans should reduce turnover rates, motivate sales reps to succeed, and keep the business as profitable as possible. 

Here are some steps to get you started. 

Step 1: Identify Business Objectives and Values

Building a company’s compensation plan starts with identifying the goals, values and objectives of the business. Your targets for increasing sales of a specific product, boosting customer retention rates, and increasing revenue will help to identify how you should pay your teams. 

For instance, in the SaaS space, if your goal is to earn as many long-term clients with high customer lifetime value as possible, you might pay teams with sales commissions, and performance-based bonuses. A compensation planner or similar software can help you calculate the right strategy for your company, based on your budget and goals. 

Step 2: Choose a type of compensation plan

Virtually every sales compensation plan consists of two components: variable pay, and base pay. Depending on your compensation strategy, your teams may earn more from sales commissions, or they may receive most of their earnings from a standard salary. 

Ultimately, each business will have its own ideal compensation plan. Choosing the right one for your company means asking yourself questions like:

• How will on-target earnings (OTE) affect team pay?
• What’s my overall budget for compensation?
• What types of compensation plans do my competitors use?
• What will salespeople expect in terms of compensation?
• How will I motivate and engage sales employees?

Step 3: Define When to Provide Compensation

Part of building the right compensation plan for sales professionals is determining when team members will receive compensation. If you’re offering teams a base salary, they’ll often receive this on a monthly basis, but commission payments can be paid:

• When a customer signs a contract (to motivate teams to close more)
• When the company receives the customer’s first payments (to encourage employees to focus on lead validation and good customer fit). 
• Every time a customer makes a payment (common with SaaS business compensation plans)
• When specific goals are reached (such as an employee meeting a sales quota)

Step 4: Set Clear Expectations

Setting expectations is essential when developing a strong sales compensation plan. If you’re using a compensation plan that rewards employees for earning specific sales, or reaching targets, they need to know exactly when they’re going to get benefits and bonuses. 

Providing your team members with a clear insight into how they can reach their quotas and increase their income will ensure they stay motivated. There are various ways to set quotas in a sales business. You can take a bottoms-up approach which considers your team’s capabilities and the perceived market opportunity, or a top-down approach. A top down approach combines market data with revenue targets, to figure out what teams need to accomplish. 

Step 5: Choose a payroll software

Once you’ve determined what your compensation plan is going to look like, based on base salary, as well as indirect compensation (commissions and bonuses), the next step is putting the plan in motion. Payroll software can be extremely useful to business leaders in the sales industry.

The right solution can offer an all-in-one service, which tracks and manages everything from payroll, to benefits, bonuses, and even HR strategies. 

Step 6: Remain flexible

Finally, as your business goals evolve, marketplaces change, and teams grow, your compensation plan may need to be revisited. For sales compensation plans in any industry to work, they need to be tailored to the specific environment. 

What works for your company now might not effectively incentivize and engage your employees in a year’s time. Consistently review and analyze your compensation plan to ensure you’re keeping your reps happy and motivated. 

Creating a Sales Compensation Plan

Designing an effective compensation plan for sales professionals can seem complex. In the SaaS and enterprise world in particular, many professionals are motivated by more than just a consistent salary. A lot of team members appreciate the thrill of being able to earn commissions and bonuses. 

Finding the right compensation plan for your team means understanding the market, your competition, the expectations of your employees, and the goals of your organization.

If you can bring all these factors together effectively, you can create a compensation plan that helps you to attract and retain top talent.

Learn more about developing and empowering your sales team today, with industry insights and guidance on the Hard Skill Exchange.