How To Set Up a Sales Commission Plan in 4 Simple Steps

Motivating your sales reps is one of the key factors of sales success. In most sales organizations, the sales commission plan is the best way to do this. Your sales commission plan is a portion of your sales compensation plan. Often, it includes a pay mix, made up of a base salary and variable commission pay. Ultimately, your sales commission plan motivates reps to close deals and perform specific sales behaviors that align with your company goals.

How to Create a Sales Compensation Plan For New Reps
  1. Understand the Basic Requirements of a Good Sales Comp Plan.
  2. Establish Role Levels.
  3. Determine Total On-Target Earnings (OTE)
  4. Decide Base Pay and Sales Commission Structure.
  5. Set Targets.
  6. Plan Compensation for Onboarding and Training.

How To Create A Commission Plan [FOR BUSINESS OWNERS]

Benefits of setting up a sales commission plan

There are many benefits you can gain from setting up a sales commission plan, such as:

What is a sales commission plan?

A sales commission plan, also called a sales compensation plan, is a monetary incentive program. The prospect of a financial reward can motivate salespeople to meet all of their sales quotas. Through incentivization, employees and the company can achieve greater economic gains than what they may have normally gained. A successful sales commission plan presents goals that are obtainable and realistic. Whatever the additional sales goals are, its critical that the compensation is of equal or greater value. This plan encourages specific actions and behaviors that suit both the company and customers needs.

Its important to consider that a sales commission plan isnt always a comprehensive solution. A proper plan lays out the structure for how to pay different salespeople based on their individual contributions to the organization. For example, a salesperson who contributes more to the company and demonstrates greater sales performance usually receives higher compensation than their colleague, whose contributions and performance are much lower. There are two primary elements that determine how employees receive compensation, including:

Variable pay

Variable pay is the amount of sales compensation that a salesperson receives based on their performance. Employees make different amounts depending on how well each of them could complete their goals. There are different types of variable pay to consider. Bonus compensation is a one-time payment that an employee receives for their performance. When the pay is commission, employees receive a percentage of the earned revenue after each successful sale. MBOs offer employees a set amount of money that they can earn by achieving individual performance and sales goals.

Base pay

Base pay is the amount of money that a salesperson gets regardless of the goals that they meet. This is typically the individuals salary, which has a fixed rate. Together with the variable pay, the employee receives a pay mix. The ratio between a salespersons base pay and variable pay is the leverage. Companies skew the balance of these two systems differently depending on their pay structure. For example, servers and pizza delivery drivers receive compensation thats skewed far more toward variable pay since the base pay they receive from their employer is low.

How to set up a sales commission plan

Here are four steps to help you set up a sales commission plan:

1. Determine the compensation mix

The first step to setting up a sales commission plan is to decide on the compensation mix, which describes how much of an employees pay is the base salary and how much of their pay is sales commissions. For example, you can do a compensation mix where employees get 75% in base salary and the other 30% in commission. Choosing the right mix depends on the structure of the business.

If personnel play a significant role in the selling of products and services, then rewarding sales with more commission may be ideal. Comparatively, if the salespeople play a more client service role, then higher salary compensation is more reasonable.

2. Determine payment dates

After youve chosen the compensation mix, determine when sales personnel receive their commission. You can choose to pay our sales commissions any way you like, but try to make it both economically feasible for the company and fair for the employees. For example, you could pay out commissions on regular paydays or maybe only once at the end or beginning of every month. Select the option that best suits the needs of the employees and the business.

3. Set realistic and actionable goals

Once youve selected the payment dates, take some time to create reasonable goals for the sales personnel to achieve. This means that the goals are obtainable and realistic. For example, you can start by setting the sales goals to be slightly above the normal sales quota. Factor in different departments and employee skill levels. You might have to stagger the goals based on groups. Some employees may be able to reach certain goals while others cannot. Therefore, provide specific goals for each group of employees and then compensate them accordingly.

4. Create the commission tiers

Commission tiers are levels in which you offer different compensation percentages depending on the sales quota level achieved. The more sales tiers that employees reach, the more money they earn in compensation. For example, by reaching tier one, employees can earn 4% of the total commission. In tier two, employees can earn 7% of the total sales commission. Increase this percentage in varying increments for each level achieved. This structure is beneficial because it helps to keep the top performers motivated while showing lower-level performers what they can earn by working more diligently.

FAQ

How do I set up a commission scheme?

How to Set Up a Commission Plan in Six Steps
  1. Gather as Much Data as Possible. …
  2. Bring Together the Right Planning Team. …
  3. Optimize Your Sales Plan. …
  4. Follow the ABCs of Incentive Planning. …
  5. Communicate Your Plan Effectively. …
  6. Continuously Analyze, Improve, and Repeat. …
  7. Making Planning, Execution, and Performance Easier.

What makes a good sales commission plan?

A sales compensation plan outlines your employees’ base salary as well as the company’s commission and incentive program. The commission structure should incentivize employees to reach their objectives in order to earn a deserved reward.

What is a typical sales commission structure?

One of the most common sales commission structures is a base rate plus commission on every sale. Some companies provide an hourly rate as the base, while others stick to a straight salary. This model puts responsibility on both the company and the sales rep.

What is a good commission percentage for sales?

However, the typical commission rate for sales starts at about 5%, which usually applies to sales teams that have a generous base pay. The average in sales, though, is usually between 20-30%. What is a good commission rate for sales? Some companies offer as much as 40-50% commission.

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