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Variable pay in sales compensation and all you need to know about it
Variable pay

Table Of Contents

What is sales compensation strategy?

Sales compensation strategy is an action plan which, on the one hand, is aimed at increasing the effectiveness of the sales reps operation, and on the other – as with every activity of a company – increasing revenues. This strategy, when well prepared, should include all the details of sales reps’ 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 variable pay in combination with fixed pay, especially in sales. This means sales reps’ earnings consists of two parts: a fixed salary and a variable part. The employee’s sales performance determines the variable part of the salary, directly linking employee performance to earnings.

When an employee reaches the sales targets set for a given period, sales compensation is paid as a type of bonus, incentive, or commission, reinforcing the employee receives fair compensation. Contrary to the basic salary, which is fixed and paid irrespective of whether the employees achieve their and the company’s goals at the given time.

Sales compensation plan

Sales compensation plans, often incorporating some type of variable pay, are a common solution in sales teams for several reasons. A commission plan is probably the most popular of all the incentive pay options. How does it work?

What is a sales compensation plan?

Sales compensation plans can take various forms and structures depending on the organization’s goals, industry, and specific sales roles, and may include variable compensation. The idea of a compensation plan is simple: when hiring a sales rep, the employer informs the employee that they will earn a base salary, and have the possibility to increase the total remuneration thanks to the sales compensation. The more you sell, the more you earn, especially with an effective commission structure in place. Sometimes, an employer offers only sales revenue, without any base salary.

Sales compensation program

The sales compensation structure must be set at an adequate level adjusted to the difficulty of the sales process. For example, selling food is – let’s face it – not difficult – in every city, there is a large number of markets and small local shops that are willing to cooperate with sales reps, which can help in offering variable pay incentives. In this case, the sales reps can systematically make deals and receive variable pay. The complete opposite will be luxurious, exclusive items and services that only a narrow group of people can afford. For example, luxury yachts, which may involve significant variable payments for sales executives. It takes longer to reach the potential customer and the decision-making process may take much longer, impacting the timing of payout. Hence, there will be fewer transactions, and salary commissions will be much higher.

If the sales objectives are set too low in comparison to the challenges and complexities of the sales process, it can demotivate sales representatives and hinder their willingness to go the extra mile. Conversely, if the compensation is disproportionately high for a relatively simple sales process, it can strain the company’s financial resources and erode profitability.

A well- designed sales compensation plan makes sure that the sales team is rewarded fairly for their efforts while maintaining the company’s financial sustainability through a combination of fixed pay and variable pay.. To achieve this equilibrium, organizations must thoroughly analyse their industry norms, market conditions, and the unique demands of their sales reps to design sales compensation plans that not only attract top talent but also drive sustainable growth and success.

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Performance bonuses – element of variable pay

Another example of a financial reward in a sales compensation plan that is given to sales reps in addition to their regular salary, can be a bonus. A performance-based bonus is an extra compensation granted to a sales rep as a reward for reaching pre-established business goals and benchmarks.


What is a bonus in a sales compensation plan?

A bonus in sales compensation serves as an additional incentive to recognize and reward the exceptional performances of sales reps. It’s an extra boost beyond the base salary and commission, designed for specific sales rep behaviours to go above and beyond in achieving their sales targets. Importantly, a bonus is typically not intended to be the sole or primary source of income for salespeople, as their base pay covers their main earnings. Instead, it complements their earnings, providing an extra layer of recognition and financial reward for outstanding results.

What is a bonus structure?

A bonus is defined as a supplement to the base salary. Contrary to a commission plan, which is another form of variable pay, it cannot be the sole source of an employee’s income, often ensuring stability on the payroll. Depending on the bonus type, there are different rules to grant it, often reflected in the payroll system.

Type of variable pay include bonuses

Discretionary bonuses

Discretionary bonuses are typically not guaranteed and are awarded at the employer’s discretion, often as a reward for exceptional performances, contributions, or other factors that the employer deems worthy of recognition. These bonuses are not usually outlined in employment contracts or predetermined by a formula, making them more flexible in nature, compared to traditional pay. Employers can choose when and to whom they grant discretionary bonuses based on individual or team achievements, company profitability, or other qualitative criteria, making it a flexible way to reward employees.

Regulatory bonuses

Regulatory bonuses, also known as contractual or guaranteed bonuses, are typically outlined in an employment contract or agreement. These bonuses are predetermined and often linked to specific performance metrics, such as achieving sales targets, meeting project milestones, or adhering to certain regulatory requirements, ensuring employees receive variable pay. Unlike discretionary bonuses, regulatory bonuses are typically considered an integral part of an employee’s compensation package and are expected to be paid if the specified conditions are met, functioning as a type of variable pay.

Bonus criteria

On the other hand, the rules for granting regulatory bonuses must be strictly specified previously in the company’s internal regulations. What does that mean? Firstly, the employer needs to define specific criteria that must be met by employees to receive variable pay as bonuses. The regulations should also contain information on the amount of the bonus, the type of variable pay involved, as well as the rules and frequency of awarding employees. At the same time, when the sales reps or sales team meet all the criteria, they have the right to demand the payment of the bonus. If necessary – even in court.

Management by Objectives (MBO) – example of variable pay plan

Management by Objectives (MBO) is a management approach and process that focuses on setting clear and measurable objectives or goals for individuals and teams within an organization, which can be linked to variable compensation. The MBO concept was popularized by management theorist Peter Drucker in his 1954 book “The Practice of Management.” The fundamental idea behind MBO is to align organizational goals with individual and team performance. This method builds a coherent set of goals for all teams and employees and for the evaluation of the performance. The sales management and the sales team are to agree on how and when to achieve business goals. In this model, sales managers are advisers rather than bosses, which can positively impact employee performance.


Where to implement MBO?

Management by objectives can be implemented in companies or other businesses where the aim is achieving satisfactory results, but not necessarily financial benefits. Therefore, it can be used in public institutions, foundations, associations, etc. This method is considered to be highly effective in achieving both the strategic and operational goals of the business.

From this point of view, the key is to adopt an adequate goal and the realization of it. Usually, the supervisor has a moderating and controlling role.

Subordinates are accountable for the effects of the work as part of the desired results, which can be tied to variable pay or profit sharing. The settled goal should be a challenge for the employee, but at the same time, it must be possible to achieve to ensure they can receive variable pay.

Management by goals helps employees set individual goals for development, and thanks to this development, there is a possibility for incentive pay. This is a popular way for employees who are not in the sales department or other commission-free employees, who might instead benefit from a performance bonus or other type of variable pay. Goals are usually set by individual employees together with their supervisors and show 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.

Find out benefits of management by objectives with commission here.

How to implement a sales compensation plan with a focus on variable pay

Benefits of variable pay

Money motivates, therefore commission plans should effectively motivate sales reps 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 achieve corporate goals.

Sales compensation plans motivate sales reps

Variable pay is an amazing motivational tool, but it may not be the best idea when introduced without proper implementation and selection of commissions. 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 cause sales representatives to not be inspired to work and achieve their goals.

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