Choosing the right sales compensation model for your business
A strong sales team is the driving force of most small to midsize businesses. Strong revenue streams are hard to come by without skilled and engaged salespeople.
But what motivates these valued employees? First and foremost, equitable and enticing compensation. And therein lies a challenge for many companies: Choosing the right sales compensation model isn’t easy and may call for regular reevaluation. Let’s review some of the most popular models and note a recent trend.
Straight salary (or hourly wages)
The simplest way to pay sales staff is to offer a “straight salary,” meaning no commissions or other incentives are involved. (Some businesses may pay hourly wages instead, though this generally occurs only in a retail environment.)
The straight salary model’s advantage is that it’s easy for the company to administer and keeps payroll expenses predictable. It also provides financial stability for employees. The approach tends to work best in industries with long sales cycles and for particularly collaborative sales teams.
As you may have guessed, the downside is that it offers no financial incentive for salespeople to go beyond the status quo. This can result in flat sales and difficulty drawing new customers.
Commission only
Quite the opposite is the commission-only model. Here, sales team members earn income as a predetermined percentage of sales revenue. There are various ways to do this, but the bottom line is that staffers are compensated purely through sales wins; they don’t receive salaries.
The advantage is that they’re strongly motivated to succeed — one could even say it’s a “do or die” approach. This model often suits start-ups or businesses looking for quick growth without a big payroll budget. The risk for companies is that commission-only positions tend to have high turnover rates because salespeople lack income stability and may change jobs frequently.
Salary plus commission
Traditionally, this has been among the most popular compensation models. It combines the stability of a salary with the financial incentive of commissions. Generally, the salary will be relatively lower because sales staffers can make up the difference through the commissions.
For the business, this model may reduce turnover while still helping motivate employees. Its chief downsides are that salaries add to payroll expenses, and there’s a relatively high degree of administrative complexity involved in tracking and calculating commissions.
Salary plus performance-based incentives (hybrid)
If you’re interested in “what’s hot” in sales compensation, look no further. This model is often called “hybrid” because it combines a salary with various performance-based incentives tailored to the company’s needs.
Just last month, cloud-based sales software provider Xactly released the results of its annual Sales Compensation Report. Of 160 companies surveyed, 62% identified performance-based pay structures for sales reps as the biggest factor driving changes to sales compensation.
Like “base salary plus commission,” a hybrid model offers employees income stability — but it allows them to earn much more through multiple incentives. For businesses, the model may strengthen employee retention while motivating sales team members to meet targeted strategic objectives, such as increasing market share or driving top-line growth.
Companies have a wide variety of performance-based incentives to choose from, including:
- Financial bonuses for acquiring new customers or expanding into new territories,
- Profit-sharing plans that tie additional compensation to the company’s overall success, and
- Long-term incentives, such as stock options, restricted stock units and performance shares.
However, it’s critical to design a hybrid model carefully. One major risk is becoming “a victim of your own success” — that is, running into cash flow problems because you must pay salespeople substantial amounts for earning the incentives offered.
No pressure
If your sales compensation model works well, don’t feel pressured to change it just to keep up with the Joneses. However, as your business grows, you may want to adjust or revise it to sustain or, better yet, increase that growth. We can help you evaluate your current model and make necessary adjustments that fit your company’s needs and budget.
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