Sales compensation is a set of payment plans that are designed to motivate sales force members. Your sales compensation plan covers all elements and specifics of your salespeople' pay, including base salary, commission, and any bonuses or perks they may be qualified for. Various combinations of these elements determine the type of plan that is implemented. The best approach to designing a sales compensation program is to first look at what you want your program to accomplish, then design it accordingly.
Sales compensation often vexes and confuses sales and marketing teams. Not only does the terminology typically cause an initial challenge, but there is a lot to understand and decide what's right for your organization. This article lays out some basic information about variable sales compensation which we will then use as we explore other related information that might be useful for sales strategists and sales leaders.
What is variable sales compensation?
The part of an employee's salary that is decided by their performance is known as variable pay (commonly a commission). Employees are paid according to the outcomes they create, which is known as variable compensation. It's frequently added on top of a regular income and comes in a variety of shapes and sizes. Everything you need to know about planning is right here.
- Commission: A percentage of sales provided to a salesperson as part of a formal pay scheme.
- Bonus: A lump sum payment is provided to employees in response to the company's success. On an annual basis, it's usually an indeterminate sum that varies according to the year's results.
- Employee Stock Option: Under certain conditions, this option allows employees to acquire stock in the firm. They are occasionally used as a substitute for monetary compensation.
- Profit-sharing scheme: Employees are given a share of the company's quarterly or yearly profit in addition to their regular income under this scheme.
Employers provide variable sales compensation for a variety of reasons
A variable compensation plan is intended to help salespeople match their daily activities with business goals, with the concept of on-target earnings guiding their efforts. Employers reward sales staff with commissions to motivate them to achieve greater business results, and it also aids firms in attracting top salespeople who want their ability to add value reflected in their compensation, specifically through on-target earnings. The top salespeople are proud of their ability to manage their earnings based on success, facilitated by their flexible remuneration structure that includes on-target earnings.
What are the advantages of variable pay?
The proper application of variable compensation has various advantages for a company:
- Improved Productivity:- Performance-based compensation incentivizes people to increase their own performance. It is a waste of resources if the IC strategy does not result in improved business results (revenue, user growth, etc.)
- Flexibility in finances:- Employers who use flexible pay can pay staff after they have created money. This implies that firms do not need to compensate new salespeople in cash right front. It also aids in the alignment of expenditures and revenue.
- Employee Retention and Engagement:- Talented employees may earn more with variable compensation, which improves retention and engagement. A poorly managed sales compensation scheme, on the other hand, might have the opposite impact.
- Performance and Correlation:- Performance is linked to revenue when variable remuneration is used, such as commission. Employees and employers can both see and measure the value they bring to the table.
Is there a disadvantage to variable compensation?
There are various precautions to be aware of with every benefit:
- When not set up correctly, variable compensation might have detrimental consequences, including retention tracking. Because the effectiveness of variable pay is dependent on various circumstances, there is no one-size-fits-all solution. Unattainable objectives, targets, and KPIs are all known to demotivate employees. In addition, conflicting goals across various roles and departments can lead to more silos and less collaboration inside a company, reducing overall growth and, in turn, affecting the entire customer experience.
- Finally, variable compensation must be simple to comprehend and always clear. Salespeople need to know what they're getting paid for, how much they're getting paid right now, which deals helped them reach their targets, how much they contributed to the payment amount, how well they're meeting their KPIs, and where they have gaps they can close to make more money quickly.
Conclusion: Variable Performance Effects
Winning businesses recognize the value of incentive pay and strive to provide competitive remuneration in order to decrease turnover and retain top people. It's all about striking the right balance. Your incentives must encourage salespeople and promote the proper sales behaviours, but they must also be designed in a way that allows you to meet your revenue and growth objectives while also driving profitability.