Many companies rely on their salespeople to ensure profitability for the business, drive client relationships and maintain the professional reputation of the organization. It’s important to sustain their high-performance and provide them with avenues for motivation while they complete their job.
Incentive pay is an effective way to not only accomplish this, but to further promote confidence, recognize your salespeople’s current efforts and also prepare them for future successes.
However, it’s important to consider the way you extend incentive pay to your employees. When done correctly, it can inspire your people to shoot for the stars but if executed poorly, it could leave them with enough drive to only complete the bare minimum.
Now is the perfect time to consider different kinds of incentive pay options that you can offer your people. We’ve made this easy by listing the most common incentive pay structures in this article, with examples to help!
Read on to help you make an informed decision on keeping your team financially motivated.
One of the most common compensation pay structures especially within startup companies, the Base Salary with Commission structure incentivizes your sales team to drive increased purchases on products and services, while also giving them ample financial security.
Commission incentive pay for salespeople usually varies and is dependent on how much the employee sells or the amount of revenue that they generate in a certain period of time. The commission percentage that you offer to your team is also flexible as your offer can be fixed or it can depend on the amount of revenue that employees bring in.
One of the main benefits of Base Salary with Commission is that employees are able to get both types of pay (salary and commission) and this fact is ideal alongside taxable fringe benefits.
For example, if your employee sells technology software valued at $500 and gets 10% commission on all sales, they will earn $50 on that specific deal on top of their base salary.
Since the commission pay is added on top of the regular salary, your employees can take home greater pay depending on how much they’re able to sell within the month.
Let’s say your person receives a $2000 base salary on a monthly basis. If they’re able to make $5000 in sales of the technology software then they can add 10% of this on top of their salary, bringing the take-home pay for that specific month to $2500.
Bonuses received by a salesperson are usually based on pre-established earning quotas. This means that your team will know exactly how much of your product/service they need to sell to qualify for a bonus.
An example scenario would be to offer your salespeople an annual base salary of $40,000 with an added opportunity for a $10,000 bonus if they’re able to sell a certain amount of products/service per year.
This is a great structure for maintaining financial organization as you will have a stable idea of how much money needs to be put aside for bonuses every year.
This pay structure can be difficult to maintain in the long-run, however, as it provides little incentive for your salespeople to outperform previous sales quotas and may not motivate them to accomplish a greater number of sales besides meeting the requirements for the bonus.
To remedy this, you can introduce further bonus incentives, especially for the salesperson who generates the most sales in a year.
This incentive pay structure provides your sales team the opportunity to earn monthly income that’s entirely dependent on their sales performance. This is perfect for teams that enjoy commission based compensation, are independent and value the freedom to depend on their own efforts.
The Commission-Only Incentive Pay structure depends on two different factors:
Since your team is dependent on their own abilities in this pay model, their success should be aligned with a generally high commission percentage.
It’s up to the company to calculate a fair commission percentage for their salespeople and this number usually varies between 5%-45%. To put it simply, the higher the commission percentage that’s offered to your team, the greater motivation they’ll have to sell your products/services.
Consider this example: One of your salespeople sold electronic goods this month, worth $100,000. If your company has a fixed commission of 20% on sales, then this employee will take home $20,000 for the month. On the other hand, you could increase your commission percentage to 45% on all sales and this employee would enjoy $45,000 in their monthly pay.
Your main goal in a Commission Only Incentive Pay structure is to choose a percentage that will motivate your team and push them to perform at their best potential everyday. If your commission percentage is too low and makes sales difficult to accomplish, you risk demotivating your salespeople and possibly causing them to look elsewhere for employment that fits their needs.
Another effective way to motivate your salespeople is to tie their commission into your company’s monthly profit margins. With a gross margin commission model, your team will receive greater pay for selling goods with a higher gross profit margin.
This incentive pay model is most ideal if your team has full control over product pricing as it will help to discourage discounts when completing sales.
Also, it’s beneficial for your company if your people are focused on selling the most profitable products! Consider the fact that higher profit margins directly lead to better cash flow, greater financial reserves and more resources that can be put to use for boosting company growth.
When considering this model, it’s important to track direct costs as these will have to be deducted from each sale to calculate your gross profit margin. The commission that your salesperson receives will be calculated as a percentage of this gross margin.
For example, consider a sale that generated $50,000 in sales and spent $30,000 on the cost of goods sold.
The gross profit margin will be the total profit of $20,000 (sales subtracted from cost of goods sold) divided by $50,000 and then multiplied by 100 to bring it to 40%.
Then, let’s say that the company offers a 5% gross margin commission on that same sale, so your salesperson will receive 5% of the 40% profit margin, which in this case would be $1000.
Even if the same product is sold twice, the commission your team receives can differ as it’s dependent on the profit margin of each sale!
Related: How Is Incentive Pay Tax Calculated For Employees?
Simply, this incentive system refers to the commission that a rep will receive when they reach certain milestones or sales targets.
The Absolute Commission Model model differs in that it gives greater control to the company to decide how and when the sales team will be rewarded. This is a great way to create clear objectives that your team needs to achieve and simultaneously maintain employee motivation as it's directly tied to their sales targets.
Along with that, you have control over the duration in which Absolute Commission will be valid and no set quotas are needed - set recommendations and benchmarks so you can drive sales for a specific product line or service. Not only does this provide an organized structure for your employees to work with, it also encourages them to maintain a sense of urgency to attain different goals/milestones before the Commission is unvalid.
A simple example of this system would be a company opting to pay their sales team $1500 for every new customer they acquire. You could also create this incentive for rewarding them when they successfully upsell too.
This type of incentive pay structure is dependent on a pre-set target and usually consists of either a base salary with commission on top, or only commission.
The Relative Commission Pay Structure could, for example, consist of a quota that’s based on the number of products/services sold or it could alternatively be based on revenue.
If a salesperson can make 100% of their pre-set quota then they will receive their on-target earnings (OTE). Consider this scenario:
An employee has an annual base salary of $80,000 and an on-target commission of $60,000. This person will automatically receive the base salary but if they want the on-target commission too, they will have to meet the company’s pre-set annual revenue quota.
Let's say they meet the revenue quota. They will then receive the base salary added to the on-target commission to make a total of $140,000 earned for the year.
The relative commission structure makes for a great motivational salary model! It also allows for well-deserved milestone earnings such as a Christmas bonus.
Finally, the Straight-Line Commission Model is one of the most popular incentive pay models used by companies to this day. This plan allows organizations to reward their sales teams based on the sales quota they reach.
For example, the company can set their quarterly sales quota to $200,000 in revenue. If the commission on this specific revenue amount is $15,000 quarterly then each salesperson will receive this amount ($15,000 per quarter) when they bring in $200,000 in revenue.
You can also think of this in the way that if an employee reaches 90% of their revenue quota, that person will receive 90% of their commission. If they reach 180% of their quota, they will receive 180% of their commission.
The Straight-Line Commission Model is a perfect way to show that you appreciate your employees.
This article has outlined a few ways to incentivize your sales team and reward them for reaching revenue targets. It’s important to keep in mind that these types of monetary motivation are there to benefit your employees and should not be used as retribution if sales objectives aren’t met.
It’s always a good idea to involve your employees in the decision making process for choosing the right salary structure that will fit your company. Gain their input, make careful calculations and be thoughtful for what will work best for your people. This way, you can set your team up for success and give them financial goals that will boost confidence while they’re also being encouraged to work harder and exceed expectations.