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The sales department plays a critical role in any organization. Sales convert potential customers into paying ones and generate the financial resources needed for the organization to operate, grow, and even exist.
However, research by Salesforce indicates that high turnover is a challenge, with sales organizations losing 25%1 of their staff annually. However, a well-designed and revised strategy for the sales representative commission can significantly impact these results.
HubSpot2 showcased this concept through its ever-evolving compensation strategy. Their sales compensation plans were central to their overall sales strategy and contributed to the company's impressive growth to $100 million in revenue.
HubSpot strategically adjusted their compensation plans over time to align with their evolving goals. Initially, their plan focused on rapid customer acquisition. When this approach reached limitations, they revised the plan in 2009 to incentivize customer retention.
Finally, in 2012, a new plan aimed to increase the average contract length for their subscription service, leading to a significant increase in prepayment commitment, from 2.5 months to 7 months.
HubSpot's compensation plan aims to motivate salespeople by rewarding positive behaviors that contribute to achieving team and company goals. Moreover, organizations recognize the importance of a motivated sales force, so nearly 80%3 of U.S. companies adjust their compensation plans every two years or less, revealed HBR research.
Understanding the importance of well-designed commission structures for sales representatives, this blog will share various strategies used by successful companies, including the six most common compensation plans you can implement.
Understanding sales representative commission
With 69% of sales professionals claiming that it has become more difficult than in previous years to sell, what every organization needs is awareness of how their sales commission plan stacks up in the industry. One of the important elements that can put you in a position to attract and recruit top talent is the sales representative commission.
Sales representative commission is a performance-based incentive that salespeople earn upon completing their target. They receive a percentage of the value of the products or services they sell. This approach can be highly motivating for sales reps, leading to increased morale and ultimately, organizational growth. Gallup research indicates that a more engaged workforce translates to higher earnings per share (EPS) for the company.
Furthermore, these organizations outperform their industry peers in regaining and growing EPS at a faster rate. The benefits are not limited to the company, however. Commission-based sales representatives themselves can enjoy significant rewards from a well-structured plan. They will:
- Have a high earning potential: Commission creates an opportunity for the sales reps to get significantly more than their base salary which may work as a huge motivator.
- Be rewarded for their performance: The commissions are directly tied to sales outcomes. So, the commission reflects the effort salespeople put in.
- Receive incentives: Sales representative commission allows them to generate more revenue. Higher commissions propel the reps to increase sales activities and close more deals.
- Be engaging: Healthy competition not only makes the work engaging but creates a culture of growth. The spark of competition can entice a sales rep to generate more deals and more revenue.
Let’s quantify a well-structured commission plan's significance on the sales reps.
--> An Indeed study has revealed that most sales commissions typically fall between 20% and 30% of the profit made on a sale. However, depending on the specific commission structure, this percentage can range anywhere from 5% to 100%.
--> According to the U.S. News and World Report, some sales salary benchmarks from 2022 include:
- The median sales representative made $63,230 annually.
- The top 25% of sales reps earned more than $93,280.
- The bottom 25% of sales reps made less than $47,220.
- Sales managers had an average annual salary of $150,530.
- Insurance sales agents earned an average of $76,950 per year.
- Real estate agents made an average of $65,850 annually.
- Retail salespersons received an average annual salary of $34,730.
--> According to a State of Sales report by Salesforce, 89% of reps use or intend to use sales analytics technology for maximum efficiency in automating and analyzing the process.
--> U.S. organizations invest heavily in managing their sales teams. They dedicate over $800 billion to this function, with $200 billion specifically allocated to sales compensation.
The statistical study underscores the significance commission has on sales reps. The numerical presentation also substantiates how the commission is used as a motivator for commission-based representatives. However, a Gartner survey in 2022 has found that 90% of sellers experience burnout that leads to their resignations. Therefore, to ensure that your top talent remains with you, create a compensation plan that aligns the salesperson’s interests with the company’s interests.
Basic compensation structure to follow:
As shown via the statistical study of the compensation pay, commissions are never the same. However, to align the commission structure with the business objectives, you must design a compensation plan discouraging top performers from leaving. Sales can create a high-pressure environment, so craft a structure to promote long-term success. Implement elements like:
- Payout schedules: Set the timing of the commission payout to support long-term goals.
- Clawback provision: Clawback is significant to help the company recoup commissions if the representative's deal ends up as non-payment or contract cancellation.
- Training: Invest in sales training so that the team stays focused on growing revenue. The training process should include practicing ethical and consultative sales processes and establishing a common sales language.
6 sales representative commissions with the formula:
There is no single ideal commission structure for all businesses. The most suitable option depends on several factors, including the size of your company, the nature of your offerings, and your desired revenue goals. Here are some common sales commission structures to consider:
1. Base Salary Plus Commission:
This combines a guaranteed income with performance-based incentives. It provides financial security and motivates overall sales while rewarding individual achievement.
Application: An employee receives a yearly salary of $40,000 and a 10% commission on all sales. If they sell $100,000 worth of products, their total earnings for the year would be $50,000.
Best for: Teams or products with unpredictable sales cycles.
2. Commission based on exceeding quota:
This combines a base salary with additional commission earned only on sales exceeding a predetermined quota. This type of structure can motivate salespeople to exceed goals for increased income and drive higher profitability.
Application: An employee has a $3,000 monthly base salary and earns a 15% commission on sales exceeding their $10,000 quota. If they sell $12,000 worth of products, their total earnings would be $3,300.
Best for: Established teams with ambitious targets.
3. Straight commission:
This represents a percentage of the total sales value. This type of commission is related to those commission-based sales representatives whose earning potential is directly linked to performance, leading to strong sales motivation.
Application: If an employee sells a product worth $1,000 with a 10% commission rate, their pay would be $100.
Best for: Short sales cycles or independent salespeople with a high tolerance for risk.
4. Residual commission:
A residual commission plan rewards salespeople for maintaining relationships with existing clients. This incentivizes them to focus on customer retention and loyalty, which can lead to long-term benefits for the company.
Application: If a legacy client continues to pay a monthly premium of $1,000 and the commission rate is 5%, the salesperson earns a recurring commission of $50 per month.
Best for: Businesses with established client bases and recurring revenue models.
5. Territory volume commission:
This commission structure applies to sales teams. The team's income is based on a predetermined rate applied to the total sales volume within their assigned territory.
Application: If a sales team generates $50,000 in sales within their territory, the company's total sales are $500,000, and the commission rate is 10%, the team's territory volume commission would be ($50,000 / $500,000) x 0.1 x $500,000 = $5,000.
Best for: Large sales teams managing geographically divided markets.
6. Tiered commission plans:
This type of plan incentivizes salespeople by offering increasing commission rates as they surpass sales goals. This structure rewards progressive effort, motivating sellers to achieve greater results.
Application: A salesperson might earn a 5% commission on sales up to $5,000, an 8% commission for sales between $5,000 and $10,000, and a 12% commission on sales exceeding $10,000.
Best for: This approach is well-suited for teams involved in complex sales processes that require multiple interactions with customers.
Strategies to integrate while structuring sales representative commission:
Let's examine case studies involving Bain & Company and a renowned German-based luxury automobile company to show the strategies in action. This will provide a credible example of how the strategy can be applied in the real world to streamline the process of sales representative compensation.
1. Bain & Company transitions the sales commission structure for 10 units within 5 weeks for its clients
Bain & Company is a prestigious international consulting firm specializing in strategy, operations, and digital transformation. Unlike some consultancies, Bain prioritizes achieving tangible results for its clients, not just delivering reports. This focus on outcomes is precisely why a large, multi-category supplier with numerous independent sales organizations sought Bain's expertise.
The client had a complex and inconsistent sales incentive structure across its divisions. So, they wanted a unified commission plan for their sales representatives. This new plan, developed in collaboration with Bain, aimed to align with the company's profitability objectives while maintaining overall commission costs.
How did Bain & Company achieve this?
Bain & Company assessed the performance of their client which is extensive and includes personnel with diverse roles, titles, and reporting structures. So, they compiled data on compensation and conducted interviews.
This information allowed them to analyze the existing commission structures and compensation levels throughout all divisions of the sales force. Bain's analysis quickly showed that vendor discounts and rebates significantly impacted the client's earnings before interest, taxes, depreciation, and amortization (EBITDA).
However, the sales force was not evaluated or rewarded based on achieving these discounts and rebates. This disruption between the goals of the sales representatives and the company's objectives created a misalignment. Even in divisions that tracked profitability after factoring in discounts and rebates, salespeople were rarely given access to this information.
This lack of transparency made it difficult to encourage the sales behaviors that would benefit the company. Bain further assessed the current and potential compensation models and evaluated their impact on every sales division. This detailed analysis allowed Bain & Co., to understand the specific effects on compensation, particularly for high-performing sales representatives.
How did Bain & Company fare?
Bain & Company revised the compensation plan and rate for their client. They implemented two key elements.
1. The use of gross-margin metrics in the short term.
2. A system to categorize vendors based on their overall profitability, with discounts and rebates.
As a result, Bain & Company successfully managed to:
- Align the client's goal with the existing systems for the sales force of all 10 units.
- Facilitated a tiered system for incentivizing working with vendors who deliver higher gross margins across 10 units.
- Made a smooth transition of sales representative commission in 5 weeks.
Perform extensive research of the current model: Bain & Company conducted an extensive assessment of the client's personnel that had diverse roles, titles, and reporting structures. They compiled data on compensation and conducted interviews. They recognized a misalignment between the goals of the sales representatives and the company's objectives. So, assessing the situation is significant in aligning a company's goals with the existing systems.
Analyze the structure to revise it, if needed: Analyse the information that you have gotten through the assessment.
Evaluate thoroughly to create a compensation model: Bain assessed the current and potential compensation models, evaluating their impact on each sales division. This detailed analysis helped Bain understand the specific effects on compensation, particularly for high-performing sales representatives.
2. A German luxury auto brand notices 5% increase in less than 90 days for qualifiers after automating the commission structure
A German luxury auto brand, also a part of the Fortune 500 faced difficulties in clearly communicating its commission programs. The lack of communication and connectedness failed to keep the employees engaged within its growing sales team that is distributed across 33 dealerships. The company sought a unified platform to streamline access to incentive information for its sales force.
What solution did this luxury automobile brand adopt?
The luxury auto brand wanted to improve the productivity of its sales representatives. This was achieved only after they integrated a multifaceted system that offered a centralized platform for clear communication regarding compensation programs.
Additionally, this system helped the organization streamline the incentive disbursement process. The system provides clear visibility into incentives earned by each representative. As a result, it ensured that the nationwide sales representative commission payouts were done in a unified manner.
How did the integration impact the luxury automobile company?
The organization incorporated monthly incentive programs for both sales executives and team leaders. A central team manages these programs using consistent guidelines, uploading, managing, and distributing the incentives.
They also added a wide variety of reward options for keeping the sales reps engaged. To further engage employees, the company launches interactive programs like trivia and quizzes through group platforms. As a result:
- There was an 11% increase in the number of units sold within under 90 days.
- The number of qualifiers saw a 5% increase in less than 90 days.
- The integrated tool was adopted by 92.8 % of the sales team.
- Payout adoption increased by 96.2%.
Centralize the communication: Always try to centralize the communication to not leave the reps hanging by the thread. The luxury auto brand implemented a unified system to communicate commission programs to their sales team spread all over the globe. This improved transparency and access to information.
Streamline the incentive management: To improve efficiency and reduce error, always streamline the incentive management. The organization accessed a central platform for managing incentive programs, including uploading, managing, and distributing payouts.
A little extra reward doesn't hurt: The German automobile company introduced a variety of reward options beyond just commissions, keeping sales representatives engaged and motivated.
Standardize the commission program: The organization implemented monthly incentive programs with consistent guidelines for both sales executives and team leaders, ensuring a unified nationwide approach.
The above-mentioned strategies serve as a helpful guide for designing an effective sales representative commission plan.
Conclusion:
A sales commission plan will not only incentivize sales representatives but lead them to put forth a greater effort to achieve sales goals. This can result in increased productivity and ultimately, higher sales figures for the company. We recommend Compass to get the proper help with sales commission management. Compass can:
- Automate the commission plan
- Provide real-time visibility into the analytics,
- Offer incentive gamification for enhanced engagement,
- Manage sales incentive program with efficiency,
- Support large teams, even those that are remote, or dispersed across geographical boundaries.
Digitize your sales commission to drive motivation through Compass.
Citations:
1. Salesforce State of Sales report. (n.d.). Salesforce. https://www.salesforce.com/resources/research-reports/state-of-sales/
2. Sales force compensation best practices at HubSpot. (n.d.). https://www.icmrindia.org/short%20case%20studies/Marketing%20Management/CLMM147.htm
3. Chung, D. J., Kim, B., Syam, N. B., Harvard University, & University of Missouri. (2020). A practical approach to sales compensation: What do we know now? what should we know in the future? (pp. 1–4) [Book]. https://www.hbs.edu/ris/Publication%20Files/ReviewPaper_2020_0210_final_64513e5f-6a65-43b3-aace-37af0c7a1bb1.pdf
