Variable pay in sales compensation
and all you need to know about it
What is incentive pay? How does employees‘ salaries look like when they are performance-related? When can we use this form of payment? Is it appropriate solution in your company? What are the payment structures for mixed salaries? What are the types of incentive pay for sales representatives? We will try to answer all these and a few other questions in today’s article.
Sales compensation strategy is an action plan which, on the one hand, is aimed at increasing the effectiveness of the team’s operation, and on the other – as every activity of the company – increasing its revenues. This strategy, when well prepared, should include all details of sales representatives‘ earnings, such as base salary, sales commission, and any other cash or non-monetary benefits that may motivate the team.
It is a well-known practice, to use pay mix, for example in sales. It means employee’s earnings consists of two parts: a fixed base and a variable part. Variable part of salary is determined by the employee’s sales performance. When an employee reaches the sales targets set for a given period, sales compensation is paid as a type of bonus, incentive or commission. Contrary to the basic salary, which is fixed and paid irrespective of whether the employees achieve their goals at the given time or not.
Of all the incentive pay options, the commission plan is probably the most popular among Polish employers. How does it work?
The idea of commission plan is simple: when hiring an employee, the employer informs that the employee will earn a lower base salary, at the same time it is possible to increase the total remuneration thanks to the commission. The more you sell, the more you earn. Sometimes employer offers only a commission, without any basic salary.
The commission rate must be set at adequate level adjusted to the difficulty of sales process. For example, selling food is – let’s face it – not difficult – in every city there is large number of markets and small-area local shops that are willing to cooperate with sales representatives. In this case, the sales representative can systematically make deals. The complete opposite will be luxurious, exclusive items and services that only a narrow group of people can afford. For example luxury yachts. It takes longer to reach the potential customer and the decision-making process may take much longer. Hence, there will be fewer transactions, and commissions are much higher.
A bonus is defined as a supplement to the base salary. Contrary to the commission plan, it cannot be the sole source of the employee’s income. Depending on the type of bonus, there are different rules to grant it. There are two types of bonuses: discretionary and regulatory. Discretionary bonus is not legally regulated in any way, because the Labor Code does not contain any provisions regarding this issue. The employer can therefore freely decide to whom to grant such a financial allowance, in what amount and how often. This means that every employee, half of the employees, one team member or no one can get the bonus. All options are allowed not only for personnel elections, but also for the amount and conditions of its allocation.
On the other hand, the rules for granting regulatory bonus, must be previously strictly specified in the company’s internal regulations. What does it mean? Firstly, the employer needs to define specific criteria that must be met by employees to receive bonus. The regulations should also contain information on the amount of the bonus, as well as the rules and frequency of awarding employees. At the same time, when the employee meets all the criteria, she/he has the right to demand the payment of the bonus. If necessary – even in a court.
Management by Objectives
MBO is a method of building a coherent set of goals for all teams and employees and evaluation of the performance. The manager and the team are to agree goals and time of the evaluation. In this model, the manager is rather adviser than a boss.
Management by objectives can be implemented both in companies and other business where attitude is aimed at achieving a satisfactory result, but not necessarily financial. Therefore, it can be used in public institutions, foundations, associations, etc. This method is considered to be highly effective in achieving both strategic and operational goals of the business.
From this point of view, the key is to adopt adequate goal and realization of it. Usually the supervisor has a moderating and controlling role.
Subordinates are accounted for the effects of work as part of the desired effects. The settled goal should be a challenge for the employee, but at the same time it must be possible to achieve.
Management by goals helps employees to set individual goals for the development, and thanks to development there is a possibility for incentive pay. This is a popular way for employees who are not in sales department or commission-free employees. Goals are usually set by individual employees together with their supervisors and are showing how they can contribute to their role and/or go beyond their day-to-day responsibilities. Often, MBOs encourage collaboration and adopt innovative, creative ideas to help the company achieve its goals.
How to implement commission plan
Money motivates, therefore commission plan should effectively motivate sales representatives to successfully close deals. By rewarding or paying for your representative’s performance, you establish a direct link between performance and compensation, which is one of the best methods companies can use to motivate sales teams and to achieve corporate goals.
Variable pay is an amazing motivational tool, but it may not be the best idea when introduced without proper implementation and proper selection of commission. Remember: if you rely too much on incentive payments, sales reps get a lot of individuality and the ability to manage them is out of your hands. On the other hand, too little variable pay for performance and a high base salary can make sales representatives not inspired to work and achieve their goals.
Tips for effective management of commission plan:
- Level of control over the sale
if your sales representative uses a lot of help from other departments, or positioning and marketing are responsible for a large part of sales in your company, the salesperson’s incentive salary should be lower than in case when only the sales department works on the company’s profits.
- Basing the employee’s income on the results of the entire team
Sales representatives should only be responsible for activities that they can control by themselves. Lowering the salary of the best sales representative because the team did not reach the required target may be seen as unfair and lead to the termination of employment of the best salespeople to the competitive company.
- Adjust plan to abilities
Roles in the sales team often require specification of the level of variable pay. For example, variable pay is higher when you have more control over the results, so the account executive tends to have the highest variable pay level comparing to the team member because she/he has a direct impact on the closure of the transaction.
- Adjust plan to the role
Your team is made up of different people and their responsibilities vary. Not all sales roles are the same, so variable compensation should be based on the role’s responsibility. While everyone has the same overarching goals, not all have the same responsibilities and decision-making powers. Role-based remuneration helps to improve the strengths of each position, motivate each person more effectively, basing rewards on activities and indicators that they can influence on a daily basis. As a result, the team is motivated, committed and inspired to achieve new goals.
The impact of mixed pay on the employee and the company
Well-prospering companies are well aware of the benefits of incentive pay and strive to maintain a competitive salary in order to minimize the turnover of good employees.
The most important thing in this issue is balance. On the one hand, you need to motivate your sales representatives and guide their proper sales behavior, but on the other hand you also need to design your sales and bonus plan in such a way as to ultimately achieve your revenue and growth goals and increase your company’s profitability.
This article was created by our partner, Xactly Corporation and published with their approval.
Xactly is leading the way in Sales Performance Management, enabling businesses to unleash their true Sales Power. Check for more information: https://www.xactlycorp.com