Different Types Of Sales Compensation

In this second episode in the series focusing on sales compensation for your Ai/Tech organisation, we look at the difrerent types of compensation.

Sales compensation plans can vary significantly from one company to another, influenced by factors such as the sales team's structure, available resources, and the company's objectives. While some companies may opt for a more substantial base salary for their sales force, others might place greater emphasis on commission-based earnings. Here's an overview of common compensation formulas:

Salary + Commission:

Salary plus commission remains one of the most prevalent methods of remuneration for sales representatives. It blends a fixed base salary with additional earnings derived from commissions. This model provides salespeople with a dependable income stream while offering the potential to boost earnings based on sales performance. It's a mutually beneficial arrangement, attracting motivated sales professionals. Commission rates typically hinge on the job's complexity and the salesperson's responsibilities. For instance, roles with lesser customer influence or overall complexity generally feature lower commission rates. The split between salary and commission earnings typically stands at 60/40 (60% base salary and 40% commission), although this ratio may vary. For more intricate sales roles necessitating customer education about the product, the split could lean towards 70/30.

Fixed Percentage-Based Commission:

Under this plan, sales reps receive a predetermined percentage of each sale they make. The concept is straightforward: Sell more, earn more. For instance, if the commission rate is 5% and a rep sells ￡1,000 worth of products, they would earn ￡50. This model offers simplicity and predictability.

Tiered Commission:

A tiered commission structure entails incrementally higher commission rates as salespeople attain higher sales levels. Comparable to advancing through levels in a game, each tier brings greater rewards. For example, a sales rep might earn 5% commission on initial sales, but this could escalate to 7% once they surpass a certain sales threshold. Tiered commissions are effective for motivating reps to exceed their sales targets. Great for scaling companies.

Bonus Plan:

Bonus plans entail additional compensation for achieving specific targets or completing designated tasks. Unlike commissions, bonuses are fixed amounts awarded for particular achievements, such as closing a set number of deals or reaching a sales milestone. This approach directly incentivises targeted objectives.

Territory Volume:

In this plan, commissions are tied to the overall sales within a sales rep's designated territory. It encourages reps to maximise sales across the entire area rather than focusing solely on individual clients. For example, a rep may earn a percentage of the total sales in their region, promoting a strategy that targets a broader clientele base.

Set Rate Commission:

Sales reps earn a predetermined amount for each item sold or deal closed in a set rate commission plan. This straightforward model rewards volume selling and is particularly suitable for products or services with consistent pricing.

Relative Commission:

This commission plan bases a rep's commission on their performance relative to their peers. It fosters a competitive environment as reps earn higher commissions by outperforming others. For instance, top performers in a sales team might receive higher commissions than their counterparts with lower sales figures, encouraging healthy competition within the team.

In next weeks episode, we explain The 5 Easy Steps To Develop An Effective Sales Compensation Plan - published on Thursday.

Written by me, polished with Ai.