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A sales commission is an incentive that an organization pays salespeople for every sale they make. Read on to know how you can create a sales commission plan for your business with examples.
Sales is a competitive profession. In order to succeed, salespeople must constantly outsell the competition to propel your business forward. And to ensure that your salespeople continue to give their best in every battle, you need to reward them for their victories.
That’s where sales commissions come in.
A sales commission plan is a monetary incentive for motivating salespeople to meet their sales quota. The aim is simple: growing your sales and business by incentivizing salespeople to achieve more than a target they’re comfortable in.
The sales commission structure that you develop for your business plays an important role in
Keeping the above in mind, let’s have a look at all the factors you need to work out as you create the best sales commission plan.
In our previous post about the basics of sales commission, we learned the importance of sales commission and the different types of sales commission structures. Let's quickly recap -
There’s no one-size-fits-all approach to this. What might work for one organization might not suit another. In fact, you might even find success with not just one sales commission plan but a combination of several.
Here’s what you need to consider while creating a sales commission plan -
Your goals and objectives lay the foundation of the sales commission structure.
For example, do you plan to target a new market, increase revenue by X%, or expand into new territories?
Based on your sales objectives, work out the details to make your commission structure. For instance, if you are going to expand into new territories, you might want to consider the potential of those territories, or how established your competitor is in that region versus your product/service capabilities.
A subpar territory might not yield as much commissions as a thriving one. A salesperson hitting quotas regularly but only making decent commissions would not be happy when their colleague earns outsize pay simply because they have a good territory.
You also need to be clear on the “type and length of the sale” as Mica Longanecker from Referral Rock puts it. “The more transactional and faster the sale, the simpler the commission model can be.”
The sales commission plans differ for various roles . For example, a sales commission plan for a regional manager would be different than one for an account manager.
To set the right sales commission plan for each role,
First, chart down the different roles in your sales team and identify the responsibilities of each role. To avoid making it complicated, divide the roles into three buckets - Entry, Mid-experience, Senior.
Next, spend time understanding their responsibilities
Finally, align their goals with your business vision.
For example, consider the table below
Longanecker also recommends, “when creating or updating your commission model, it’s important to engage the sales team and get alignment on what is going to change. You don’t need to make everyone happy but you should at least involve everyone on the sales team to make sure they’re heard. Don’t be afraid to make adjustments if things aren’t working.”
Check-in with what your industry is paying in commissions so you don’t under- or over-pay commissions.
According to 2019’s BLS Occupations Employment Statistics (OES) survey, the average commissions as per industries are:
Real Estate: $62,060
Securities, Commodities, and Financial Services: $93,090
Wholesale and Manufacturing, Technical and Scientific Products: $92,980
The average sales to commission ratio also varies as per industry. For instance, some sectors such as independent contractors may take an aggressive approach based on 100% commission pay structure and no base salary.
On the flip side, industries that focus on customer education such as pharmaceuticals tend to observe a 75:25 salary to commission ratio.
So, a simple action step for you is to identify the base pay for each role based on your company goals and recurring revenue. From there, go on to map the cap on the commission you are willing to pay.
To arrive at a sales commission plan, you need to know how much you can afford to pay a salesperson or account executive. In other words, set an OTE.
On-target earnings (OTE), is the total pay a salesperson would receive on attaining their sales target. The OTE is composed of base pay, which is a fixed amount, and the sales commission that is variable based on the sales performance.
For example, if the base pay is $30,000, and the maximum sales commission is $10,000, the on-target earning would be $40,000.
This means, the salesperson would receive a fixed amount of $30,000 irrespective of the sales, and an additional up to $10,000 if they’ve reached the sales targets.
As you derive an OTE, ensure it matches the base pay and commission standards of the industry. For example, the OTE for an SDR in the SaaS industry from San Francisco is typically between $50,000 and $80,000 per year.
Aidan Snee, the founder and CEO of Inside Sales Solutions, explains, “work out what you can afford and hope that the figure is more than you need to motivate them. Then choose which performance metrics you need to base the incentives on.”
When you plan out things, take into account what motivates everyone on the team from the top performer to the low ones.
For example, research highlights:
Snee also goes on to warn, “be very careful to dig into each possible scenario — you need to ensure you’ll still be happy if they over-deliver on the performance metrics you've incentivized and come up short in other areas.”
The LC Firm’s Greg Livengood shares how to align a sales commission plan with the KPIs for an account manager:
Sales commission structure: “Do not offer a variable compensation plan and instead provide a healthy salary and include an MBO based on a KPI such as a TPS survey making sure the assigned accounts feel well served.”
KPIs set: “Allow the Account Manager to focus on addressing customer issues and making sure the customer renews their business.”
Sales commission structure: “If you do decide to pay based on a variable plan, I recommend setting the variable pay to 30% or more compared to base pay for the plan to be able to motivate the account manager as well as justify the administrative effort.”
KPIs set: “A typical measure is based on upsell amount. I typically hesitate to include a renewal measure in the plan since securing renewals should be a core part of the job (see Option 1 if renewals seem to be the main responsibility)”
It’s also essential to keep in mind that the sales commission plan that you make aligns with the company culture. For instance, do you encourage teamwork or are your teams at their best as individual contributors? Based on this, does your commission structure foster the culture?
Lastly, make sure to settle on when you’ll be paying commissions. Will it be cleared when the sale is made or will they get them monthly or quarterly based on the quota achieved. This way, SDRs can have clear expectations and will know how they’ve to work to meet their sales quota.
Summing up, “your structure needs to have achievable targets, must take changing market factors into consideration, and ensure that any extremes in performance don’t create scenarios where the structure actually ends up hurting your business,” Snee notes. “There are always many factors to consider – most of which will be unique to your business.”
Let’s consider the role of an SDR from the SaaS industry.
An SDR’s primary job involves outbound prospecting—cold calling, cold emails, following-up with prospects, etc.
And then passing those leads to the Account Executive to close the deal. At the end of the day, the expectation is to bring in new opportunities for the business.
Sales commission plan example:
Responsibility: Sales Approved Leads (SALs).
KPIs/Goals: Number of SALs
On-Target Earning: $65,000 per year [70:30 = $45,500 : $19,500 ]
Sales Target: 10 SALs per month
When we take the base salary and commission ratio as 70:30, the SDR would roughly earn $3800 of base salary every month, with the remaining $1600 as variable pay.
The SDR wins 10 SALs in a month, attaining 100% of their sales target.
The SDR under-achieves. The variable pay decreases depending on the percentage of attainment.
The SDR over-achieves. The variable pay increases depending on the percentage of attainment.
Note: You can cap the attainment percentages to limit the maximum commission you can provide.
You can also add more layers on top of this basic commission plan. For example, you could combine this structure ( base + commission ) with the tiered commission structure. Or, you can introduce quantitative elements such as average deal size, pipeline contribution, etc.
Let’s take an example -
Responsibility: New opportunities for the business
KPIs/Goals: Number of SALs, pipeline contribution
Sales Target: 8 SALs per month, $8,000 pipeline generation
Depending on your business, you can assign weightage for the KPIs. In this case, let’s consider a weightage of 70:30 between SALs and pipeline generation.
The role of an AE in the SaaS industry is more evolved than an SDR.
In addition to finding new opportunities, an AE also has to close the deals brought in by the SDRs. So, on top of the commission plan discussed above, you could include additional incentives.
For example, you could provide commissions for closing multi-term contracts, on-site implementation, or even cross-selling another product.
Responsibility: Revenue contribution.
KPIs/Goals: Revenue attainment
On-Target Earning: $90,000 per year [70:30 = $63,000 : $27,000 ]
Sales Target: $15K MRR
When we take the base salary and commission ratio as 70:30, the AE would roughly earn $5,200 of base salary every month, with the remaining $2,250 as variable pay.
Note: You could also include a cap of the number of times you provide additional incentives during a particular period.
Lastly, once you’ve worked out sales commissions for various members of your team, you need to tie all the information together in an easy-to-understand agreement.
A sales commission agreement, therefore, is the final step to your commission plan. It draws the agreement of the compensation guidelines between you and your employees.
Make sure you address the following six factors in your sales agreement to make it a complete document:
1. The sales commission structure laying out the plan covering when a commission is earned, paid, and the consequences of canceled sales and customer refunds.
2. Authorization or the green signal you give the rep to sell on behalf of the business.
3. Non-compete clause that refrains salespeople from selling on behalf of competitors for a specified period after having left the employer.
4. Non-disclosure clause that stops employees from sharing confidential information with others.
5. Documentation i.e., you ask sales reps to use documents and tools, for instance, a CRM that your business provides.
6. Agreement or the part where both you and the rep’s signatures go.
Remember, each salesperson gets their own sales commission agreement so a salesperson compensation plan is different from an account executive compensation plan.
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