The Complete Guide to Sales Compensation in 2024

Companies today are getting lost in the sales compensation maze. The tech stacks we pull data from are expanding, deal volume is increasing, and compensation is becoming more sophisticated. Sales compensation — especially for enterprise companies — can be messy without the right tools and expertise.

Leaders spend months crafting the perfect compensation plans, yet their teams still feel like their bonuses are random. The math seems like a mystery that managers arbitrarily decide on, and employees (understandably) never seem to know whether the team is on track to hit quota.

Because variable compensation is rarely transparent for employees, they start viewing mistakes and setbacks as threats to the very bonuses that sold them on the job in the first place. Luckily, sales compensation management has entered the chat.

This guide will show you how managers, payees, and employees can finally get the data-driven compensation transparency they’ve been searching for. You’ll learn how to build the perfect plan for your team and how to use tools that streamline payouts. We’ll cover automated sales compensation tools and strategies that decrease payout errors and reduce time spent on payroll administration.

What is Sales Compensation?

Your sales compensation plan determines how to reward salespeople based on how much revenue they generate, how long it takes to close deals, and how risky the deals are.

Unfortunately, compensation plans are highly complex because leaders must tailor them to the company’s needs and sometimes even the individual rep. The purpose of a sales compensation plan is to motivate salespeople to achieve business goals, but it can also serve as a management tool.  

One of the most common compensation structures is “variable compensation,” which is pay given to an employee based on the results they produce. It is usually offered on top of a fixed salary and comes in various forms.

Sales Compensation Explained

Variable sales compensation rewards top-performing reps for reaching a specific sales goal or target.

Many sales teams, including software companies, manufacturing firms, and B2B organizations, choose this compensation structure to motivate salespeople to close more deals.

The type of product or service you sell plays a role in determining what type of sales compensation plan you should implement. Many components go into creating a sales compensation plan, including

1. Base salary

A base salary is a predetermined amount of money you pay your employee each month, regardless of performance or revenue generation. Base salaries are usually established on a sliding scale depending on the role and seniority within an organization.

2. Commission

Sales commission is practically synonymous with sales careers. Commission is a portion of revenue (usually in addition to the base salary) given to the sales employee as part of an official compensation plan. Some sellers work entirely on commission.

3. Profit-Sharing Plan

This plan gives employees a portion of the company’s quarterly or annual profit in addition to their base salary.

4. Bonus

Bonuses are an extra lump sum given to employees based on the company’s performance. It’s often an unspecified amount annually and will vary depending on the year’s results.

5. Stock Options

This option gives employees the right to purchase shares in the company under certain circumstances. They are sometimes offered as an alternative to cash compensation and are popular with startup companies with ambitions of going public or being bought out.

Why do employers offer variable compensation?

A variable compensation plan aligns salespeople’s daily activity with company objectives. Sellers understand that meeting the company’s targets will result in better commission checks, so employers offer commissions to motivate sales reps to produce better revenue results.

It also helps employers attract top salespeople who want their ability to create value reflected in their paychecks. The best sales reps pride themselves on their ability to control their income based on performance. Flexible compensation allows them to do that.

The Advantages of Variable Sales Compensation

Variable compensation plans (VCPs) provide several benefits. First, they’re an alternative to traditional salary and fixed salary plans, which are the norm for other employees and departments.

1. Empowering Employees to Hit Revenue Targets

VCPs put revenue-critical employees in the driver’s seat regarding their incomes, giving employees more control over their pay. In this way, VCPs reward employees for outstanding performance while offering cost-effective compensation.

2. Increases productivity

Performance-based pay gives employees an incentive to improve their performance. If the comp plan is not effectively incentivizing certain behaviors (revenue, user growth, etc.), then the plan hasn’t been built correctly.

3. Employee engagement and retention

Companies with attractive compensation plans tend to attract competitive self-starters who are confident they can reach company targets and make a good living. In addition, when companies pay employees well and feel that they reward them for their efforts, they’re more likely to stay.

4. Financial flexibility

VCPs also give business owners more control over the compensation plan. For example, flexible pay allows employers to pay employees after they have generated revenue. That means that employers don’t need cash to pay new reps upfront. It also helps to align expenditure with income. Flexibility also benefits business owners when they need to change the base compensation or require employees to meet specific performance metrics to earn additional commission.

The Disadvantages of Variable Sales Compensation

While a variable compensation plan can be a great way to incentivize salespeople and keep them motivated, there can be disadvantages to offering this type of plan. For one, setting up the correct parameters for the project to be fair and equitable for all involved can be challenging.

Plus, if the goals are too ambitious or not achievable, it can lead to frustration and poor morale among the sales team. Finally, if the plan is not well-structured or monitored, it can lead to salespeople taking risks or cutting corners to reach their goals. As such, companies should carefully consider all of these potential drawbacks before implementing a variable compensation plan for their B2B salespeople.

The most common sales compensation planning pitfalls are:

1. Poor Execution

Effective comp plans are complex to create and difficult to administer because they’re usually manually managed, even by large enterprises. Multiple stakeholders also make setting the measures of performance and goals difficult.

2. Lack of foresight

If goals are unattainable due to poor planning, sellers will quickly get frustrated and search for other opportunities. Companies that offer commission-only salaries often struggle to attract or retain sales talent. Even though fixed wages may not directly increase sales performance, they provide employees with a safety net. A combination of fixed and variable income is the best way to motivate employees effectively.

3. Not ethically aligned

One major disadvantage of variable compensation plans is that they can encourage sales representatives to engage in unethical behavior. For example, a salesperson who is paid a bonus for each new client they bring in might resort to misleading tactics to get a prospect to sign on the dotted line. Or an account executive who is paid based on the number of products sold may fail to inform customers about the actual costs of the products or may even oversell, i.e., sell more products than the customer needs or can use.

Should I Offer My Employees Variable Compensation?

Despite the effectiveness of variable pay, the plan is not easy to manage. The two most significant issues companies face are sales management’s inconsistent application of the compensation plan throughout the organization and the disconnect between employee performance assessments and compensation rewards (SHRM).

In other words, variable compensation programs can motivate employees and achieve superior business performance, but you must administer them correctly to be profitable. Administering comp plans correctly means ensuring targets are clearly defined, achievable, and aligned with broader business objectives.

What’s the Difference Between Sales Incentives and Sales Compensation?

Sales compensation and incentives both refer to rewards companies use to motivate their sales teams. The critical difference between the two is that sales compensation is a type of monetary incentive, while incentives are variable and can be used to reward high-performance levels.

Companies may use a combination of fixed salaries, variable payouts based on performance, and long-term incentive plans such as stock options or profit sharing. Ultimately, companies must tailor their compensation plans to the specific needs of each organization to ensure that it motivates employees while also helping to achieve company goals.

What Is the Difference Between Compensation and Commission?

Compensation is the fixed amount of money an employee receives for performing specific job duties. Compensation is usually a set amount regardless of how much the individual contributes to the company’s revenue.

Commissions, on the other hand, are performance-based payments. Companies pay commission on a percentage of revenue the individual generates.

Sales compensation plans must align the interests of the sales force with the interests of the business. For example, a sales person may receive a base salary and additional pay for meeting or exceeding their sales quota.

On the other hand, a commission is a percentage of the total amount of sales generated and is paid on every deal. So, for example, if you earn 3% on all sales generated, you would earn $300 on a $10,000 sale.

What Is the Purpose of Sales Compensation?

Simply put, sales compensation motivates employees to produce more. Incentivizing employees to boost performance is effective, but many poorly planned sales compensation plans ultimately do more harm than good because of false assumptions and unrealistic objectives.

Like any great coach will tell you, the fundamentals must come first. Sticking to these pillars will ensure you never drive the wrong behavior or outcomes. The following are the fundamental sales compensation plan objectives that should underpin any good program.

1. Boost individual salesperson performance

Whatever other objectives you may include in the compensation plan, this is the number one goal of all incentive plans.

While many companies will have their own long-term strategic goals (more on those below), it’s essential not to forget that the core reason to incentivize is to increase the number of sales that the individual sales representative closes above the baseline.

If your plan isn’t incentivizing closing more deals, you should just put them on a base salary and save yourself the time and hassle of administering commission-based pay.

2. Align individual actions with organizational goals

Enterprise growth strategy is a constant balancing act—and compensation is a crucial lever. Your sellers will naturally focus on the short-term goals that yield a quick payout. However, you must ensure that their actions result in a fast payout and meet your company’s long-term goals.

Many sales leaders fail to realize that poorly planned short-term sales goals can undermine the business in the long term. While these plans result in quicker results, in the end, they reduce profitability in other facets of the company.

Short-term goals may involve:

• Sales quotas
• Profit targets
• Strategic milestones related to product use, channel or account growth, etc.
• Internal ratings or customer feedback scores

Long-term strategic goals for the business may include:

• Strategic changes to the customer base or the pipeline
• Sustained cash flow
• Incremental profitability
• Improved employee retention
• Increased market share
• Greater shareholder value
• The introduction of new or refreshed products or services

3. Retain top performers

Finding top talent is rare, and losing them costs more than just the cost of replacement and retraining (which is high enough as it is). But, despite what many sales managers might think, there are steps we can take to stop our best people from seeking greener pastures.

Most salespeople leave because of compensation plan issues. These issues aren’t just about their potential earnings but also the speed and accuracy with which they’re paid. If your team regularly deals with sales commission disputes and errors, it will cause a massive drag on your sales organization.

Best Practices for Creating Your Sales Compensation Objectives

All compensation objectives should be operational, controllable, measurable, and transferable. The problem is that some organizations make their sales objectives so complex that they strain resources, making it impractical to administer the incentives and operate the program. That’s why it’s best to simplify payout plans.

Operational

Overly complex compensation plans can quickly become expensive and impractical to operate. So, simplify your commissions to keep them cost-effective and easy for you and the sales ops team to perform. Or invest in sales compensation automation software.

Controllable

To be controllable, your sales objectives must be within the control of the people you intend to incentivize. Demotivating the sales team by setting an impossible commission target will adversely affect their performance. Your salespeople should be able to control whether they reach their goals.

It’s also essential to ensure management has levers to control the compensation plan during unexpected sales events. For example, commissions on some products and services can quickly get out of control in extreme circumstances.

Measurable

This may seem obvious, but objectives must be measurable. Ensure you can easily tie the outcomes to the objectives at the end of the sales cycle to reduce sales commission disputes.

Communicable

The final important thing to remember is that your plan should be easy to communicate. If your sales reps don’t understand how to maximize their compensation, you will demotivate them, and sales will rapidly drop.

Incentives Make Objectives Subjective

Sales force compensation aims to tie your business objectives to the success of the individuals most able to impact them. Keep that in mind at all times, and you’ll go a long way to designing a winning sales incentive compensation plan.

How To Develop an Effective Sales Compensation Plan

Sales compensation is an integral part of an employer’s total compensation package, including the salesperson’s salary and commissions and other benefits such as health insurance, retirement contributions, and paid time off.

When creating a sales compensation plan for your company, there are several vital points to consider. First, you must determine the plan’s structure and how to implement it. This includes deciding what commission or bonus structure you will use and how you will track and measure performance.

Also, consider which incentives you’ll offer to reps and how you’ll reward them for achieving goals. Finally, don’t forget to ensure that the compensation plan is fair and equitable for all sales representatives.

The Four Elements of Sales Compensation

Sales compensation is an essential topic for all salespeople. You need to understand the four elements of adequate sales compensation, how they affect each other, revenue, and overall profitability.

The four elements of sales compensation are:

1. Compensation for time worked (salary, shift differentials, overtime, commission, and benefits)  
2. Compensation for work performed (hours worked, total pay, gross pay)
3. Compensation paid for input into the sale (bonus pay, profit sharing, commissions, and commissions based on volume)
4. Compensation earned based on performance (targeted, incentive, and commission)

Compensation is the sum of all these elements. If one element is changed without the others being affected, then the total compensation for a particular sales personnel will change. For example, SPIFs or holiday bonuses that don’t occur consistently.

The Top Three Sales Compensation Methods

1. Performance-based pay

The salesperson is compensated based on the actual results they achieve. These are often called “commission-only” sales jobs. The compensation might be a specific dollar amount, or it might be a percentage of the sale.

2. Salary plus commission

This method combines two elements of compensation: a base salary and a commission on sales. The base salary is paid regardless of performance, and the commission is paid on top of that.

3. Hybrid incentive plans

This method combines elements of pay-per-performance and salary plus commission. For example, a salesperson might get an initial base salary and a commission on sales over a certain threshold.

What is Sales Compensation Management?

The concept is simple: variable compensation rewards employees for meeting specific sales goals, making it a powerful way of motivating your sales team to sell more products or services. The more they sell, the more money they make.

Don’t let the simplicity fool you—incentive-based pay (commission) motivates better performances, and science proves it. According to Yale and Harvard research, bonuses increase productivity.

The more often bonuses are given (quarterly versus annual), the more revenue they generate. However, this study also concluded that the further salespeople are from their quota, the more likely they will give up.

That’s why the way you structure and manage your sales incentive compensation plan is critical. This post will explain sales incentive compensation management plans, how to successfully roll them out to your team, and how to optimize your plan to crush your goals.